Illinois · education savings
Bright Start and Bright Directions: the 529 subtraction
Illinois lets anyone who puts money into one of the state’s own 529 plans subtract up to $10,000 a year, $20,000 on a joint return, on Schedule M. The federal return gives nothing for it, so nobody asks. What counts, who can claim it, the December 31 deadline, and the recapture rules that catch K-12 withdrawals and out-of-state rollovers.
By Charles Trautman, EA
Need to Know Tax · written from Illinois Department of Revenue sources, October 29, 2026; updated November 12, 2026 after the election · not yet reviewed by an Illinois practitioner
A contribution to an Illinois 529 plan is the one deduction on the Illinois return that rewards saving rather than earning less. Put $10,000 into a Bright Start, Bright Directions or College Illinois! account by December 31 and Illinois net income drops by $10,000; a married couple filing jointly can subtract $20,000. At 4.95% that is $495 or $990 of Illinois tax, every year, for money that stays yours. The subtraction goes on Schedule M, line 13 (verify), and it is open to the person who made the contribution, whether or not that person owns the account. Because there is no federal deduction for a 529 contribution, the federal return never asks about it, and a preparer working only from the federal return never finds it.
The flip side is that Illinois wants the deduction back when the money leaves the Illinois system or is spent on something Illinois does not count. Those add-backs are on the same Schedule M, and the one most parents trip over is tuition for a private elementary or high school.
Three plans, one limit
Illinois sponsors two 529 savings plans and one closed prepaid program. Bright Start is sold directly, with no sales charges and asset-based fees averaging about 0.24% a year (verify); Bright Directions is the same program sold through financial advisers, with adviser compensation added; College Illinois! is the prepaid tuition program, closed to new enrollment since 2017 but still holding contracts. The $10,000 / $20,000 limit is a single limit across all three and across every account and beneficiary. A couple with three children and three Bright Start accounts can subtract $20,000 in total, not $20,000 per child.
Contributions to any other state’s 529 plan earn no Illinois subtraction at all. Earnings in those plans still come out Illinois-tax-free when spent on qualified expenses, so a family that moved here with a Utah or Nevada account is not penalized for keeping it; they simply get nothing for adding to it. The usual answer is to open an Illinois account for new money.
| Item | Rule |
|---|---|
| Amount | Up to $10,000 per year; $20,000 married filing jointly; one limit across all Illinois accounts |
| Eligible plans | Bright Start, Bright Directions, College Illinois! only |
| Who claims | The contributor, on an Illinois return; the account owner need not be the contributor |
| Deadline | Contribution made (postmarked or received) by December 31; no carryforward of excess |
| Income limit | None |
| Rollovers in | Only the contribution portion of money rolled in from another state’s plan is subtractable; earnings are not |
| Employer contributions | Contributions an employer makes on your behalf count toward your subtraction |
| Where | Schedule M, Step 3, line 13, one account number per row; total to IL-1040 line 7 |
Who can take it
The subtraction belongs to whoever made the contribution, provided that person files an Illinois return. A grandparent in Illinois who deposits $10,000 into a grandchild’s Bright Start account owned by the child’s parent takes the subtraction; the parent does not, because the parent put nothing in. Schedule M asks for the account number of each account contributed to and has a box to check for contributions that were gifts into someone else’s account; a gift without an account number needs a copy of the cancelled check and the owner’s name and address attached. Account statements from the plan portal, dated December 31, show each contributor’s deposits for the year and are the document to keep.
On a joint return the $20,000 is one figure for the couple, not $10,000 each tested separately, so it does not matter which spouse wrote the check. A married couple filing separately in Illinois is back to $10,000 each. A nonresident with Illinois-source income can take the subtraction only in proportion to the Illinois share on Schedule NR.
Timing: December 31 is a wall
Unlike an IRA contribution, which can be made until April 15 and counted for the prior year, a 529 contribution counts in the year it is made. The plan treats a check postmarked in late December but posted in January as a prior-year contribution (verify), but electronic transfers are dated when they settle, so a transfer started on December 31 can land in the new year. There is no carryforward. A $30,000 deposit in one year subtracts $20,000 on a joint return and loses the other $10,000 for Illinois purposes forever; the same $30,000 spread over two Decembers subtracts all of it. Large gifts also meet the federal gift tax: the annual exclusion is $19,000 per donor per recipient for 2026, and a 529 can take five years of exclusions at once with a Form 709 election, but Illinois still subtracts only what went in during the year.
Worked example: one deposit, two ways to make it
A married couple with Illinois net income of $160,000 wants to put $40,000 toward a child’s college over the next two years. Their son’s grandmother, also in Illinois, offers to contribute $10,000 of it herself.
| All $40,000 in December 2026, parents only | $20,000 parents + $10,000 grandmother in 2026; $10,000 parents in 2027 | |
|---|---|---|
| Parents’ subtraction, 2026 | $20,000 (capped) | $20,000 |
| Grandmother’s subtraction, 2026 | $0 | $10,000 |
| Parents’ subtraction, 2027 | $0 | $10,000 |
| Total subtracted | $20,000 | $40,000 |
| Illinois tax saved at 4.95% | $990 | $1,980 |
Same $40,000 into the same account; the second plan saves $990 more by spreading the deposits across two calendar years and two Illinois returns. The grandmother’s gift stays under her $19,000 annual federal gift exclusion.
Recapture: when Illinois takes it back
Schedule M has two addition lines that reverse the subtraction, and they are the part of the rule most people have never heard of.
