3 Changes to Section 529 Plan Rules Under the New Tax Law
posted Oct 4, 2018 by Dave Desmarais, CPA/PFS, MST, MBA, AEP® in the Global Tax Blog
Section 529 “qualified tuition” plans were created as a tax-favored college savings tool under the Small Business Job Protection Act of 1996. More than two decades later, the Tax Cuts and Jobs Act (TCJA) changes the rules for Sec. 529 plans in three important ways.
1. Funds May Be Used for Elementary and High School Tuition
For tax years starting in 2018, you can withdraw up to $10,000 per year to pay for tuition at a public, private, or religious elementary or secondary school. (The provision applies on a per-student basis, rather than a per-account basis.) These withdrawals are federal-income-tax-free. And, unlike many of the individual tax provisions under the TCJA, this change is permanent.
There are a couple of caveats to consider. First, Sec. 529 plans are state run. So, it’s possible that some states may not allow tax-free distributions to attend a school with a religious affiliation.
Second, the expanded use of Sec. 529 plans could cause disputes between divorced parents. How? If a noncustodial parent is responsible for paying for college costs and has been contributing to a Sec. 529 plan, he or she might be unhappy to discover that the custodial parent took distributions from the account to cover tuition costs for elementary or high school, without first discussing the withdrawals with the noncustodial parent.
2. Large Contributions Reduce Your Lifetime Exemption
Under the TCJA, for tax years starting in 2018, contributions of more than $75,000 (or $150,000 if you are married and make a joint contribution with your spouse) will use up part of your unified federal gift and estate tax exemption.
Another provision of the TCJA increases the lifetime exemption for 2018 to $11.18 million if you’re single or $22.36 million if you’re married. So, the reduction for jumpstarting a Sec. 529 plan is probably not a major concern for most people. But the TCJA provision that expands the lifetime exemption is set to expire in 2026.
3. Funds Can Be Transferred to ABLE Accounts
If you have a child who became disabled before age 26, you can set up a tax-favored Achieving a Better Life Experience (ABLE) account to cover qualified disability expenses. Like Sec. 529 plans, contributions to ABLE accounts aren’t tax deductible, but distributions are tax-free if they’re used to pay for housing, education, health care and other qualified expenses for a designated beneficiary.
Under the TCJA, funds now may be rolled into an ABLE account, tax-free, from the designated beneficiary’s own Sec. 529 plan or from the Sec. 529 plan of certain family members. Rolled-over amounts count toward the overall limitation on amounts that can be contributed to an ABLE account within a taxable year.
Our tax professionals can help you understand the changes to Sec. 529 accounts under the new law and brainstorm tax-savvy ways to make your family’s education more affordable. Contact us for more information.
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