How to Report 529 Plan Contributions and Withdrawals on Your Tax Return

During the tax season, all our tables disappear under a mountain of paperwork and our Google search history fills up with questions like "can I claim my pet as a dependent?" and sadly getting no for the answers. But if you've been saving for education expenses with a 529 plan, you might be facing a whole new set of tax questions. Did you report that contribution correctly? What about that withdrawal for last semester's tuition? Or do you even need to report these things at all?

While a lot of people may know the answers, we all need help with tax forms. So we've put together this guide to help you as 529 plan users and navigate the pain of tax reporting:

Can You Deduct 529 Plan Contributions?

For the clarification, no, you cannot deduct 529 plan contributions on your federal tax return.

While the IRS won't give you an immediate tax break for contributing, they are actually cutting you a better deal in the long run. All the earnings in your 529 plan grow completely tax-free. And as long as you use the money for qualified education expenses (more on that later), you'll never pay federal taxes on those earnings.

Think about it this way, instead of a small tax deduction now, you're getting years—potentially decades—of tax-free growth. For many families, that's actually the sweeter end of the deal, especially if you start when your kids are young.

Are 529 Contributions Tax Deductible at the State Level?

Now here's where things get interesting! While the federal government might not show your 529 contributions any importance, many states absolutely do.

Depending on where you live, your state might offer tax deductions or credits that can put real money back in your pocket. Some states are super generous—allowing deductions of $10,000 or more per beneficiary. Others might cap it at a few thousand dollars per tax return.

The sweet spot? These state tax benefits usually don't have income limits, unlike many other education tax breaks that start phasing out once you hit a certain income threshold. So even if you earn too much to qualify for other education tax perks, you might still get this one.

Here's the catch, though—many states only offer these tax benefits if you contribute to your home state's 529 plan. Before you choose a plan from another state (even if it has slightly better investment options), make sure you're not leaving free money on the table.

529 Contribution Limits You Should Know

Unlike retirement accounts with their strict annual caps, 529 plans offer surprising flexibility. There's no annual federal limit on how much you can stuff into a 529 plan, which is pretty refreshing in the world of tax-advantaged accounts.

But before you start emptying your bank account into your child's 529, there are some boundaries you should know about:

Gift tax considerations: Contributions to 529 plans count as gifts to the beneficiary. For 2025, you can contribute up to $19,000 per beneficiary without triggering gift tax reporting requirements.
Superfunding option: Want to jumpstart a 529 plan? You can make a massive one-time contribution by using the "5-year election." This lets you frontload five years' worth of gifts—up to $95,000 per beneficiary in 2025—without triggering gift taxes, though you'll need to report it on Form 709.
Total contribution limits: Most states cap the total amount you can contribute per beneficiary, usually between $250,000 and $500,000. !

How to Report 529 Contributions on Your Tax Return

For your federal return, you don't need to report your 529 plan contributions at all! No special forms, no confusing worksheets, no nothing. Your 529 plan administrator isn't tattling to the IRS about your contributions either.

The only exception? If you're contributing more than the annual gift tax exclusion amount ($19,000 per beneficiary in 2025), you'll need to file Form 709 for gift tax purposes. This doesn't mean you'll owe any gift tax—it's just a reporting requirement. And unless you've already given away millions in your lifetime, you likely won't owe a penny.

For state tax returns, things work differently. If your state offers a deduction or credit, you'll need to:

Track all contributions made during the year (I keep a simple spreadsheet)
Find the right line on your state tax return for 529 plan contributions
Enter your total (up to your state's limit)
Possibly include account numbers or other identifying info

Pro tip: Your 529 plan administrator will send you an annual statement of contributions. File this away immediately with your tax docs, your future self will thank you when April 15 rolls around!

How to Report 529 Withdrawals Correctly

When you make withdrawals, this is where you'll need to pay closer attention to keep the tax benefits intact. Every January, you'll receive Form 1099-Q showing:

The total amount taken out (Box 1)
The portion that represents earnings (Box 2)
The portion that represents your original contributions (Box 3)

But if any portion went to non-qualified expenses, you'll need to include the earnings portion (not the entire withdrawal) as "Other Income" on Schedule 1. You might also face a 10% penalty on those earnings.

Here's a real-world example:

You withdraw $10,000 from your 529 plan
Of that, $8,000 was your original contribution, $2,000 was earnings
$9,000 went toward tuition, but $1,000 went toward a spring break trip (clearly not qualified!)
Since 10% of the withdrawal was non-qualified, 10% of the earnings ($200) becomes taxable income

What Counts as a Qualified 529 Expense?

Understanding what counts as a qualified expense is absolutely crucial to avoiding unexpected taxes and penalties. Luckily, Congress has expanded the list in recent years.

