The Tax Cuts and Jobs Act modifies Section 529 qualified tuition plans to allow the plans to distribute up to $10,000 in tuition expenses incurred during the tax year for designated beneficiaries enrolled at a public, private, or religious elementary or secondary school. Previously Section 529 plans were only used for college tuition, up to full tuition amounts. The provision for college tuition remains the same.
Although contributions are not tax deductible for federal tax purposes, funds within a Section 529 plan can accumulate tax-free within the plan until they are distributed tax-free to the educational institution for the child-beneficiary. The new $10,000 limitation applies on a per-student, not per-account basis. As a result, if an individual is a designated beneficiary of multiple accounts, a maximum of $10,000 in distributions will be free of income tax, regardless of whether the funds are distributed from multiple accounts. Some state plans provide a limited deduction against state income taxes for contributions to Section 529 plans. They may also provide caps on contributions.
The expansion of Section 529 plans to cover elementary and secondary school education applies to distributions made after December 31, 2017. Since Section 529 plans set up for a child-beneficiary’s college education may now be redirected earlier to primary and secondary tuition, parents, grandparents and other contributors will need to decide how best to manage each child’s combined accounts. If amounts needed to cover college tuition should accumulate tax-free until those years, or should they be used earlier. Generally, if contributions are limited either by a donor’s financial resources or by state caps, use for college tuition will allow a greater amount to accumulate tax-free. If projected accumulated contributions can cover more than college tuition, then using remaining Section 529 balances for secondary and even elementary school may make sense.
These expanded Section 529 plan rules are still young, however the tax-free growth benefit of Section 529 plans have a long-term perspective. Giving some thought to how these expanded Section 529 plans might be used in your family situation is a good idea..
Contact an MCB Tax Advisor at 703-218-3600 to discuss your tax planning needs and whether the new Section 529 plan rules are the best option for you and your family.