New Jersey has been slower than other states to consider contributions to 529 plans as state income tax deductible. The good news is that the New Jersey College Affordability Act (NJCAA), which went into effect in 2022, remedies the situation and adds additional tax deductions for qualified higher educational expenses.

The NJCAA includes three separate income tax deductions for taxpayers with a gross income of $200,000 or less. Deductions available for qualifying taxpayers include contributions up to $10,000 to a 529 savings plan, a portion of payments made for an NJCLASS student loan, and up to $10,000 in-state tuition expense.

Deduction #1 – Section 529 Plan – Qualified Tuition Program (QTP)

To encourage saving for future education costs, the federal government established two types of 529 plans: Education Savings Plans and Prepaid Tuition Plans.  New Jersey taxpayers who qualify can make tax-deductible contributions up to $10,000 to either plan.  

Education Savings Plans allow you to save for a beneficiary’s qualified educational expenses at generally any college, university, or vocational school as well as for tuition at eligible public, private and religious K-12 schools and the costs for certified apprenticeships.

Prepaid Tuition Plans allow savings towards the cost of tuition for a select number of in-state educational institutions.  In New Jersey only one 4-year university and 6 trade schools participate in this offering.  Given the rapidly changing environment in post-secondary education and limited choices available, investing in the Educational Savings Plan option allows for greater flexibility.

Like many states, New Jersey has its own state-sponsored program called NJBEST 529.  Savers in the NJBEST 529 program choose from portfolios comprised largely of funds from Franklin Templeton. To promote participation in the state program, NJBEST 529 makes scholarship funds available to program beneficiaries (see the Bonus-NJBEST Scholarship section below).  Before deciding on the state-sponsored program because of these scholarship funds, it is wise to consider other places for your college savings account.

New Jersey residents can contribute to 529 plans in other states or national brokerage firms and still receive a deduction on their state taxes. There are many options available. Remember that the total cost of participation in a 529 plan will include state and management fees as well as charges on the investments themselves. These fees can vary widely among plans.

Deduction #2 – Payment on an NJCLASS Loan  

For participants in the New Jersey College Loans to Assist State Students (or NJCLASS) payments up to $2,500 applied to loan principal or interest are tax-deductible for New Jersey.

The NJCLASS program provides three options for New Jersey families to finance their student loans.  In the table below NJCLASS rates are compared to the Federal Parent PLUS program.  Note the effect of repayment terms on loan rates.   

Deduction #3 – Deduction for NJ college tuition expense

New Jersey taxpayers who attend college in-state can receive a tax deduction up to $10,000 for tuition costs.  It is important to understand that the $10,000 deduction for tuition costs and the $10,000 deduction for 529 contributions refer to the tax entity that is filing.  For example, a married couple filing jointly would receive a single $10,000 deduction even if they made three $10,000 contributions, one for each of their children.  Similarly, if two family members attend NJ institutions of higher learning, only $10,000 in tuition expense is deductible for the tax entity that is filing.   

Bonus – NJBEST Scholarship 

The NJBEST Scholarship provides a tax-free scholarship to beneficiaries of an NJBEST 529 College Savings Plan provided the beneficiary attends a college in New Jersey, according to specific guidelines.  Depending on how long the NJBEST account has been opened, the student can receive up to a maximum $ 3,000 scholarship per year. 

Don’t Forget about Federal Education Credits

Federal education credits and state tax deductions can work together to lower the cost of attending college. The American Opportunity Tax Credit (AOTC), and Lifetime Learning Credit (LLC) are the two education tax credits at the federal level for post-secondary tuition expenses.  

They have the same eligibility criteria: credits phase out for modified adjusted incomes (MAGI) for single taxpayers over the income range of $80,000-$90,000 and $160,000-$180,000 for married filing jointly. On the other hand, there are a number of important differences between the credits.  The AOTC is partially refundable and the LLC is non-refundable.  Other differences include the requirement of at least half-time enrollment in a degree program for the AOTC whereas the LLC can be applied to costs for career development or improving job skills.  Another important distinction between the two is that the AOTC can be used for no more than 4 tax years for the same student.  The LLC has no limit on the number of years that it can be claimed.  For further information on benefits of both credits see this IRS comparison. 

Remember you may be able to deduct interest you pay on a qualified student loan, also subject to MAGI phaseout limits.  This interest is an above-the-line adjustment to income that does not require you to itemize your deductions.

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Putting it all together 

There’s no denying that the costs of higher education can be burdensome. A variety of tax credits and deductions are available to assist families with these expenses.  

If you have any questions about New Jersey or federal education tax credits, we can help.  We make it our business to stay on top of everything that impacts your family’s financial health, now and in the future.  

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