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529 Plan Savings & the New Tax Act
The main advantage of the 529 plan is that earnings are not subject to federal tax and generally not subject to state taxes when used for the qualified education expenses such as tuition, fees, books, computer software and equipment, as well as room and board. Over 30 states offer a tax deduction or credit for 529 plans when you deposit the money. The contributions to a 529 plan earn interest tax-free and the withdrawals are tax –free; however, the contributions to a 529 plan are not deductible for federal taxes.
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Previously the 529 plan was limited only to “qualified higher education expenses”. The Tax Cuts and Jobs Act (2017 Tax Act) has made some positive changes to the 529 Plan for parents with younger children. The new Tax Act, now includes expenses for tuition in connection with enrollment or attendance at an elementary or secondary (kindergarten through grade 12) public, private or religious schools.
Starting in 2018, you can use up to $10,000 from 529 plan proceeds for elementary and high school tuition costs (this limit is the total across all 529 plans for a single student). For any outstanding 2017 tuition bills, distributions from 529 plans may be used to pay them.
Anyone can make contributions to your child’s 529 plan and contributions to the savings plan qualify for the 2018 gift-tax annual exclusion of $15,000 per beneficiary without incurring a federal gift tax. Additionally, taxpayers can maximize their tax savings by gifting up to five years’ of gifts in one year ($75,000 for individual gifts and $150,000 for joint gifts) --and avoid federal gift taxes by making a special election to treat the gift as if it were made evenly over a five-year period (an exception does apply if the contributor dies before the five-year period).
Even if you currently have a 529 account for college savings, it might make sense to open another account for K-12 savings. Having dedicated accounts can help you stay on track to meet each individual goal.
If a wealthy family in the highest tax bracket opens a 529 plan with $200,000. The money grows at 6% annually, and the family takes out the maximum $10,000 each year, they avoid $2,380 in taxes annually. During the elementary and secondary school years, it saves $30,940 in taxes.
At that point, the account would still have $370,717 left over. And once the beneficiary of the 529 account enters college, the family can withdraw as much as the entire annual cost of college and related expenses (not just $10,000) each year, avoiding even more capital gains taxes over that period.
Talk to us about your 529 plans.