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Unlock Colossal Savings on Private School (K-12) with 2018 Sec. 529s


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5/21/2018
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Unlock Colossal Savings on Private School (K-12) with 2018 Sec. 529s

Sec. 529 “college savings plans” were overhauled under the TC&JA and can now be used for “pre-college” educational expenses for K-12 private school education—this is especially helpful for families sending (or planning to send) their kids to private school. (Sec. 11032, and Sec. 529 of TCJA).  For K-12, there is a $10,000 limitation on distributions that can be taken for your children’s “qualified” education expenses. 

The State Tax Distribution Conundrum

In most states, like New York & New Jersey, contributions to a Sec. 529 plan up to $10,000 are exempt from state income taxes.  Under Federal law, contributions are permissible up to the annual exclusion amount of $15,000 ($30,000 for married individuals).

Pre-college education expenses may be subject to state withdrawal penalties in some states and/or otherwise be subject to state income taxes.  Unfortunately, in our area New York, New Jersey and Connecticut have not yet joined the 30 other states who now offer a deduction or credit against state taxes for Sec. 529 distributions for “pre-college/K-12” educational expenses.  Pennsylvania has a particularly generous 529 program regime, allowing for contributions of any amount to be made tax-free from state taxes, and allowing distributions/withdrawals to also be taken tax-free. 

In New York City, one Wall Street Journal report noted that the cost of private school education for children in K-12 have increased to levels of over $50,000, a 23% increase over the cost 5-years ago!!  Remember, withdrawals of over $10,000 from the Sec. 529 “college savings” plan—"non-qualified distributions”—are subject to a 10% penalty

Around the Country, private grade school annual tuition is in the range of about $8,000/yr and average private high school tuition is in the range of about $18,000/yr.  But, there is a great degree of variance from state-to-state.

Connecticut’s 529 program is called CHET already treats distributions or withdrawals from a qualifying plan as state tax-free, and State Treasurer Denise Nappier is currently investigating whether the changes to the federal law automatically extend the tax benefit to K-12 educational expenses, as the CT legislation is tied to the federal definition of “qualified education expenses,” or whether legislative changes will be required.  But, under Connecticut’s tax regime, it seems likely that distributions, even in excess of the $10,000 federal tax-free distribution/withdrawal amount, will most likely be tax-free.

Sec. 529 accrued balances can also be transferred to Sec. 529 ABLE Accounts for families with a disabled child.

Home Schooling

A last-minute amendment killed by Democrats before the bill became law would have extended the use of Sec. 529 college savings to home schoolers under HR 4862.  Expenses that would have been covered were: “curriculum and curricular materials, books or other instructional materials, online educational materials, tuition for tutoring or educational classes outside of the home (if the tutor or instructor is not related to the student), dual enrollment in an institution of higher education, and educational therapies for students with disabilities.”

It stands to reason that this bill, re-introduced several times, will eventually become law.

J. Allen Weston, executive director of the National Home School Association is quoted as saying: "The bottom line is that [we] would welcome home-schoolers being given a much-deserved tax break."

Withdrawal/Distribution Rules for College Expenses

It is important to recognize that withdrawals for Qualified Higher Education Expenses (“QHEE”) are tax-free, regardless of amount (unlike the $10,000 credit for pre-college, K-12 savings).  You can get credit for tuition and fees, room and board, books and supplies, any school-related special services, and computer costs, and then deduct any costs already covered by tax-free educational assistance.

Study Abroad, Tutors & Special Programs

You can even deduct some expenses for educational opportunities that are not strict “requirements” of a college curriculum, like study abroad and tutors.  The qualifying expenses are not a blank check.  You don’t get credit for the flight overseas, or any excursions during the international travel, but the primary room and board, qualified tuition, books, and educational side of the trip are usually fully covered.

Some Other Sec. 529 Basics

Sec. 529 plans can be used for graduate school as well as college.  They can also be used for many trade schools, as not anyone is looking for a traditional liberal arts education.  As the form of education is dramatically changing, there is an increasing utilization of online learning, and online education (i.e., University of Phoenix) generally qualifies, even programs that are entirely online.

Text of the Bill Changes

‘‘(7) TREATMENT OF ELEMENTARY AND SECONDARY TUITION.—Any reference in this subsection to the term ‘qualified higher education expense’ shall include a reference to expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.’’

More on NY State Tax Treatment on Sec. 529 Tax Distributions/Withdrawals

On January 17, the New York State Department of Taxation and Finance issued a preliminary report on various aspects of the new federal tax law. Within that report, the Dept. of Tax & Finance states “it appears that distributions [of 529 funds] for K-12 tuition expenses would not be considered qualified distributions under…New York statutes.” Accordingly, any New York State tax benefits would be recaptured at the time a distribution is made from a NY 529 account to fund K-12 expenses (i.e.: the NY tax deduction and any earnings on contributions would be subject to NY tax).

The memo further says the Dept. of Tax & Finance “will continue to review the federal law’s provisions on 529 plans….and welcome discussion for possible solutions and alternatives.”



Category: Tax Law


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