New tax bill expands use of 529 Plans to private school tuition

URGENT call to action by 12/31 – new tax bill expands 529s

As you may know, the U.S. Congress passed a tax reform bill that was signed into law by the President yesterday. Included in the law is a provision that expands the use of 529 accounts to pay for educational expenses like qualified elementary and secondary private and religious school tuition.

Previously, only qualified higher education (college) expenses were eligible for penalty-free and tax-free withdrawals. Under the new tax law, qualified higher education expenses will now include distributions from your 529 Plan account of up to $10,000 per year, per beneficiary to be used for expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.

What does this mean for you?
If you do not already have a Maryland or alternative state 529 Plan and you are either paying for private school tuition or expect to pay for private school tuition you MUST NOW have a 529 Plan and you should be contributing the maximum amount under gift tax rules which is currently $14,000 per child, per taxpayer.

Example: Let’s say you are already contributing $2,500 to a Maryland College Savings/529 Plan. In addition, you are paying $10,000 a year for private school tuition. So your total annual commitment to education related savings and expenses is $12,500 a year.

Currently, you receive a State tax deduction for the $2,500 contribution to the Maryland 529 Plan and that contribution is invested and growing tax free. Let’s also assume you have a balance in your 529 Plan from prior year contributions of $21,000 (roughly the national average). You also do not receive any benefit from paying the $10,000 of private school tuition.

We expect under the new law you can contribute your total commitment of $12,500 a year (because it’s less than the annual gift tax limit of $14,000) to the 529 Plan and also take your $2,500 State tax deduction. Any excess contribution is carried over for future year deductions. You can then take a tax-free and penalty-free withdraw of $10,000 to pay private school tuition in 2018 because you have a balance in your account. Since you contributed your full commitment of $12,500 at the end of the day your account balance will increase by the $2,500 contribution; just as it has every year.

The logistics are fluid and we are waiting on the final details of how this will be handled by the 529 Plan Administrators, but given the contribution deadline is fast approaching we wanted to get this information to you as soon as it became effective. 529 Plan accounts must be opened and the deposit received by December 31st of each year. As such if you want to take a deduction this tax year you must have the 529 Plan open and funded by December 31st. The fastest way to do this is by opening and depositing your contribution online! We can link ourselves to the account after the fact and provide additional guidance after the New Year but please don’t delay.

There are also additional ways to expand the annual contribution and tax deduction so call our office for more information.

Chesapeake Financial Advisors is a fee-only financial planning, investment advisory and tax planning firm with offices in Towson, Bel Air and Columbia, Maryland.