529 plans have long been the go-to savings vehicle for college. Now, with the “Tax Cuts and Jobs Act,” Congress has allowed 529 account holders to use funds from a 529 account to pay for tuition at private K-12 schools.
What are 529 accounts? 529 plans, established under the Internal Revenue Code and legally known as “qualified tuition plans,” were created to encourage saving for college by providing certain tax advantages to account holders. Here’s how they work: an account holder creates and funds a 529 plan for a named beneficiary, often a child or grandchild. The money deposited into the 529 account grows tax-free, and the beneficiary may withdraw funds from the account for “qualified expenses.” Under the prior law, “qualified expenses” included higher education tuition, room and board, books, computers, and software. In the “Tax Cuts and Jobs Act,” Congress expanded the definition of “qualified expenses” to include up to $10,000 per year of private primary and secondary school tuition.
Additional State Tax Advantages. While there is no federal income tax deduction for contributions to 529 plans, in more than 30 states, including Missouri, a state income tax deduction is available. In Missouri, residents can deduct up to $8,000 per year for contributions made to Missouri 529 plans. A Missouri resident can deposit funds into a Missouri 529 plan and then use the funds to pay for private secondary school tuition, allowing the resident to claim a tax deduction for up to $8,000 per year for funds deposited into the 529 account.
Estate and Gift Tax Planning. In addition to receiving a state income tax deduction, a contribution to a 529 plan is considered a completed gift for federal estate and gift tax purposes. Federal law allows donors to “front-load” 529 plans, meaning that a donor can contribute up to five years’ worth of annual exclusion gifts to the account in advance. Currently, a donor can gift up to $75,000 to each 529 plan without using any of his or her federal estate and gift tax exemption. The donor must survive the five years to get the full benefit of the gift, or a portion of the gift may be brought back into his or her estate. Front-loading a 529 plan allows the funds to have more time to grow tax-free. These rules make 529 plans an attractive planning tool for estate and tax planning.
Consult an attorney at Paule, Camazine & Blumenthal, P.C. to discuss how these recent changes in the tax law might affect your estate and tax planning.