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The Indiana 529 Credit - Tax Benefits for Using the IN 529 Plan

Rules for Claiming the Indiana 529 Income Tax Credit

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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.

Claiming the Indiana 529 Income Tax Credit:

The Indiana 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 Indiana 529 tax credit requires completion of Indiana state form IN-529 and proper inclusion on a taxpayer's primary IT-40PNR.

Reference and Documentation:

Additional information on the Indiana 529 tax credit can be found on the Indiana Department of Revenue's website and the Indiana College Choice Section 529 website.

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