Sunny Day Fund exists to power financial health for all. Employees save automatically, straight from their paycheck, for the moments that matter most. Thus far, it meant saving for the unexpected like a car repair or a pet bill; and it has also meant saving for the expected like a vacation or starting a family. Now, Sunny Day Fund’s Savers will also be able to save for their first home – with potential state tax benefits across eleven states and counting – and further enable hardworking Americans to achieve their dreams.
For most households in America, their home is the single largest asset they will ever own. It can also be the hardest one to start. A down payment and closing costs can run tens of thousands of dollars or more. For many employees, that large cash outlay is what stands between renting and building equity in their home.
Whether you’re a Saver saving with Sunny Day Fund today, a total rewards leader deciding which benefits work best for their people, or the benefits consultants or plan advisors who advise them – this guide is to help you understand First-time Homebuying Savings Accounts, how they sit alongside core financial benefits like retirement and health savings, which states are offering tax advantages, and what that means for workers and employers alike.
What is a First-Time Homebuyer Savings Account?
A First-Time Homebuyer Savings Account (FHSA, sometimes called an FHBSA or FTHSA) is a state-level savings program that offers tax advantages to people saving for their first home. Think of it as a 529 plan, but for a down payment instead of college tuition.
The structure varies from state to state, but the basic idea is the same. An individual designates a savings account as their FHSA on their state tax return, contributes money to it over time, and as long as the funds are eventually used for an eligible home purchase (down payment, closing costs, and similar disbursements), the state rewards them with one or both of these benefits:
• A state income tax deduction or subtraction for contributions made each year, and/or
• State tax-free growth on the interest, dividends, and capital gains the account earns.
Critically for employer-sponsored benefit design, these accounts are not held at any special institution or any under special plan subject to ERISA. In most states, an ordinary savings, money market or brokerage account with principal protection at a bank or credit union can be designated as an FHSA on the account holder’s tax return. The “FHSA” status is a tax designation, not a separate product type — which is part of what makes it easy to layer on top of a workplace savings platform like Sunny Day Fund, while allowing employer contributions if preferred.
Which States Offer a First-Time Homebuyer Savings Account Tax Break?
As of May 2026, sixteen states have enacted FHSA tax programs, plus Connecticut, whose newly enacted program began for new accounts in 2026 with deductions claimable on 2027 returns. The rules differ meaningfully from state to state, so this is not a one-size-fits-all benefit — a relevant consideration for multi-state employers thinking about how to communicate the benefit to their workforce.
The bullets below summarizes each program. Please treat them as a starting point rather than tax advice — programs are amended regularly, several states index their caps to inflation, and the fine print matters.
Alabama
- Status: Active; sunsets Dec 31, 2028 unless extended
- Year enacted: 2018
- Annual deduction (single / joint): $5,000 / $10,000
- Lifetime / aggregate cap: $25,000 / $50,000 over 5 years
- What's deductible: Contributions + earnings
- Lookback / first-time definition: No home owned in past 10 years (covers "second-chance" buyers)
- Penalty: 10%
- Link to learn more about Alabama’s rules
Colorado
- Status: Closed — no subtraction allowed for tax year 2025 or later
- Year enacted: 2016
- Annual deduction (single / joint): —
- Lifetime / aggregate cap: —
- What's deductible: Earnings only (historically)
- Lookback / first-time definition: First-time in CO
- Penalty: Recapture
- Link to learn more about Colorado’s rules – note, no longer live
Connecticut
- Status: New — accounts open Jan 1, 2026; deductions first available on 2027 returns
- Year enacted: 2025
- Annual deduction (single / joint): $2,500 / $5,000 (AGI under $100K / $200K)
- Lifetime / aggregate cap: No statutory lifetime cap; annual deduction limited (no withdrawals within first year without penalty)
- What's deductible: Contributions + earnings; federal AGI thresholds apply
- Lookback / first-time definition: First-time buyer in CT 1–4 family residence
- Penalty: 10%
- Link to learn more about Connecticut’s rules
Idaho
- Status: Active
- Year enacted: 2017 (deductions began 2020)
- Annual deduction (single / joint): $15,000 / $30,000
- Lifetime / aggregate cap: $100,000 total account balance
- What's deductible: Contributions + earnings
- Lookback / first-time definition: Has never owned a home anywhere
- Penalty: Recapture
- Link to learn more about Idaho’s rules
Iowa
- Status: Active. However, financial custodian must be based in Iowa (ineligible for Sunny Day Fund’s Portage Bank custodian).
