TCJA Expands Section 529 Plan Benefits to Grades K-12

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Prior to enactment of the Tax Cuts and Jobs Act (TCJA) in December 2017, legislators had considered what changes to make to educational benefits as part of tax reform. Suggestions included eliminating the student loan interest deduction, taxing graduate student tuition waivers, and modifying the American Opportunity Credit. None of those proposals were enacted in the final version of TCJA, but the law did expand section 529 plans (qualified tuition programs) to include pre-college education costs.

 

Background

Named after section 529 of the Internal Revenue Code, qualified tuition programs have in recent years become a popular way for parents and other family members to save for a child's education. The plans, tax-advantaged programs designed to encourage savings for future college costs, are sponsored by a state or educational institution.

 

A 529 plan lets a contributor open an investment account to save for a beneficiary's future qualified education expenses - tuition, fees, computers, books, supplies, and (for full-time students) room and board. Contributors may choose among a wide variety of investment options ranging from mutual funds to target-date portfolios. Income earned within the plan are not currently taxable, and become permanently tax-free when distributions are used to pay for qualified expenses.

 

New Law Explained

TCJA allows, for the first time, plan distributions to be used for expenses related to an elementary or secondary public, private, or religious school (K-12 expenses). Starting in 2018, up to $10,000 of plan distributions per student in any tax year be used for these pre-college expenses.

 

Some states expand upon the federal benefits of 529 plans to allow deductions or credits against state income tax. For example, New York residents enrolled in the state's 529 college savings program may reduce state income up to $10,000 a year, a tax benefit that can save New York City residents more than $1,000. New York has issued preliminary guidance that the new K-12 distributions may not be qualified under New York law. If so, state tax benefits that accrued on contributions may need to be recaptured on the New York tax return. Owners in other states or plans should review how their states are addressing the federal changes.

 

Contact your LMC professional if you have questions about the federal modifications to 529 plans under the Tax Cuts and Jobs Act and their effect on your state tax return.

 

 

 

 

 

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