Many states offer state tax breaks for money contributed to their own 529 college savings plan. Only five states (Arizona, Kansas, Maine, Missouri, and Pennsylvania) also offer state tax deductions for contributions to out-of-state 529 plans. For example, a Pennsylvania resident can deduct contributions to any 529 plan from the income reported for Pennsylvania income tax.
There are different caps on this deduction, though. Arizona residents can deduct no more than $1,500 a year, if they’re married (no more than $750 for single taxpayers). Missouri allows deductions up to $16,000 a year for couples, $8,000 for singles.
Tax breaks for out-of-state 529 contributions have been proposed in 30 other states but their approval is uncertain, in the current fiscal crisis. Meanwhile, several states are in the process of hiking their income tax rates to make up for revenue shortfalls. That will make upfront state tax deductions for 529 plans more valuable, along with the income tax exemption for 529 withdrawals if the money is spent on higher education.
