Impact of Tax Reform on 529 College Savings Plans

For several months Americans have been told about the benefits tax reform will bring including a reduced tax bill for both individuals and companies. The Tax Cuts and Jobs Act of 2017 created the most seismic changes to U.S. tax regulations in over thirty years. While many are familiar with narrative that tax reform will reduce taxes on individuals and businesses starting 2018, far fewer are aware of specific changes to established programs. One key change which will impact most are the new rules for the administration of 529 college saving plans. Under the new tax law individuals are now able to use the money saved in these plans to fund additional educational expenses. To help clients, prospects and others understand the change and how it will impact their situation, Wilson Lewis has provided a summary of key points below.

What is a 529 Savings Plan?

A 529 savings plan is a tax advantaged savings plan designed to encourage taxpayers to save now for their children’s future college education expenses. These plans which are also called qualified tuition plans are sponsored by individual state agencies or educational institutions. While there are limits to the amount that be contributed in a 529 plan, it’s determined by the total expected cost. For example, if the expected cost of a four-year undergraduate degree is $250,000 then plan contributions are limited to this amount. Since the cost of education varies by state it makes sense that the total is higher in some states and lower in others. Currently the limits vary between $235,000 – $550,000 depending on the state and institution type.

What Changed Under Tax Reform?

Under tax reform the use of 529 savings plans has been extended to allow accountholders to not only pay for college tuition on a tax-free basis, but also elementary and secondary school expenses at public, private or religious institutions. This change allows accountholders to take up to $10,000 in annual distributions from their 529 plan to pay for private school tuition, books and other fees through the 12^th grade. This move considerably expands how distributions can be used to fund qualifying higher and non-higher education expenses.

What about the Coverdell ESA?

Many taxpayers are familiar with the Coverdell Education Savings Account (ESA) which was specifically designed as tax advantaged investment account for K-12 and higher education expenses. Prior to the changes to 529 plans it was the only savings options available for K-12 expenses. While this remains an option, there are limitations which must be considered. A taxpayer must have less than $95,000 Adjusted Gross Income (AGI) and $190,000 for married couples. Beyond this, there is a limit of $2,000 per year per beneficiary which can be contributed to the account. Contributions more than $2,000 are subject to an excise tax and contributions must stop once the student turns 18 years old.

Contact Us

The changes ushered in through tax reform create new opportunities for funding your children’s educational expenses at all levels. Depending on your situation a Coverdell Education Savings Account (ESA) or other program may be more appropriate over a 529 plan for non-higher education expenses. If you have questions about education savings accounts or need assistance with tax planning in 2018 and beyond, Wilson Lewis can help. For additional information please call us at 770-476, 1004, or click here to contact us. We look forward to speaking with you soon.