- Year enacted: 2017
- Annual deduction (single / joint): $2,372 / $4,744 (Tax Year 2026; indexed)
- Lifetime / aggregate cap: 10× the annual limit in effect at account opening
- What's deductible: Contributions + earnings
- Lookback / first-time definition: Beneficiary — no home owned in past 3 years (account holder can be an existing homeowner)
- Penalty: 10%
- Link to learn more about Iowa’s rules
Kansas
- Status: Active
- Year enacted: 2021
- Annual deduction (single / joint): $3,000 / $6,000
- Lifetime / aggregate cap: $24,000 / $48,000; $50,000 account balance trigger
- What's deductible: Contributions + earnings
- Lookback / first-time definition: Never owned, or 3 years post-divorce
- Penalty: 10%
- Link to learn more about Kansas’ rules
Maryland
- Status: Active
- Year enacted: 2021
- Annual deduction (single / joint): $5,000 / $10,000
- Lifetime / aggregate cap: $50,000 over 10 years
- What's deductible: Contributions + earnings
- Lookback / first-time definition: No home owned in Maryland in past 7 years
- Penalty: 10%
- Link to learn more about Maryland’s rules
Michigan
- Status: Active; contribution deductions sunset after TY 2026
- Year enacted: 2022
- Annual deduction (single / joint): $5,000 / $10,000
- Lifetime / aggregate cap: $50,000 max account balance
- What's deductible: Contributions + interest
- Lookback / first-time definition: No home owned in past 3 years
- Penalty: 10%
- Link to learn more about Michigan’s rules
Minnesota
- Status: Active
- Year enacted: 2017
- Annual deduction (single / joint): Contribution cap $14,000 / $28,000
- Lifetime / aggregate cap: $50K / $100K total contributions; $150,000 account max
- What's deductible: Earnings only (interest/dividends); contributions are NOT deductible
- Lookback / first-time definition: Beneficiary — no home owned in past 3 years
- Penalty: 10% on excess
- Link to learn more about Minnesota’s rules
Mississippi
- Status: Active
- Year enacted: 2017
- Annual deduction (single / joint): $2,500 / $5,000
- Lifetime / aggregate cap: No statutory lifetime cap
- What's deductible: Contributions + earnings
- Lookback / first-time definition: Has never owned a home in MS or any other state
- Penalty: 10%
- Link to learn more about Mississippi’s rules
Missouri
- Status: Terminated after Sep 1, 2025
- Year enacted: 2018
- Annual deduction (single / joint): $800 / $1,600 (deduction = 50% of contributions; max contribution $1,600 / $3,200)
- Lifetime / aggregate cap: $25,000 contributions; $50,000 account max
- What's deductible: 50% of contributions + earnings exempt
- Lookback / first-time definition: Never owned a principal residence (3-year post-divorce exception)
- Penalty: Recapture
- Link to learn more about Missouri’s rules
Montana
- Status: Closed to new accounts as of Jan 1, 2024
- Year enacted: 1997
- Annual deduction (single / joint): $3,000 / $6,000 (historically)
- Lifetime / aggregate cap: 10 years of deductions
- What's deductible: Contributions + earnings
- Lookback / first-time definition: Never owned anywhere
- Penalty: 10%
- Link to learn more about Montana’s rules – note, no longer live
Ohio
- Status: Active; pairs with above-market interest rate at participating banks only located in Ohio (ineligible for Sunny Day Fund’s Portage Bank custodian)
- Year enacted: 2024
- Annual deduction (single / joint): $5,000 (no joint accounts; spouses open separate accounts)
- Lifetime / aggregate cap: $25,000 lifetime deduction; $100,000 max balance
- What's deductible: Contributions + interest
- Lookback / first-time definition: Open to any Ohio resident; not restricted to first-time buyers
- Penalty: Recapture
- Link to learn more about Ohio’s rules
Oklahoma
- Status: Active
- Year enacted: 2019
- Annual deduction (single / joint): $5,000 / $10,000
- Lifetime / aggregate cap: $50,000 aggregate (principal + earnings)
- What's deductible: Contributions + earnings
- Lookback / first-time definition: No home owned in past 3 years
- Penalty: 10%
- Link to learn more about Oklahoma’s rules
Oregon
- Status: Active; new accounts can only be opened through Dec 31, 2026
- Year enacted: 2018
- Annual deduction (single / joint): $5,930 / $11,865 (TY 2024; indexed)
- Lifetime / aggregate cap: $50,000 aggregate over 10 years
- What's deductible: Contributions + earnings
- Lookback / first-time definition: No home owned in past 3 years; AGI under ~$104K / $149K
- Penalty: 5% + recapture
- Link to learn more about Oregon’s rules
Virginia
- Status: Active
- Year enacted: 2014
- Annual deduction (single / joint): No annual contribution cap
- Lifetime / aggregate cap: $50,000 total principal
- What's deductible: Earnings only (interest, dividends, capital gains); contributions are NOT deductible
- Lookback / first-time definition: Has never owned a home anywhere, ever
- Penalty: 5% on earnings
- Link to learn more about Virginia’s rules
A few patterns worth knowing:
- Most states deduct contributions (up to an annual cap) and also exempt the account’s earnings from state income tax.
