529 savings plans and private school tuition
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The 2017 tax reform package expanded 529 plan benefits to include tax-free withdrawals for private, public or religious elementary, middle and high school tuition. The new law also allows traditional 529 accounts to be rolled into 529 ABLE accounts without taxes or penalty. This page includes all the information available on this and other new benefits of 529 plans as of August 1, 2020, and will be updated regularly as additional details become available.
529 plans can be used for private elementary and high school tuition
The Tax Cuts and Jobs Act, which was signed into law in December 2017, allows families to use 529 plans to pay for up to $10,000 in tuition expenses at elementary or secondary public, private or parochial schools. The changes became effective January 1, 2018.
Federal tax benefits
529 plans offer tax-free earnings growth and tax-free withdrawals when the funds are used to pay for qualified expenses. Prior to the Act, the definition of qualified expenses was limited to costs associated with attendance or enrollment at a college, university or other accredited post-secondary institution. Today, families can also take tax-free withdrawals to pay for up to $10,000 of K-12 tuition.
Private school tuition may be state tax deductible
Over 30 states offer a tax credit or deduction for contribution to a 529 savings plan. In most cases, residents must use their home state’s plan in order to qualify, but families who live in Arizona, Kansas, Minnesota, Missouri, Montana and Pennsylvania can claim a tax deduction for contributions to any state’s 529 plan. Maximum deductions and credits vary by state.
It’s important to remember that these state tax breaks are only available when the funds are withdrawn to pay for expenses that the state considers qualified, which may or may not include K-12 tuition. States are currently reviewing the impact of the federal tax change to determine whether updates to state legislation are required. See table below.
At the state level, non-qualified withdrawals may be subject to state income tax and, in some cases, a penalty on the earnings portion. You may also have to repay any deductions or credits claimed.
States that consider K-12 tuition a qualified expense
The states listed below have conformed to the federal tax code. Don’t see your state listed? You can still take advantage of federal tax-free withdrawals for pre-college tuition, but the withdrawal may not qualify for state tax benefits. Are you a plan administrator? Please contact us with any updates or changes to your state’s legislation
A 529 account can be rolled over to an ABLE account
The new tax law also allows tax-free rollovers from traditional 529 savings accounts to 529 ABLE accounts. ABLE accounts offer tax-free investment growth and tax-free withdrawals when the funds are used to pay for qualified disability expenses, including education, job training, healthcare and financial management. Contributions, including rollover contributions, are limited to $15,000 per year, and only the first $100,000 saved in the account is exempted from the $2,000 Supplemental Security Income (SSI) limit. Beneficiaries with account values greater than $100,000 will not receive SSI benefits, but will still receive Medicaid.
Another important change allows individuals who are working and earning income to contribute an additional amount to an ABLE account, up to the current poverty level, above the $15,000 limit. This is provided they do not participate in their employer’s retirement plan.
To qualify for an ABLE account, an individual must have been diagnosed with a significant disability before their 26th birthday, with a condition expected to last at least 12 consecutive months. The individual must also be receiving benefits under SSI and/or SSDI, or be able to obtain a disability certification from a doctor.
The final tax reform bill did not include:
- Allowing 529 plans to be used for homeschooling expenses
- Changes to Coverdell Education Savings Accounts
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