North Carolina does not currently allow a state income tax deduction for contributions made to a North Carolina 529 Plan or any other qualified tuition program. North Carolina previously allowed a deduction for certain contributions made between 2006 and 2013
If you claimed a North Carolina deduction for contributions made while the deduction was available and later take a nonqualified withdrawal, part or all of the prior deduction may be required to be added back to North Carolina income.
When Do I Need to Report a 529 Plan Withdrawal?
You may need to report a North Carolina adjustment if:
- You previously claimed a North Carolina 529 deduction when the deduction was allowed, and
- You withdrew funds from the account for a purpose that does not qualify under IRC Section 529.
In these situations, the amount previously deducted may be subject to North Carolina recapture rules and added back to income on your North Carolina return.
What Is a 529 Plan?
A 529 Plan is a tax-advantaged education savings program designed to help pay qualified education expenses for a designated beneficiary.
Funds may generally be used for qualified expenses such as:
- College tuition
- Required fees
- Books and supplies
- Room and board (when eligible)
- Computers and certain technology expenses
- Qualified vocational and technical education expenses
- Registered apprenticeship program expenses
- Certain special-needs services
- Qualified student loan repayments, subject to federal limits
- Up to $10,000 per year per student for qualified K-12 tuition expenses
What Happens If I Use the Funds for Nonqualified Expenses?
If a withdrawal is not used for qualified education expenses:
- The earnings portion of the distribution may be subject to federal income tax.
- An additional federal tax penalty may apply.
- North Carolina may require recapture of prior North Carolina deductions claimed during the years the deduction was available.
Rollovers Between 529 Plans
Generally, funds may be rolled over from one qualified 529 Plan to another qualified 529 Plan if all applicable federal requirements are met.
North Carolina Reporting
If you are required to recapture a previously claimed North Carolina 529 deduction due to a nonqualified withdrawal:
Navigation
- State
- Edit North Carolina (three dots)
- Additions to Income
- Withdrawal of 529 Contributions Not Used for Qualified Purposes
Enter the amount of prior North Carolina deductions that must be added back as required by North Carolina law.