Using 529 Plans: Minnesota Tax Benefits

Many people are aware of the tax benefits available at a Federal level for funding and using a 529 plan to pay for college costs.  Investment income from these plans is exempt from Federal tax as long as the funds are used to pay for qualified higher education expenses and now up to $10,000/year can be used for qualified K-12 expenses. 

The state of Minnesota also exempts the tax on any investment income from 529 plans under the same condition.  However, there are also additional tax benefits to funding and using a 529 plan in Minnesota.  The state provides both a credit and a subtraction option for taxpayers depending on your adjusted gross income (AGI).  You may contribute to any state’s 529 plan, it does not have to be Minnesota’s state plan, in order to receive the benefits.

Credit Option:

A nonrefundable credit of 50% of contributions up to $500 maximum is offered depending on your AGI.  If your AGI falls below $75,000 as both a single or married filing jointly taxpayer, you are eligible for the full credit.  If your income falls between $75,000-100,000 as a single taxpayer or $75,000-160,000 as MFJ taxpayers, then you are eligible for a phased out portion of this credit. 

Nonrefundable credits directly offset your Minnesota tax liability but will only benefit you to the extent of your tax liability.  You cannot receive any portion of this credit as a refund. 

Subtraction Option:

A taxpayer may subtract up to $1,500 for single and $3,000 for MFJ of contributions to a 529 plan.  If you claim the credit, you may not take the subtraction.  Any individual is eligible for the subtraction. 

Summary:

Credits generally provide a larger tax benefit for the same contribution amount as they are a dollar-for-dollar reduction of tax liability.  However, some taxpayers will be above the AGI threshold for the credit and should still take advantage of the subtraction to reduce overall tax liability. 

Source: Minnesota State Legislation, House Research Short Subjects, January 2018, Sean Williams and Joel Micheal