New Jersey may become the 35th state to offer an income tax benefit for residents who contribute to a 529 plan. The 529 plan tax deduction is part of a comprehensive college affordability plan in the state’s fiscal year 2022 budget proposal.
New Jersey Governor Phil Murphy, Senate President Stephen Sweeney and Assembly Speaker Craig Coughlin agreed upon a number of provisions to help families who are saving and paying for college, as well as those who are paying off student loans. Highlights of the plan include the following:
New Jersey State Income Tax Deductions
The proposal includes potential state income tax relief for college savers, families with current college students and student loan borrowers.
529 plan tax deduction
The proposal includes a provision to allow New Jersey taxpayers to deduct 529 plan contributions of up to $10,000 per year from state taxable income. The benefit would only be available to households with an annual income of $200,000 or less. Families must contribute to the NJ Better Education Savings Trust (NJBEST) 529 plan in order to qualify.
529 plans allow families to invest for college on a tax-deferred basis. The investment is tax-free when a family takes a distribution to pay for qualified education expenses. 529 plans also receive favorable treatment on the Free Application for Federal Student Aid (FAFSA). In most cases, students who are applying for need-based financial aid are better off saving in a 529 plan rather than any other savings vehicle.
Tax deduction for tuition payments
The proposal also includes a state income tax deduction for up to $10,000 in contributions for in-state tuition payments. Like the 529 plan tax benefit, this tax deduction only applies to households earning up to $200,000.
Tax deduction for student loan payments
Families who earn up to $200,000 may also deduct up to $2,500 in student loan repayments from New Jersey taxable income. Qualifying repayments include payments of interest and principal toward New Jersey College Loans to Assist State Students (NJCLASS).
NJCLASS student loans are available to New Jersey residents and students, and include in-school, refinance and consolidation options.
NJBEST Matching Contributions
New Jersey’s college affordability plan encourages low-income families to save for college by offering matching contributions to a newly opened NJBEST 529 plan. Matching contributions of up to $750 would be available to families who earn less than $75,000 per year.
Fifteen states currently offer matching grants for residents who use their 529 plans. States provide these benefits to increase enrollment and participation in their college savings programs. Students with even a small amount of college savings are more likely to enroll in and graduate from college than students without any savings.
Free College Tuition for New Jersey Students
New Jersey’s Community College Opportunity Grant (CCOG) currently offers residents free tuition for two years at an in-state community college. Governor Murphy’s new proposal extends this benefit to a student’s entire four years of college.
The Garden State Guarantee provides free tuition at New Jersey public 4-year colleges for third- and fourth-year students. Eligible students must have an annual household income below $65,000. Tuition discounts for higher income students would phase out on a sliding scale. Individual colleges would determine their own income threshold.
Governor Murphy expects the expanded free tuition program to “benefit tens of thousands of New Jersey students,” according to a press release.
The NJBEST 529 plan is available exclusively to New Jersey residents. Not a New Jersey resident? Explore more 529 plan options here.