What does it mean when comparing 2 college saving plans, they say State Tax Credit or Deduction? ?

Question

These are 2 different states and what they offer in terms of 529 savings plans. One says yes and the other no to the question. What is a state tax credit? Sorry, naive about taxes.

Answer 1

If I understand the question correctly, it is a credit you can take on your state income tax. Of course, you actually have to live in the state that offers the credit.

Answer 2

Good question Amy.  A lot of people are confused by the terms "credit" and "deduction".  A credit directly reduces the amount of tax owed; that is, if you owe $500 before credits and have a $100 credit, your net tax is $400.  A deduction is a reduction in the amount of income being taxed.  A $100 deduction would reduce your taxable income by that amount, and if the state tax rate were 5%, you would have a $5 tax reduction.

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