It was touch-and-go there for a minute—Congress almost repealed more than a half dozen provisions in the tax code that help students of low- and middle-income families afford a higher education. Much to the benefit of many taxpayers, many of the provisions were retained that encourage saving for higher education, help students and families pay for college, and assist with the student loan repayment.
The most significant change is that 529 Plans now include tax-free distributions to pay for private kindergarten through high school tuition and expenses. Prior to the reform, 529 Plans earnings growth and withdrawals were only tax free when used to pay for qualified higher education costs. If families wanted to invest funds to pay for private school in a tax-advantaged account, they were limited to Coverdell Education Savings Accounts. These carry the low maximum annual contribution of $2,000 and contributions were phased out for tax filers with adjusted gross income of $220,000 for married filing jointly, and $110,000 for all others. Furthermore, contributions to Coverdell ESAs are not tax-deductible.
The Tax Cuts and Jobs Act amended the treatment of 529 plans so that families can withdraw up to $10,000 per year tax-free for private elementary and high school tuition. This is a meaningful benefit to families who choose to enroll their children in private schools. The National Center for Education Statistics reports that nearly 10 percent of all students are enrolled in a private school. According to Private School Review, an online resource for evaluating potential schools, the national average for private school tuition is around $10,300 per year, which includes both elementary and high school tuition.
When contributing to any savings account with tax-free growth, the longer you can let the investment compound, the more tax benefit you’ll see. If you choose to begin taking withdrawals from your child’s 529 Plan for K-12 education expenses, you may see less tax advantaged growth. However, more than 30 states offer state tax deductions for contributions to a 529 plan. In Georgia, beginning with returns filed in 2017, joint filers may deduct up to $4,000 per beneficiary, per year, and $2,000 per beneficiary, per year for all others. Additionally, Georgia taxpayers are not required to itemize their deductions to make this adjustment to income.
If you are currently saving to a Coverdell ESA, you may consider rolling the account into a 529 Plan to take advantage of the absence of annual contribution limits. In 2018, individuals can contribute up to $15,000 to a 529 plan before incurring gift tax issues. That limit is doubled for couples married filing jointly. Overall plan limits vary by state, ranging from $235,000 to $520,000. Some taxpayers may benefit from establishing two 529 plan accounts, one for K-12 expenses and one for college costs. This will allow you to pick investments that correspond to your time horizon. Many plans offer investment tracks that gradually shift to more conservative investments as the beneficiary reaches college age. If you intend to use the funds for private elementary or secondary schools, you may consider a static investment that contains a mix of fixed and growth investments.
Before you spend your 529 Plan funds for K-12 education, make sure your state’s tax laws have been amended to account for these withdrawals. The language that governs state tax deductions for contributions and qualified withdrawals may differ from federal laws—you want to avoid any unintended tax consequences.
If you have questions regarding how using 529 Plan funds for private school tuition may affect your overall college savings, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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