Overview of the Alabama 529 Plan Deduction:Though Alabama was one of the last states to offer its residents a deduction for contributing to a Section 529 plan, they've made up for it by offering one of the largest deductions of any state. Currently, the deduction is set at $5,000 per taxpayer, meaning a husband and wife filing jointly could each claim the deduction if they contributed a total of $10,000.
Value of the Alabama 529 Plan Tax Deduction:Alabama residents trying to decide between an Alabama 529 plan and other savings vehicles need to account for the potential income tax savings of using the Alabama 529 plan. Remember, Alabama residents do not receive a state income tax deduction for contributing to any other state's Section 529 plan.
Considering that the top tax bracket in Alabama is 5.00%, a $5,000 contribution to an Alabama 529 plan can save each taxpayer a maximum of $250 at tax time. In other words, receiving the deduction is similar to a 5.00% bonus on the amount contributed. While this is attractive, it still may not offset the benefits of using other accounts such as a Coverdell Education Savings Account (ESA) or an UTMA Custodial account.
Claiming the Alabama 529 Income Tax Deduction:Since 2008 is the first tax year that this deduction is being offered, it is currently unclear how it will be reported on the Alabama state income tax return.
It has been made clear however, that even though the law allowing the deduction was passed mid-year, the deduction will be allowed retroactively to January 1, 2008.