Does Massachusetts Offer Tax Deductions for 529 Plans?

A 529 plan, named after the tax code section authorizing its existence, allows you to save money for future education expenses such as for you to go back to school or to save for your children to go to college someday. The federal government doesn’t offer a current tax deduction or credit for contributions made to a 529 plan, although the money does grow tax-free in the account and can be withdrawn tax-free and penalty-free. However, some states, including Massachusetts, have started rewarding contributions with income tax breaks at the state level.

Massachusetts 529 Tax Benefits

When you file your Massachusetts state tax return, you can claim a deduction for your contributions to a 529 plan. However, the Massachusetts 529 plan tax deduction is limited to $1,000 if you file as single or head of household, or $2,000 if you and your spouse file a joint income tax return.

In addition, the 529 plan or any other pre-paid tuition program or a college savings program to which you contribute must be sponsored by the state of Massachusetts or under its authority to qualify for the deduction.

Deduction Subject to Recapture

After you’ve claimed a deduction for contributing to a 529 plan, you could be forced to pay back any savings on Massachusetts state tax if the money isn’t used as intended. If a distribution is made from a 529 plan for anything other than qualified education expenses or the beneficiary’s death, disability or receipt of a scholarship, Massachusetts can recapture the tax savings in that year.

For example, if you take money out to go on vacation a few years after you make the initial contribution, you have to pay back your tax savings. If the ownership of a 529 plan is transferred, the recapture provisions apply to the new owner instead.

2019 Tax Year

The 529 plan contribution deduction for Massachusetts income taxes continues in 2019 as the deduction is in existence through the 2021 tax year, pending future legislation. However, the amount of the annual deduction is not indexed for inflation, so the amount of the maximum deduction you can claim is still $1,000 for people filing as single or head of household and $2,000 for couples filing a joint return.

2018 Tax Year

Although 529 Plans prior to 2018 were college savings plans, the Tax Cuts and Jobs Act (TCJA) that was signed into law in December 2017 expanded this educational age group. Beginning with tax year 2018, eligible 529 plans -- including the Massachusetts 529 plan -- allowed up to $10,000 per year to be applied toward K-12 tuition costs.