The cost of education can be a significant burden on families. The amount of money that you save up for your child’s education plays a large role in choosing the school they attend. Many families end up relying on student loans to pay for college tuition, which leaves the student in debt for years after their graduation. It is possible for families to help pay for education by building savings in a 529 Plan account. With these plans, an account holder can save money for a beneficiary to help pay for college tuition and post-secondary training, as well as tuition for elementary and secondary schools.
The 2017 Tax Act has changed the 529 Plans in ways that benefit the account holder. This guide explains 529 Plans and how they will be affected by the new tax laws.
What is a 529 Plan?
A 529 Plan, or qualified tuition plan, is a savings plan sponsored by the state, educational institutions, or state agencies with tax advantages and incentives to help save for educational expenses. These plans are owned and controlled by the account holder, and the savings in the account are put towards the education of a designated beneficiary. You can name anyone as the beneficiary including children and other relatives, friends, and yourself. The main advantage of the 529 Plan is that the earnings are not subject to federal tax, and generally not subject to state taxes, when used for qualified educational expenses. The qualified educational expense for a 529 Plan include:
- Tuition and fees
- Room and board for on-campus living
- Room and board for off-campus living (expenses cannot surpass estimated off-campus expenses from the university or institution)
- Other supplies specifically required by the school or university
Illinois is one of more than 30 states that offer a tax deduction or tax credit when you deposit money into a 529 Plan. The contributions you make to a 529 Plan earn tax free interest, and you can make tax-free withdrawals. However, you cannot deduct your contributions for federal taxes.
How has the 2017 Tax Act changed 529 Plans?
The 2017 Tax Act has led to several key changes in the rules for 529 Plans. One change is that tuition and expenses for elementary school and secondary education (grades K-12) are now considered qualified educational expenses. Previously, only higher education expenses were covered by 529 Plans. This change benefits parents with younger children by covering expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.
Starting in 2018, you can:
- Use up to $10,000 from a 529 Plan for elementary and high school tuition costs (this limit is the total across all 529 Plans for a single student)
- Pay for outstanding tuition bills from 2017 with savings from your 529 Plan.
Another key change is that anyone can make a contribution to your 529 Plan, and these contributions qualify for the 2018 gift tax annual exclusion of $15,000 per beneficiary without incurring a federal gift tax. A contributor can also choose to gift up to five years’ worth of gifts in one year – such as $75,000 for individual gifts and $150,000 for joint gifts – and treat the gift as if the payments were made evenly over a five-year period, thus avoiding federal gift taxes for contributions of over $15,000. There is an exception that applies if the contributor dies before the five-year period is up.
With the new changes to the 529 Plans in the 2017 Tax Act, families can now open accounts to help save for college tuition, as well as tuition and educational expenses for elementary and secondary education. If you are considering starting a 529 Plan, it might help to open two accounts, one for K-12 savings and one for college savings. This can help you better stay on track to achieve your savings goals.
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