Category Government Programs
Title What's Next for 529 Savings Plans?
Author/s George Tryfiates, ACSI Director for Government Affairs
Preview What's Next for 529 Savings Plans?

What's Next for 529 Savings Plans?

By George Tryfiates, ACSI Director for Government Affairs

The recent tax reform law created a great opportunity for Christian schools and families. The Tax Cuts and Jobs Act was signed into law December 22, 2017. In a significant step forward that ACSI strongly supported and promoted, the law expanded 529 savings plans so that they now allow savings for private school elementary and secondary tuition expenses. The maximum distribution for K-12 tuition is $10,000 per year, per child for expenses incurred beginning January 1, 2018.

This means current account owners may begin using these funds for elementary and secondary tuition expenses. But, they need to be aware that state laws may not yet line up with the new federal expansion.  Anyone interested in using a current 529 account for Christian school tuition needs to be sure to check their state's law before doing so. Some states automatically follow the federal law. Other states will need a legislative fix. Be sure to find out which category your state follows.

The practical effect of the federal law's expansion is that, beginning January 1, 2018, parents can begin to save for both college expenses and for K-12 tuition expenses and the earnings will grow free of federal tax. Special federal tax provisions exist for treatment of gifts to 529 savings plans so that even grandparents or extended family may contribute.

Many state 529 plans also provide breaks on state taxes for contributions to and distributions from 529 accounts. This is where families must ensure that their state law matches the federal law and also recognizes elementary and secondary tuition as a qualified education expense.   Account owners will need to watch when and whether their state will allow state tax breaks to apply to K-12 tuition expenses. For example, many states allow a state tax deduction for contributions to a 529 savings plan. Five states (AZ, KS, MO, MT, PA) allow a state tax deduction for contributions to plans in any state, not just at home. In addition, like the federal government, many states do not tax the earnings on savings. Be careful to find out if any of these favorable tax policies will be available in your state for K-12 tuition expenses in the immediate future.

State legislatures typically meet in the first quarter of the year. If a legislative fix is required, it could happen in that time frame. Or, it could be pushed off till the next session. One bill in Colorado, for example, would match the federal law while another seeks to ban the use of 529 savings plans for private school elementary or secondary tuition. ACSI expects states to be addressing the issue throughout their legislative sessions.  

The law also made positive changes to the treatment of ABLE (Achieving a Better Life Experience) accounts for families of disabled youth. ABLE accounts are similar to 529 savings plans in that they allow parents to save for expenses for disabled youth free of federal tax on the earnings. ABLE accounts also make it possible for families to save without losing their eligibility for means-tested programs on which they rely. The new tax law makes moving funds from a 529 savings account to an ABLE account a qualified distribution as of January 1, 2018. This gives parents greater flexibility in making the best use of either or both programs.

This is not tax or investment advice. Readers should consult their tax advisor about their specific circumstances and for more information about the law in their state.  

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Notice: This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It has been provided to member schools with the understanding that ACSI is not engaged in rendering legal, accounting, tax, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Laws vary by jurisdiction, and the specific application of laws to particular facts requires the advice of an attorney.

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