- Note: Virginia, Minnesota, and (historically) Colorado only allow earnings to be deducted from state income tax. Interest, dividends, capital gains — get the state tax break. Contributions themselves are not deductible.
- States define “first-time” differently.
- Virginia and Idaho require the account holder to have never owned a home.
- Alabama uses a 10-year lookback (the most permissive among states that look back).
- Maryland’s 7-year lookback applies only to Maryland-state homeownership.
- Most other states use 3 years.
- A few states (Iowa, Mississippi, Minnesota) allow existing homeowners to contribute to an account, as long as the named beneficiary is a first-time buyer — a useful detail for parents, grandparents, or other family members.
- Annual caps vary widely. Most states fall in the $2,000–$5,000 individual range.
- Idaho ($15K) and Minnesota ($14K) are notable upper outliers, though Minnesota’s figure is a contribution cap and only earnings are deductible.
- Missouri is the lower outlier at $800.
- A few programs are winding down:
- Colorado closed new subtractions after TY 2024.
- Montana stopped accepting new accounts on Jan 1, 2024.
- Michigan’s contribution deduction sunsets after TY 2026.
- Oregon stops accepting new accounts after Dec 31, 2026.
- Alabama’s program is set to sunset Dec 31, 2028 unless reauthorized.
- Ohio is structurally different. The Ohio Homebuyer Plus program, launched in 2024, offers above-market interest rates at participating Ohio banks and credit unions plus a state income tax deduction. Importantly, it is not limited to first-time buyers, and it caps the lifetime deduction at $25,000 with an account balance maximum of $100,000.
- States with FHSA legislation currently under consideration as of early 2026 include:
- Illinois (SB 148)
- New York (S. 1157)
- Pennsylvania (HB 818 / SB 803)
- RhodeIsland (HB 7673 / SB 2556)
- West Virginia (HB 3375)
- Massachusetts has also been tracked by industry groups. The list of states with active programs has grown steadily over the last decade, and it is likely to keep growing.
Who's Responsible for Following State FHSA Rules?
State FHSA rules change frequently. Caps get indexed for inflation, sunset dates get extended or allowed to lapse, eligibility thresholds get tweaked, and entirely new programs get enacted (or wound down, as Colorado and Montana have recently demonstrated). The bullets and notes above reflect the law as best we can summarize it as of May 2026 — but they are a snapshot, not a guarantee, and they are not tax advice.
More importantly, the responsibility for claiming the tax benefit correctly sits with the individual Saver; not with the employer, not with the partner financial institution that holds the underlying account, and not with Sunny Day Fund enabling the awareness of the program.
Here is why that matters in practice:
- In most states, the FHSA “designation” happens when the Saver files their state tax return — the financial institution typically has no role in flagging the account as an FHSA. Many states (Oklahoma, Iowa, Alabama, Maryland, Minnesota, Michigan, Virginia) require a specific schedule or form to be filed each year the deduction or subtraction is claimed.
- The Saver is responsible for maintaining documentation: contribution and withdrawal records, year-end 1099s, and — when the home is eventually purchased — the settlement statement that demonstrates the funds were used for an eligible cost.
