Learn about the new qualified tuition expenses, gifting limits, and rollover provisions for 529 plans.
In late December 2017, the President signed new federal tax legislation that will change how 529 accounts can be used. Individual states may have variations. One of the most impactful changes is that tuition for primary and secondary education is now a qualified expense. Other changes include higher gifting limits and tax-free rollovers from 529 accounts to ABLE accounts.
As part of the act, the IRS tax code was amended to reflect that “qualified higher education expenses” will now include a reference to expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. The changes made in the new tax program take effect after December 31, 2017 and there is no sun setting provision for this change.
The new legislation stipulates that the amount of cash distributions from all qualified tuition programs for a single beneficiary during any taxable year shall not exceed $10,000 for these expenses, incurred during that year. It merits noting that the rules for tax-free withdrawals for post-secondary education remain unlimited up to the amount of post-secondary qualified expenses incurred for the beneficiary.
At this time, individual states and program managers are in the process of reviewing the recent federal tax law changes and determining how best to incorporate them into their programs. Please consult with your tax advisor to best determine how each state may be treating the expenses associated with K-12 education.
In any given year, an individual can gift up to the annual gift tax exclusion amount to anyone without incurring any gift tax consequences. Effective January 1, 2018, the exclusion amount increased to $15,000 from $14,000. And uniquely to 529 plans, an individual can accelerate the gifting by five years, thereby making an immediate contribution of $75,000. A married couple filing jointly can now make a split gift in the amount of $150,000 per beneficiary in 2018.
If a person makes the five-year election, the gift is ratably divided over five years; should the contributor die, a prorated part of the gift is moved back into their estate. The five-year and/or split gift election is made on IRS form 709. Although a larger gift can be made, the amount exceeding the five-year election amount would reduce your Unified Lifetime Gift Tax Exemption. Contributions to a 529 plan account are considered completed gifts to the named beneficiary, but from a legal standpoint the owner always controls the account.
The new legislation also allows for a tax-free rollover of a 529 account to an Achieving a Better Life Experience (ABLE) account. The rollover would need to take place prior to January 1, 2026, as this provision expires. ABLE accounts were created in 2014 to give individuals with disabilities and their families the opportunity to save for the future without limiting access to critical income, healthcare, food or housing assistance programs. Rollovers from 529 plans are still subject to annual contribution limits of $15,000 in 2018.
These changes and enhancements provide increased flexibility around how you can save. Please consult with your financial advisor to determine whether these strategies may be appropriate for your situation.
Certain conditions may apply. Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible education expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it on an eligible education expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings. Investors should consider before investing, whether the investor's or the designated beneficiary's home state offers state tax or other benefits only available for investments in such state's 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. 529 plans offered outside their resident state may not provide the same tax benefits as those offered within their state. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James Financial Advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.