Overview of the Vermont 529 Plan Income Tax Credit:
Vermont is one of just a few states that offers a tax credit instead of a tax deduction for contributions to its Section 529 plan. Currently, the tax credit offered equals 10% of the amount contributed to qualifying plans, up to $250 (a contributed amount of $2,500).This credit is offered for each beneficiary (child) a taxpayer contributes on behalf of, but the contributor must be the owner of the account. Vermont taxpayers filing a joint return are permitted to each claim a credit for the same beneficiary, as long as they each contribute separately to the account.
Value of the Vermont 529 Plan Tax Credit:
One of the most confusing things about the Vermont 529 tax credit is that the credit amount is applied directly against the taxes a resident owes. This stands in contrast to the typical "deduction from income" that most states offer for funding a Section 529 plan. When compared side by side, a tax credit of $250 is far more valuable to a taxpayer than a tax deduction for the same amount.In short, a $2,500 contribution to an Vermont 529 plan essentially puts $250 right back in the pocket of a taxpayer. That's equivalent to an instant 10% return on a parent or grandparent's investment, simply for funding a Vermont 529 plan.
With this in mind, most Vermont parents will have little reason to choose another state's Section 529 plan, a Coverdell Education Savings Account (ESA), or a UTMA Custodial account over the Vermont 529 plan.
Claiming the Vermont 529 Income Tax Credit:
The Vermont 529 Plan income tax credit can be claimed for the prior year on funds contributed electronically or postmarked before January 1st of the following year.Claiming the Vermont 529 tax credit requires completion of Vermont state form IN-112.