- Non-qualified withdrawals trigger recapture, additional state income tax, and (in most states) a 5%–10% penalty. The Saver, not the platform, is on the hook for any tax consequences of a non-qualified withdrawal.
"Penalty" vs. "Recapture" — Example of FHSA Penalty
Not all FHSA states treat a non-qualified withdrawal the same way. There are two distinct mechanisms, and a few states apply both.
Flat penalty is a fixed surcharge on the amount you withdraw for a non-qualified reason — similar to the federal penalty on early retirement withdrawals. It depends only on how much you take out.
Recapture reverses the tax break you already claimed. Every year you contributed, you lowered your state taxable income through a deduction. Recapture adds those past deductions back into your income, so you repay the tax you previously avoided. It depends on how much you deducted over time and your tax rate the year it's triggered.
For example, imagine Maxine, a saver in a "5% + recapture" state (like Oregon):
Over four years, Maxine contributes $40,000 to her FHSA and deducts all of it, saving roughly 5% in state tax each year — about $2,000 in cumulative tax savings. Her account also earns $3,000 in growth. In year five, she withdraws the full $43,000 to buy a car — a non-qualified use.
Here's what Maxine owes:
- Flat 5% penalty on the withdrawal: $43,000 × 5% = $2,150
- Recapture of prior deductions: the $40,000 she deducted gets added back to her taxable income → at ~5% that's roughly $2,000 in reclaimed tax
- Plus ordinary state tax on the $3,000 in earnings, which were never taxed → ~$150
- Maxine’s total cost: roughly $4,300 — wiping out every dollar of benefit she got, plus the penalty on top.
The takeaway: A flat penalty alone is predictable and capped by withdrawal size.
Recapture can be larger for long-term savers, because the more you deducted over theyears, the more there is to claw back. Always confirm which mechanism — or both— your state uses before taking a non-qualified withdrawal.
Note: Numbers are illustrative; actual figures depend on sate's rate, contribution history, and the qualified/non-qualified split.
For Savers, read your state’s rules linked above or located at your state’s respective Department of Revenue website. Consult a qualified tax professional before claiming any deduction or subtraction. Don’t forget to engage with free tax help from Volunteer Income Tax Assistance (VITA) programs.
For HR and benefits teams: work with Sunny Day Fund to communicate among your people and leverage our partners for financial education. Leverage trusted resources for FHSAs and home-buying assistance more broadly, like ReadyOwn by Homeownership Council of America.
For brokers and consultants: it means the FHSA tax advantage is most effectively positioned as a potential benefit available to some workers, layered on top of the more universal benefits of automatic savings. It’s a nice feature to have on top of, for example, an emergency savings program without burdening the employer too much.
Who Qualifies for an FHSA? Typical Eligibility and Beneficiary Rules
While each state writes its own statute, the rules across FHSA programs follow a common shape. If a Saver lives in a state with an FHSA program, here is the framework to expect.
Who can open one. In most states, any adult resident who has not owned a home within the lookback period can open an account. Some states explicitly require account holders to be 18 or older. Several states (Iowa, Mississippi, Minnesota) let parents, grandparents, or other relatives open or contribute to an account on behalf of a qualified beneficiary, and Ohio’s program permits the contributor — not just the account holder — to claim the deduction. For employers, this means a benefit like Sunny Day Fund’s First Home goal can be meaningful not only to the employee themselves but to employees helping a child or grandchild save.
What counts as a qualified use. Across virtually every state, the funds must go toward the down payment, closing costs, and other settlement-statement items for the purchase of a primary residence — typically a single-family home, condo, townhome, or in some cases a manufactured home. Most states require the home to be located in that state. Vacant land, vacation properties, and investment properties do not qualify.
What is owed if the funds are not used for a home. Every state imposes a recapture penalty on non-qualified withdrawals. The earnings (and, where contributions were deducted, the contributions themselves) are added back into the Saver’s taxable income for the year of withdrawal, and most states tack on an additional penalty of 5% to 10%. The most common exceptions are death of the accountholder and disability, and several states allow a 60-day rollover to another FHSA without penalty.
