By Anne Hart, CPA
The tax law changes that came from the Tax Cuts and Jobs Act (TCJA) are causing people to re-evaluate their education expenses. Have you ever thought about sending your child to a private kindergarten but thought it may be too expensive? Though it still may be too expensive, at least you can now make use of a 529 Education Savings Plan to get a larger tax break than ever before!
For starters, a 529 Education Savings Plan provides you with a tax-advantaged way to save for your beneficiary’s educational future. According to the Internal Revenue Service, the main advantage of a 529 Education Savings Plan is that earnings are not subject to federal tax and are generally not subject to state tax when used for appropriate purposes. In addition, contributions may be eligible for a state tax deduction depending on which state plan you choose. Therefore, the longer your money is invested, the larger the tax benefit you may receive might be.
Under the TCJA, 529 Education Savings plans have been expanded to cover even more education expenses than before. Now taxpayers can withdraw up to $10,000 per year, per beneficiary to pay for elementary school, middle school, and high school tuition. This is in addition to the traditional rules of 529 Education Savings plans that allow you to use withdrawals to cover your beneficiary’s qualifying expenses for higher education. While qualifying expenses include only tuition for grades K-12, tuition, fees, books, room and board, and other education- related expenses for post-secondary education all fall under the umbrella of qualifying expenses.
Now you may wonder what happens if you contribute to a 529 plan but your beneficiary did not end up having any qualifying expenses. 529 plans offer flexibility that allows the beneficiary to be changed to another member of the family. In addition, contributions to 529 plans can now be rolled over into ABLE accounts. An ABLE account is a tax-advantaged account that’s used to pay for expenses for individuals who become disabled prior to age 26. Note that to rollover your 529 plan, it must be used either for the same beneficiary or another member of the same family. However, this allows for flexibility if either you or your child’s circumstances have changed.
The expanded use of 529 plans creates an opportunity for tax savings for all individuals, even those with very high income. You don’t have to be a resident of a state to contribute to its 529 plan and nearly everyone can participate being that there is no income limitation. However, you should be mindful that not all states adopted the Federal 529 Plan changes. Although there’s no contribution limit to these plans, you should consider the amount you’d like to contribute by taking into account the beneficiary’s expected cost of qualifying educational expenses and the gift tax annual exclusion of $15,000 (or $75,000 if you choose the 5-year lump sum election in 2018).
Be sure to consult your Untracht Early tax advisor when deciding which state plan to use or if you have any questions regarding the tax benefits of a 529 Education Savings Plan. Learn about additional estate planning opportunities as a result of the TCJA.