Rising college tuition and related costs show no sign of slowing down. A tool designed to help you manage these costs is the tax-free 529 plan. However, with the signing of the new tax law last year, families can now use 529 plans to cover more than just college tuition.
Included in the Tax Cuts and Jobs Act of 2017 is a provision extending 529 plans to cover primary and secondary private education (grades K-12). Previously, this option was only offered through Coverdell Educational Savings Accounts (“ESA”). With this option now available through 529 plans, it’s easy to assume the plans are interchangeable, but key differences exist. For example, Coverdell ESAs have income, contribution and time limits; 529 plans have none. Talk to your tax advisor to determine which plan fits your specific situation best.
Also, once you’ve done your due diligence and decided 529 plans are for you, you can rollover funds from your Coverdell ESA with no withdrawal or tax penalties. Over time, this may make Coverdell ESAs obsolete.
The new tax law allows up to $10,000 per year in distributions from 529 accounts for K-12 tuition expenses. Naturally, there is a shorter time to save for K-12 than for college, so the fruits of tax-free compounding interest will not mature as much. But, a state tax break may be available if your state offers a deduction or credits for contributions to 529 plans. More than 30 states allow such tax benefits (NJ and DE do not allow such deductions). A full list of those states and the description of what is recognized is listed here.
Some states allow residents to carry forward any excess contributions above the limit to future tax years. You’ll have to use your home state’s plan to qualify for the deduction or credit, but residents of a few states, including Pennsylvania, may get the deduction for contributing to any state’s 529 plan.
Contributions to 529 plans qualify for the gift-tax annual exclusion, which stands at $15,000 per recipient in 2018 ($30,000 for married benefactors). To maximize tax savings, benefactors can give up to five years of gifts in a single year (up to $75,000 in 2018) per recipient and not pay gift taxes.
The new tax law expands the benefits of 529 savings plans and you can start taking advantage now. The Tax Warriors® at Drucker & Scaccetti have experience helping clients plan for the next generation’s education. We are always prepared to assist you.