People often worry about how they’ll afford college for their children and grandchildren, but education costs start much earlier than adulthood. While every state offers free public education for all children, some parents choose private schools instead and the average cost of tuition for private schools can soar to over $10,000 a year. Although many parents and guardians are aware that a qualified tuition program, also known as a 529 plan, can help families afford higher education costs on a tax-favored basis, they may not know that this program may now be used to pay for tuition for elementary or secondary public, private, or religious school.
What is a 529 Plan?
529 plans are qualified tuition programs. 529 comes from the Internal Revenue Code section that provides for them and are designed to facilitate the funding of future education costs. 529 plans are sponsored by states, state agencies, or educational institutions. All 50 states and the District of Columbia offer 529 plans for anyone to contribute to any citizen’s education costs.
A 529 plan comes in two forms: prepaid tuition plans and savings plans. Prepaid tuition plans allow a person to purchase credits for tuition and fees at participating colleges and universities at present tuition rates. The education savings plan is an investment account. Both types of plans may have residential requirements. While there are no federal income tax deductions for the contributions, some states do offer tax benefits for contributions made to a 529 plan. In addition, the earnings grow tax-free and distributions are tax-free as long as they are used for “qualified higher education expenses”. Qualified higher education expenses generally include tuition, fees, books, supplies and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution; they also include room and board if the designated beneficiary is enrolled at least half-time. Typically, the designated beneficiary is a child, grandchild or other relative.
What Are Other Benefits of 529 Plans?
In addition to special tax deductions, 529 plans offer:
- Low investment fees
- Tax-deferred investment growth
- Gift- and estate-tax benefits
How Have New Tax Laws Changed 529 Plans?
Previously, 529 plans allowed for tax-free distributions only to the extent of qualified higher education expenses at an eligible educational institution, when generally meant accredited colleges and universities. After the passage of the Tax Cuts and Jobs Act of 2017, the definition of qualified higher education expenses was expanded to include tuition for elementary or secondary public, private, or religious school, up to $10,000 per year, per student. This is a huge benefit for families with children enrolled in or seeking enrollment in private and religious K-12 schools.
State Tax Savings in Maryland, Washington, D.C. and Virginia
Maryland’s 529 plan program allows residents to take an additional $2,500 per year, per beneficiary state tax deduction for contributions made to a Maryland 529 plan. More information about Maryland’s 529 plans can be found at the Maryland 529 website.
The D.C. 529 plan allows residents to take tax deductions of up to $4,000 for individuals and up to $8,000 for married couples filing jointly for D.C. 529 Plan contributions. More information about D.C.’s 529 plans can be found at the DC College Savings Plan website.
In Virginia, residents may deduct Virginia 529 contributions up to $4,000 per account, per year. More information about Virginia’s 529 plans can be found at the Virginia 529 website.
If you’d like to learn more about 529 plans and how the new changes under the TCJA may benefit you and your family, please contact us.