The Tax Cuts and Jobs Act that was signed into law last December includes many provisions that will be beneficial to individuals and families. These include lower tax rates, a higher standard deduction, an expanded child tax credit, a lower AGI threshold for deducting medical expenses, and an increased exemption amount for calculating the alternative minimum tax (AMT).
Under the Radar Benefit
There’s another benefit that has flown a little bit under the radar that you might not be aware of. As of January 1 of this year, you can make tax-free withdrawals of up to $10,000 from Section 529 college savings accounts to pay for qualifying elementary and secondary school expenses. This is in addition to using Section 529 funds to pay for college tuition and expenses.
As a result, you can now use money that you’ve saved in your 529 plan to help pay for private, public or religious elementary, middle and high school tuition without paying a penalty if you choose. Previously, if you withdrew money from a 529 plan and didn’t use the money to pay for qualified college education expenses, you were subject to a 10% tax penalty on the earnings portion of the money you withdrew.
Don’t Jeopardize Your College Savings Plans
Keep in mind, though, that if you take money out of your 529 plan to help cover elementary and secondary school expenses, this could negatively impact your college savings plans. So you should think very carefully about the long-term implications of taking money out of your 529 for anything other than college, even with the beneficial changes brought about by the tax law.
One strategy that can help you avoid this dilemma is to open a second account within your 529 plan that’s devoted to helping pay for elementary and secondary school costs. This way, it will be easier to keep your college savings separate from your K-12 savings. This will also make it easier to choose investments that better fit your anticipated withdrawal schedules for K-12 funds and college funds.
529 ABLE Account Rollovers
The tax reform act also made another change affecting 529 plans. Traditional Section 529 accounts can now be rolled over into 529 ABLE accounts tax- and penalty-free. These accounts were created by the Achieving a Better Life Experience (or ABLE) Act of 2014 to make it easier for disabled Americans to save for college in a tax-advantaged way.
Money saved in a Section 529 ABLE account can be withdrawn tax-free when used to pay for education, job training and support, healthcare and financial management for individuals who have been diagnosed with a significant disability before they turn 26 years old. You can now roll up to $15,000 held in a traditional 529 account into a 529 ABLE account if your child is later diagnosed with a qualifying disability, such as autism.
State Income Tax Deductions, Too
Keep in mind that many states, including Kansas and Missouri, offer a state tax income deduction for contributions to Section 529 plans. This is true regardless of which state’s 529 plan you contribute to.
However, each state has its own criteria in terms of what it considers to be qualified education expenses. It’s not certain right now whether elementary and secondary school expenses will qualify for this special state tax break.
Please contact us if you have more questions about the tax treatment of Section 529 and Section 529 ABLE accounts.