Here's what definitely qualifies:

Tuition and fees at eligible colleges, universities, vocational schools, and trade programs
Required books, supplies, and equipment
Room and board (if enrolled at least half-time)
Computer equipment, software, and internet access
Special needs services for beneficiaries who need them

Thanks to recent tax changes, these also now qualify:

Up to $10,000 per year for K-12 tuition
Up to $10,000 lifetime for student loan repayments
Registered apprenticeship program costs
Transfers of up to $35,000 to a Roth IRA for the beneficiary (subject to restrictions)

What's definitely NOT qualified:

Transportation costs (those plane tickets home for Thanksgiving)
Health insurance premiums
Sports or activity fees
Cell phone plans (even if they claim it's "for school").

Using IRS Form 1099-Q the Right Way

Form 1099-Q is your roadmap for properly reporting 529 withdrawals. Let's demystify this form once and for all.

First, check who received the form. If the money went directly to the school, the beneficiary (student) gets the form. If it went to the account owner, they receive it instead.

The form contains three crucial boxes:

Box 1: Total amount distributed
Box 2: Portion of that distribution that was earnings
Box 3: Portion that was your original contribution

The key thing to understand? Only the earnings portion (Box 2) could potentially be taxed—never your original contributions. You already paid tax on that money before it went into the 529 plan.

Here's what to do when this form arrives:

Don't panic! In most cases, you won't need to do anything with it
Calculate your total qualified education expenses for the year
If these expenses equal or exceed your total distributions, file the form away—you're done!
If your qualified expenses are less than your distributions, you'll need to calculate the taxable portion

Pro tip: Keep your 1099-Q forms for at least three years after filing, along with receipts for all your education expenses.

What Happens with Non-Qualified Withdrawals?

Let's face it, sometimes plans change. Maybe your child got a full scholarship (congratulations!), decided college wasn't their path, or perhaps you simply saved more than you needed. Whatever the reason, taking non-qualified withdrawals comes with tax consequences you should understand.

When you use 529 funds for non-qualified expenses, two things happen:

The earnings portion becomes subject to federal income tax
Those same earnings typically face an additional 10% penalty

Let's say you withdraw $20,000, and $5,000 of that represents earnings. If this is a non-qualified withdrawal, you'll pay income tax on that $5,000 plus an additional $500 penalty (10% of $5,000). Ouch!

Fortunately, there are exceptions to the 10% penalty (though not the income tax) if:

The beneficiary receives a tax-free scholarship
The beneficiary attends a U.S. military academy
The beneficiary dies or becomes disabled
You're using the funds for expenses you're also claiming under education tax credits

Before making a non-qualified withdrawal, consider these better options:

Change the beneficiary to another family member (I switched my older daughter's leftover funds to my younger son)
Save the funds for graduate school
Roll over up to $35,000 to the beneficiary's Roth IRA (subject to restrictions)
Roll funds to an ABLE account for a disabled beneficiary

By exploring these alternatives, you can often avoid both taxes and penalties while still putting your hard-earned savings to good use.

Conclusion

Understanding tax implications of 529 plans doesn't have to feel like you're taking an advanced calculus exam. While the federal government doesn't offer deductions for contributions, the tax-free growth and withdrawals make these plans powerful tools for tackling the ever-rising cost of education.

The key takeaways? Check for state tax benefits, maintain records of qualified expenses, and know the implications before making any withdrawals. With proper planning, your 529 can work alongside other education tax benefits to maximize your savings.

Have questions about how your 529 plan works with other education tax benefits? We at NSKT Global specialize in maximizing tax savings for families at all stages of their educational journey. From determining which expenses qualify to properly documenting your withdrawals, we'll handle the tax headaches while you focus on what matters—preparing for a bright educational future.

FAQs About 529 Plans and Taxes

Are 529 plan donations tax deductible federally?

No, 529 plan contributions aren't deductible on your federal tax return. The tax benefit comes later—as tax-free growth and withdrawals for qualified education expenses.

What are the 529 plan contribution limits for 2025?

There's no specific annual limit, but gifts over $19,000 per beneficiary in 2025 may require filing a gift tax return. Many states have total contribution limits between $250,000 and $500,000 per beneficiary.

How do I know if a withdrawal is qualified?

A qualified withdrawal pays for eligible education expenses: tuition, fees, books, required supplies and equipment, room and board (if enrolled at least half-time), computers and software needed for school. K-12 tuition (up to $10,000 annually) and student loan payments (up to $10,000 lifetime) also qualify.

Do I need to include 529 information on my federal return?

If all your withdrawals covered qualified education expenses, you typically don't need to report anything on your federal return. Only if some portion went to non-qualified expenses would you need to report the taxable earnings portion.

What if I used 529 funds for non-education expenses?

If you used 529 funds for non-qualified expenses, the earnings portion will be subject to income tax plus an additional 10% penalty. Before taking this hit, consider changing the beneficiary or exploring penalty exceptions—there are often better options available!