If you are a parent or grandparent saving money for children’s college education, there were some important changes made to 529 plan rules under the Tax Cuts and Jobs Act (TCJA), recently signed into law.
529 plan contributions are still not deductible on your federal tax return. However, there are some new ways account holders can use and contribute account assets.
K-12 Expenses Provision
Perhaps the most notable change was expanding the types of educational expenses that qualify for tax-favored use of 529 plan assets. Under the new tax law, up to $10,000 of qualified 529 plan withdrawals can be made each year to pay for elementary and secondary school tuition at qualified K-12 schools and for qualified tutoring services, including public, private, and religions institutions.
The earnings on those qualified withdrawals will be free from federal estate taxes. However, it is important to understand your state’s laws; those earnings may still be taxed at the state level. Several states have indicated that they intend to implement the same tax treatment, but not all states are on board. For the states that are on board, many haven’t updated their tax codes yet to reflect the changes.
What’s more, if your state offered tax deductions or credits for making contributions to 529 plan accounts, you might have to pay back those tax benefits if you make withdrawals to fund K-12 expenses.
In states that have already amended their tax codes to mirror the federal law, this provision can be helpful for parents, grandparents and others who want to be able to help further children’s education at the primary and secondary levels.
Tip: Before deciding to use 529 account assets for K-12 expenses, check with your 529 plan provider or your tax professional to understand the potential implications of doing so. The tax treatment will depend on which state’s plan you are invested in and on the state you live in.
Gift Tax Exclusion Allows Donors to Superfund a 529 plan Account
Family members or other donors who want to contribute to a 529 plan account can already do so without having to file a gift tax return, when making gifts of up to $15,000 per recipient per year. And, if the donor and his or her spouse both make contributions, that amount is doubled.
To encourage gifts into 529 plan accounts, donors can actually make up to five years of gifts free of gift taxes – gifting up to $75,000 per recipient.
Benefits for ABLE Accounts
Individuals with disabilities, including people receiving Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) income, may benefit from the recent tax legislation too.
529 plan accounts can now be rolled into ABLE accounts (created under the Achieving a Better Life Experience Act in 2014) without incurring tax penalties. Any amount rolled over from a 529 plan account would count toward the annual ABLE account contribution.
Families who set up 529 plan accounts for their children or grandchildren before the child was diagnosed with a disability may welcome this news, because it can help them use 529 plan assets for the beneficiary even if he or she is not able to (or chooses not to) pursue higher education.
This provision of The Tax Cuts and Jobs Act is set expire in 2025, unless Congress takes action to extend it or make it permanent before then.
529 Plan Decisions That Make Sense for Your Family's Goals
These tax law changes mean there are now more opportunities for parents, grandparents and other donors to help further children’s education. However, before deciding to start a 529 plan account in order to use it for K-12 expenses, talk to us and find out the potential tax implications.