Qualified withdrawals from a Section 529 college savings plan are excluded from federal gross income beginning this year. But what about state income taxes? Can you (or your beneficiary) take the same exclusion on your state income tax returns?
In general, state income exclusion is less valuable than an upfront deduction for your contributions, which many states now offer. Even if there is no exclusion available, withdrawals from a 529 plan that are used to pay for qualified college costs will be reported to your beneficiary (the student). Students tend to be in very low tax brackets, especially for state income taxes. That is, if the top income tax rate in your state is 8 percent or 10 percent, a low-income student may owe only 2 percent or 3 percent on the money that comes out of a 529 plan, to pay college bills.
