The Tax Cuts and Jobs Act (TCJA) signed into law in December 2017 provides a significant boost to families who send their children to private elementary and secondary schools, for which one year’s tuition can often be greater than the same expenses at an in-state public university.
Effective Jan.1, 2018, families may temporarily use 529 college savings accounts to fund their children’s K through 12th grade education at a private school or religious school and take tax-free withdrawals of up to $10,000 per year to pay to cover related tuition expenses.
529 college savings plans have long offered families at all income levels a tax-advantaged planning tool for affording the rising costs of a college education. Parents, grandparents or other individuals may contribute to 529s for the benefit of a young child and allow those dollars to grow tax-deferred until the child reaches college age. At that point, funds may be withdrawn tax-free to pay for the child’s qualifying education expenses, including university tuition, books, computers and room and board.
Individual donors receive the flexibility to fund 529 plans in the manner that is most affordable to them, whether that be small monthly installments or larger annual gifts, free of gift taxes without the imposition of federal taxes on the investment gains. Additionally, donors can avoid federal gift tax on their 529 plan contributions when they give $15,000 or less per year, per beneficiary, (or up to $30,000 for married couples filing joint tax returns).
Under the new legislation, donors with the financial means may take advantage of existing laws to superfund 529 plans for college and private school tuition for as many children as they wish by contributing five years of tax-free dollars in one single year. For single taxpayers, the maximum lump-sum contribution is $75,000 per beneficiary; married couples who file joint tax returns may set aside $150,000 free of gift taxes and allow those dollars to grow free of capital gains taxes in a 529 plan for each of their children and/or grandchildren. Any gifts above these amounts will count against a taxpayer’s lifetime gift tax exclusion, which is doubled from the current level under the tax reform law to $11.2 million for individual filers or $22.4 million for married taxpayers filing joint returns.
Theoretically, 529 plan beneficiaries may begin withdrawing up to a maximum of $10,000 per year when they turn kindergarten age to pay for schooling at a private institution or religious school and continue to take distributions at these restricted amounts for the next 13 years until they complete high school. At that time, they will be unrestricted in the amount of funds they withdraw each year for qualifying college-level education expenses, including tuitions, fees, room and board.
It is important to note that the ability to use a 529 plan to pay for a child’s elementary or secondary school education is set to expire on Dec. 31, 2025. That gives families ample time to beginning planning in early 2018 to take advantage of the expanded use of 529 plans while the opportunity exists.
The professionals with Provenance Wealth Advisors stay abreast of changes to tax laws to help families maximize their tax savings while building and preserving wealth.
About the Author: Brendan T. Hayes is a financial planner with Provenance Wealth Advisors, an Independent Registered Investment advisor affiliated with Berkowitz Pollack Brant Advisors and Accountants and a registered representative with Raymond James Financial Services. He can be reached in the firm’s Boca Raton, Fla., office at (561) 361-2001 or via email at firstname.lastname@example.org.
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Brendan T. Hayes is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.
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This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. This and other information about 529 plans is available in the issuer’s official statement and should be read carefully before investing. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors.