Overview of the Indiana 529 Plan Income Tax Credit:Indiana 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 is 20% of the amount contributed to qualifying plans. Unfortunately, the contributions of Indiana taxpayers filing a joint return are combined for purposes of claiming the credit.
The maximum total contribution eligible for a credit, across all accounts, is $5,000. In other words, the maximum credit that can be claimed by an individual or couple filing jointly is $1,000 ($5,000 multiplied by 20%).
Value of the Indiana 529 Plan Tax Credit:One of the most confusing things about the Indiana 529 tax credit is that the credit amount is applied directly against the taxes a resident owes. This is in contrast to the typical "deduction from income" that most states offer for contributing to a Section 529 plan. When compared side by side, this tax credit of $1,000 is far more valuable to a taxpayer than a tax deduction for the same amount.
In short, a $5,000 contribution to an Indiana 529 plan essentially puts $1,000 right back in the pocket of a taxpayer. That's equivalent to an instant 20% return on a parent's money, simply for funding an Indiana 529 plan.
Looking at this unique tax credit from another angle, the receipt of a $1,000 tax credit is the equivalent of a parent being permitted to deduct $29,411 from their state income tax return (based on a top state income tax rate of 3.40%)! With this in mind, most Indiana 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 Indiana 529 plan.