New Minnesota 529 College Savings Credit -Deduction
Are you saving or thinking about saving money for
college in a 529 college savings plan? Good news, the
state of Minnesota passed legislation in the summer
of 2017 to give you an additional incentive to
contribute to a 529 plan! Here are the high-level
details – you will either be eligible for a tax credit or a
tax deduction. Higher wage earners will get a
deduction, lower wage earners the credit.
Tax Credit = Receive a tax credit (dollar for dollar
reduction of your tax bill) equal to 50% of your 529
plan contribution, up to a maximum credit of $500. If
you contribute $1,000, you reduce your tax bill by
$500! The income cut-offs and phase outs will be
Tax Deduction = There is not an income phase out for
the deduction. If you can’t qualify for the tax credit,
you should qualify for the tax deduction. Your
deduction is equal to a maximum of $3,000 for a
married filing joint return, and $1,500 for all other tax
Example: Ted & Ann are married and contribute
$3,000 into 529 plans for their two children. They can
deduct the $3,000 contribution from their Minnesota
income tax return. If they are in the 7.05% tax
bracket, their tax savings would be $211.
Frequently Asked Questions
Question #1: The tax credit appears to be more
favorable than the tax deduction, but what are the
Answer: It depends on your tax filing status. If your
adjusted gross income (AGI) is $75,000 or below, you
can qualify for the $500 maximum tax credit
regardless of your filing status. Above that $75,000
threshold, and the tax credit starts to phase out:
A.) Individual filers above $75,000: Up to $500 less 2% of
your AGI over $75,000. In other words, once your AGI
goes over $100,000, the credit would be reduced to
zero. At some point before you reaching the full
phase out limit, you may be better off claiming the tax
deduction instead of the credit depending on your
contribution amount and marginal tax rate.
B.) For joint filers with an AGI above $75,000, but below
$100,000: Up to a $500 tax credit less 1% of AGI over
C.) For joint filers with an AGI above $100,000 but not
over $135,000: Up to a $250 tax credit less 1% of AGI
D.) For joint filers with an AGI above $135,000: No tax
Question #2: Do I have to contribute to a Minnesota
sponsored plan to receive the tax credit?
Answer: No. It’s not state specific.
Question #3: Can grandparents contribute and
receive a tax deduction (or credit)?
Answer: Yes. It’s based on the account owner. As a
grandparent, you can own the account and list your
grandchildren at the plan beneficiary. You can even
change beneficiaries as you desire.
Question #4:What if my child (or grandchild) does
not attend college?
Answer: Your first option is to switch the beneficiary
of the plan to another child (or adult). As a last
resort, you would make a non-qualified withdrawal.
In other words, you would use the 529 funds for
something other than qualifying educational
expenses. If so, there would be adverse tax
Question #5: How do I calculate the additional
Minnesota tax for non-qualified use?
Answer: It gets complicated quickly. It depends if you
received a prior tax deduction, a tax credit, or both.
The Minnesota tax penalty is calculated by
determining two ratios – the credit ratio and the
Credit Ratio: Ratio of (Two times the amount of
credits the account owner claimed for all
contributions to the accounts) / (Total contributions
in all taxable years to the account owners accounts)
Subtraction Ratio: Ratio of (Total amount of
subtractions the account owner claimed in all years) /
(Total contributions in all taxable years to the account
Putting them together – the additional tax is:
= (50% of the product of the credit ratio X amount of
the non-qualified withdrawal) + (10% of the product
of the subtraction ratio X amount of the non-qualified
Clear as mud? If you don’t take a withdrawal for a
non-qualified use, then you won’t have to worry
about the additional tax consequences in later years.
Question #6:What if I am a part-time resident of
Answer: The credit would be allocated based on the
percentage of income attributable to Minnesota.
Non-residents would not qualify. You will also not
qualify if you can be claimed as a dependent by