Illinois Lawsuit Challenges 529 Plan Tax Incentives

July 1, 2007

An intended class-action lawsuit filed in Illinois in mid-May has the potential to challenge how all state Treasury offices apply tax deductions for contributions to in-state, versus out-of-state, 529 college savings plans. At the center of the lawsuit are the tax incentives that many states extend to residents allowing them a tax deduction for each year's contribution to a 529 plan sponsored by their home state's Treasury. However, tax deductions for similar contributions made to 529 plans operated by other states are generally not allowed. That policy of providing favorable tax incentives for in-state contributions over contributions to out-of-state plans is unconstitutional, charges the Illinois lawsuit, and could spark major changes to all state plans.

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