Save for education, save on your taxes
529 tax benefits help your savings grow faster. Tax-free earnings, favorable gift tax treatment and additional state tax benefits make 529 plans a great option for most savers.
Tax benefits breakdown
- Overview of 529s
- Tax benefits of 529s
- Virginia state tax deduction
Enjoy tax–free earnings
Saving $200 per month for 18 years1,2
Earnings in a 529 account grow free from federal taxes when the money is used to pay for qualified higher education expenses. The earnings on most other savings or investment accounts, like mutual funds, are commonly subject to capital gains taxes upon withdrawal.
Contributions to a 529 plan do not have to be reported on your federal tax return each year. Additionally, any investment earnings are not reportable until the year they are withdrawn.
Favorable estate and gift tax treatment
Contributions to a 529 plan are treated as a completed gift to a student and are generally excludable from the account owner’s taxable estate. This means in 2023 contributions up to $17,000 a year, or $34,000 for married couples are gift tax free.
Special 529 rules allow a gift giver to make a lump sum contribution of up to five times the annual gift tax exclusion amount and spread it over five years for a tax free gift of up to $85,000 (joint taxpayers may fund up to $170,000) in 2023. Consult your tax advisor for more information about your specific tax situation and tax consequences.
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Virginia residents: Virginia state income tax deduction
Virginia529 account owners who are Virginia taxpayers may deduct contributions up to $4,000 per account per year with an unlimited carryforward to future tax years, subject to certain restrictions. Those age 70 and above may deduct the entire amount contributed to a Virginia529 account in one year.
Virginia state income tax deduction examples3
Mr. Smith contributed $8,000 dollars to his account in the first year. He may deduct $4,000 from his Virginia state income tax return in the first year, and $4,000 on his Virginia state income tax return the next year.
Ms. Jones contributed $4,000 to her account for one child and $4,000 to a second account for another child in the first year. Ms. Jones may deduct the total $8,000 on her Virginia state income tax return.
Ms. Henry, who turned 70, contributed $10,000 to her 529 account. Since she is at least 70 years old, she may deduct the entire $10,000 contribution on her Virginia state income tax return.
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1 This chart is for illustrative purposes only and is not intended to reflect actual performance of any specific investment. Assumes interest rate of 6.25 percent compounded monthly. The value of your Virginia529 account will vary depending on market conditions and the performance of the investment option you select, and it may be more or less than the amount you deposited. You could lose money – including the principal you invest – or not make money if you invest in one of these programs. Past performance of investments is not an indicator of future returns.
2 This example assumes a federal tax rate of 25 percent and a Virginia tax rate of 5.75 percent.
3 The examples are provided for illustrative purposes only and are not meant to provide you with tax advice. Your tax consequences depend on your individual circumstances. You should consult your own tax advisor regarding specific tax consequences of using the deductions in the manner described above.