Time limits. Most state programs require the funds to be used within a set window —frequently 10 years, sometimes 15 — or face the same recapture treatment as a non-qualified withdrawal. Ohio operates on a tighter 5-year window. Mississippi, Oklahoma, and Virginia have no statutory time limit.
Documentation. A Saver will generally need to file a schedule or form with their state income tax return each year the benefit is claimed (Schedule HBC in Alabama,Schedule M1HOME in Minnesota, Form 5792 in Michigan, the FTHSA annual report inIowa, Form 502SU line “ww” in Maryland, Form 588 in Oklahoma, the subtraction line in Virginia). They should keep their 1099s, their settlement statement when the purchase happens, and records of every contribution and withdrawal.
A few things FHSAs are not. They are not federally tax-advantaged accounts— the IRS does not recognize the FHSA designation, so contributions do not lower federal taxable income (Connecticut’s program is the partial exception: eligibility is tied to federal AGI, but the benefit itself is still at the state level). They are not retirement accounts. And they are not the same as a Roth IRA used for a first-home withdrawal, which is a separate federal mechanism with its own rules.
How to Open an FHSA Through Your Workplace Financial Wellness Program
The First Home goal on Sunny Day Fund works the same way as every other goal on the platform: automatic, payroll-deducted, employee-owned, and potentially able to receive employer-funded rewards where the program is configured to offer them. What is new is the explicit framing, document assistance, compliance — and the corresponding ability to align with the state tax advantage where one exists.
For Savers. If you are already a Sunny Day Fund user, you can add a “First Home” goal alongside your emergency fund or other buckets. Set a per-paycheck contribution that fits your budget — even $25 per pay period adds up — and adjust it as your situation changes. If you live in a state with an FHSA program, work with a tax professional to designate the account on your state return and file the required form each year. When you are ready to buy, save your settlement statement; your state revenue department may ask for it. And remember: the tax benefit is yours to claim correctly, and yours to lose if the rules aren’t followed.
For HR and benefits teams. If you already offer Sunny Day Fund, the First Home goal is available at no incremental cost — it slots into your existing implementation. Consider three things during rollout: (1) timing the announcement to coincide with open enrollment or a financial wellness moment, (2) coordinating with your tax or payroll vendor on state-specific FHSA messaging for employees in active states, and (3) deciding whether any portion of an existing emergency-savings match or boost should be portable to home-savings goals. Our implementation team can help with all three. If you do not yet offer Sunny Day Fund, this is one more reason to look at workplace emergency and goal-based savings as a category — homeownership consistently ranks among the top financial stressors in employee surveys, and a low-friction, automatic path to a down payment is a benefit with broad appeal across demographics and income bands.
For consultants (and retirement plan advisors). The FHSA landscape is a useful talking point for clients in the active states, but the more durable story is the underlying behavior: workplace-based, automatic, goal-based savings consistently outperforms ad-hoc personal saving in plan-level participation, retention, and 401(k) leakage data. The First Home goal extends that mechanism to the largest non-retirement asset most households will ever build. Where the state tax advantage exists, it is a meaningful additional incentive. Where it does not, the behavior change still holds — and the addressable base is nearly every U.S.employer.
Cash savings has served to protect long-term savings like tax-advantaged retirement savings and health savings from costly loans and early withdrawals. Homes have caused some of that leakage out of retirement. It doesn’t have to be that way.
With workplace savings, automatic contributions, employer rewards, and (in a growing number of states) a real state tax advantage on top, it’s easier than ever for workers to take charge of economic mobility policies like FHSAs — and for employers and their advisors to enable them.
If you are ready to start, we are ready to help! Reach out to us contact@sunnydayfund.com.
This article is for general informational purposes only. It is not tax, legal, or financial advice, and it does not create any obligation on the part of Sunny Day Fund or any participating employer to ensure the availability or applicability of any state tax benefit. State FHSA rules change frequently, several caps are indexed annually for inflation, and individual eligibility depends on facts and circumstances. Savers are solely responsible for determining whether they qualify, designating their accounts correctly on the applicable state tax return, maintaining required documentation, and filing for any tax benefits in accordance with state law. Please consult your state’s Department of Revenue or a qualified tax professional before relying on any specifics for your own return. Sunny Day Fund is a workplace savings platform, not a bank; partner bank details and current interest rates are available at www.sunnydayfund.com.