Rollovers out of Illinois (line 7). Move money from Bright Start to another state’s 529 plan and Illinois adds back the smaller of the amount transferred or the subtractions you took in prior years that have not already been recaptured. A family that moves to Colorado and rolls the account into CollegeInvest to get the Colorado deduction pays Illinois back first, on the final Illinois return. Leaving the Bright Start account where it is avoids this; the money can still be spent at any eligible college in any state.
Nonqualified withdrawals (line 9). Take money out for something that is not a qualified expense at an eligible institution and the same rule applies: add back the smaller of the withdrawal or the prior subtractions not yet recaptured. The federal 10% penalty and federal tax on the earnings come on top. The recapture is waived if the withdrawal is because the beneficiary died or became disabled, and a scholarship refund can be put back within 60 days without triggering it.
K-12 tuition is nonqualified in Illinois. Federally, a 529 can pay up to $20,000 a year of elementary and secondary tuition and, from 2026, curriculum, books, tutoring and testing fees. Illinois never adopted the K-12 expansion. For Illinois purposes those withdrawals are nonqualified: prior subtractions are recaptured and the earnings portion is added to Illinois income on Schedule M line 4. The federal return shows nothing wrong, the 1099-Q looks ordinary, and the Illinois return is simply wrong unless someone knows the rule. A parent paying private school from a Bright Start account should at least know what it costs: on a $10,000 withdrawal that had been subtracted, about $495 of recaptured Illinois tax plus 4.95% of the earnings.
What Illinois does treat as qualified matches the rest of the federal list: tuition, fees, books, supplies and equipment at a college, university, community college or trade school eligible for federal student aid; room and board for at least half-time students; computers and internet; registered apprenticeship costs; and up to $10,000 lifetime of student loan repayment for the beneficiary or a sibling. Rollovers to the beneficiary’s Roth IRA under the federal rules, up to $35,000 lifetime from an account open 15 years, are treated as qualified by Illinois as well (verify).
The federal picture, for contrast
Federally a 529 contribution is an after-tax gift; the benefit is that earnings grow and come out untaxed when spent on qualified expenses. Illinois adds the front-end subtraction and otherwise follows the federal result, with the K-12 exception above. One interaction to watch: a parent who claims the American Opportunity or Lifetime Learning Credit for tuition cannot also treat the same tuition as a qualified 529 expense federally, and may end up with 529 earnings in federal AGI; Illinois lets those earnings be subtracted back out on Schedule M line 39 (verify). Illinois also allows an income tax refund to be deposited straight into a Bright Start account from the IL-1040 direct deposit section (verify), which starts next year’s subtraction.
Behind the scenes
Illinois has allowed the subtraction since 2005 (verify), and the $10,000 / $20,000 limit has not moved since, which at 4.95% makes it a fixed $495 or $990 a year in a state whose tuition has roughly doubled in the interval. The recapture rules came in with it, for the plain reason that a deduction on the way in with no consequence on the way out would let anyone run money through a 529 for a year and take 4.95% off. The out-of-state rollover recapture is the same logic applied to people who leave: the state paid for the deposit, and the state wants it back if the account leaves too.
The K-12 gap is a story of nonconformity. When the 2017 federal tax act let 529 money pay private school tuition, most states with a deduction had to decide whether to follow. Illinois did not, partly on cost and partly because the state’s own K-12 education expense credit already gave private school families something. The 2025 federal act widened K-12 use again and doubled the annual limit; Illinois again did nothing. The result is one of the few places where the Illinois return is harder than the federal one.
What to bring
- December 31 statements for every Illinois 529 account you contributed to, showing the account number and your deposits for the year
- For a gift into someone else’s account: the account number, or a copy of the cancelled check with the owner’s name and address
- Any Form 1099-Q for withdrawals, with a note of what the money paid for and where
- If money was rolled in from another state’s plan: the breakdown of contributions versus earnings
- If money was rolled out to another state’s plan or withdrawn for K-12 tuition: the amount, and your prior Illinois subtractions
- Employer 529 contributions, from the pay stub or W-2
Questions people ask
I contribute to my grandchildren’s accounts. Can I deduct it, or only their parents?
You can, on your own Illinois return, up to $10,000 or $20,000 joint, because you made the contribution. The parents deduct only what they put in themselves.
Does the limit apply per child?
No. It is one limit per return across every Illinois 529 account you contribute to, however many beneficiaries.
I have a Vanguard 529 from Nevada. Should I move it to Bright Start?
Moving it earns a subtraction only for the contribution portion of what you roll in, not the earnings, and only up to the annual limit in the year of the rollover. A simpler answer is usually to leave the old account alone and direct new contributions to Bright Start.
Can I pay my daughter’s Catholic high school tuition from Bright Start?
Federally, yes, up to $20,000 a year. For Illinois it is a nonqualified withdrawal: the subtractions you took come back as income, and the earnings portion is taxed. Decide with the Illinois cost in view.
We are moving out of state. What happens to the account?
Nothing, if you leave it in Bright Start; it can pay for college anywhere. Roll it to your new state’s plan and Illinois recaptures your prior subtractions on the final Illinois return.
I made a $15,000 contribution in one year, filing single. Can I carry $5,000 forward?
No. The excess is lost for Illinois purposes. Spreading deposits over December and January would have used both years’ limits.
Illinois pays you to save; it also keeps the receipt
Contribute to an Illinois plan by December 31, subtract it on Schedule M in your own name, and before any withdrawal ask whether Illinois, not just the IRS, calls it qualified.
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Written by Charles Trautman, EA, editor · Need to Know Tax, Lone Tree, Colorado
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