Paying for education has never been easy, but in 2025, families have more tools than ever to reduce the financial strain. From federal tax credits that offer immediate relief to state-sponsored 529 plans that grow tax-free and may offer income tax deductions or credits, a well-planned strategy can lead to significant long-term savings. By understanding how to combine these federal and state incentives, families can fund K–12, college, and even graduate education with greater confidence and less cost.
529 Plans: Tax-Free Growth, Expanded Flexibility, and 2025 Updates
A 529 plan is a state-sponsored savings account designed to encourage long-term savings for education. Contributions are made with after-tax dollars and are not deductible on federal returns, but the earnings grow tax-deferred. Withdrawals used for qualified education expenses are entirely tax-free at the federal level.
Qualified expenses include tuition, fees, books, room and board, K–12 tuition (up to $10,000 per year), computers and internet access, certain apprenticeship programs, and student loan repayment (up to $10,000 lifetime per beneficiary). In 2025, qualified K–12 expenses include curriculum, instructional materials, tutoring, online tools, testing fees, and dual enrollment programs. Educational therapies for students with disabilities are also eligible.
In addition to these benefits, the Secure 2.0 Act now allows for penalty- and tax-free rollovers from 529 plans to Roth IRAs. Starting in 2024, beneficiaries may roll over up to $35,000 over their lifetime into a Roth IRA in their name, subject to an annual limit ($7,000 in 2025). The 529 account must have been open for at least 15 years, and contributions must meet a five-year aging requirement before rollover. This provision helps families repurpose unused education funds for retirement without losing tax benefits.
In 2025, the federal annual gift tax exclusion is $19,000. Because 529 contributions are treated as gifts for tax purposes, individuals may contribute up to this amount per beneficiary each year without filing a gift tax return. Married couples filing jointly may contribute up to $38,000 per beneficiary. A special five-year election also allows lump-sum contributions of up to $95,000 ($190,000 for joint filers) to be spread evenly over five years for gift tax reporting purposes.
Additionally, the Tuition Gift Tax Exclusion remains available. This provision allows individuals, including grandparents, to make unlimited tax-free payments directly to an educational institution for a beneficiary’s tuition. These payments do not count against the annual gift tax exclusion or lifetime exemption and can be used to reduce the giver’s taxable estate.
State-Level Tax Benefits
While there is no federal income tax deduction for contributions to a 529 plan, many states with income taxes offer a deduction or credit for contributions when calculating state income tax. In most cases, the total amount or a portion of annual contributions is deductible. Pennsylvania, for example, allows deductions up to $18,000 per beneficiary ($36,000 for joint filers) and permits deductions for contributions to any state’s plan. New York offers up to $5,000 ($10,000 for joint filers) for contributions to its own plan, and New Jersey allows households earning under $200,000 to deduct up to $10,000 for contributions to the NJBEST plan.
Most states allow contributors other than the account owner, such as grandparents or relatives, to claim state tax benefits. However, only the account owner or their spouse may claim the deduction in seven states. There are typically no holding period requirements, meaning taxpayers can contribute, take an immediate qualified distribution, and still qualify for a deduction or credit in the same year. This can effectively function like an annual tuition discount for K–12 or graduate education.
State income tax benefits are based on annual contributions, and families may continue contributing each year regardless of the beneficiary’s age. There are no time limits on 529 accounts. Contributions may continue through elementary school, high school, college, and graduate programs.
Federal Education Tax Credits
While 529 plans support long-term savings, two federal education tax credits offer more immediate relief: the American Opportunity Tax Credit and the Lifetime Learning Credit.
- American Opportunity Tax Credit (AOTC): In 2025, the American Opportunity Tax Credit provides up to $2,500 per eligible student for qualified education expenses. Up to 40% of the credit—$1,000—may be refundable, meaning eligible taxpayers can receive that portion even if they owe no federal income tax. The credit is available only for students enrolled in a degree or other recognized credential program. It begins to phase out for individuals with modified adjusted gross income (MAGI) over $80,000 and for married couples filing jointly over $160,000, and is completely phased out at $90,000 and $180,000, respectively.
- Lifetime Learning Credit (LLC): The LLC provides up to $2,000 per tax return, regardless of the number of students. It covers tuition and fees for undergraduate, graduate, or continuing education courses that improve job skills. Unlike the AOTC, the LLC is not refundable, but it is available for unlimited years. The credit phases out at the same income levels as the AOTC.
Proposed Changes in Federal Legislation (Not Yet Law)
The House passed a budget reconciliation bill (“One Big Beautiful Bill Act”) that proposes several education-related tax revisions on May 22, 2025. These provisions still need to be passed by the Senate and signed into law by President Trump. Key provisions in the House’s proposed bill, which may be amended before becoming law, include:
- Retention of the AOTC and LLC, with a new requirement to report the student’s Social Security Number and the educational institution’s Employer Identification Number (EIN) on tax returns
- Permanent tax-free treatment of student loan forgiveness due to death or disability
- Permanent exclusion from income for employer-paid student loan repayment assistance (up to $5,250 annually)
- Expansion of 529 plan qualified expenses to include additional K–12 and workforce education costs
- Enhancements to ABLE (Achieving a Better Life Experience) accounts, including increased contribution limits and qualification for the Saver’s Credit. Rollovers from 529 plans to ABLE accounts would be made permanent
- Creation of new Trump Accounts (formerly MAGA Accounts) for children under age 8, with contribution and distribution rules similar to education and retirement accounts
Families seeking to manage education costs should consider immediate and long-term tax strategies. The combination of 529 plans and federal education tax credits offers flexibility, growth potential, and meaningful savings. With recent updates and proposed legislation, families have more options than ever to align education savings with broader financial goals.
Contact your Stephano Slack tax manager/partner at 610-687-1600 or taxinfo@StephanoSlack.com to discuss your situation.
Author Martha Eckhardt, EA, is a highly skilled Senior Tax Manager and Office Manager at Stephano Slack’s Haddonfield office. With a sharp focus on individual tax compliance, Martha excels in handling complex multi-state cases and serving high-net-worth clients. Her expertise includes managing trusts, preparing gift tax returns, and overseeing private foundations’ 990-PFs. Additionally, Martha brings specialized knowledge in Expat tax returns and associated Equalizations. For personalized tax solutions, reach her at 856-528-5386 or meckhardt@stephanoslack.com.
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