This article was last edited on April 21, 2019.
The Tax Cuts and Jobs Act of 2017 made a major impact on 529 savings plans that help families save for their children’s educational expenses with tax-advantaged investments. It’s important for you, as a tax preparer, to stay updated on the new rules so you can help your clients enjoy smarter savings and avoid penalties.
So, what’s new?
Expanded Eligibility: In the past, 529 plans could only be used for eligible college and university expenses, including tuition, fees, books and sometimes room and board. Now, the eligible institutions are expanded. Distributions from 529 plans can be used for public, private or religious kindergarten through 12th grade educational expenses. This provides more opportunity than the Coverdell education savings account, which has an income limit. While there is no withdrawal limit for qualified college and university expenses, there is a limit of $10,000 that can be withdrawn per year, per child for K-12 costs.
Additionally, the Internal Revenue Service now states that when a college student receives a refund from dropping a class, he or she can re-contribute the refund to any of his or her 529 plans within 60 days to ensure it is tax-free.
ABLE Account Connection: The Achieving a Better Life Experience (ABLE) Act was passed in 2014, helping families save for children with disabilities. ABLE accounts are similar to 529 plans in that they provide tax-free investment growth and withdrawals. With the new legislation, existing 529 plans can be rolled into ABLE 529 plans, ensuring that your clients will not lose their savings should their child become disabled.
Deducting the Details: If your clients are seeking another deduction or credit – or a tax break in general – the 529 plan with its expanded eligibilities might be right for them. Due to the nature of these plans, it’s recommended, though, that you advise your clients to start investing shortly after the birth of their child. If a client moves to another region of theUnited States, be sure to advise them that some states offer a deduction or credit on tax returns while others may surprise residents with penalty regulations. Just because federal rules allow for certain use of the money, not every state or educational institution may sponsor a 529 plan.
