Qualified tuition plans, also known as “529 plans” in reference to the applicable Internal Revenue Code Section, have been around for years, allowing for tax-free investment gains as long as the funds are used for qualified higher education expenses. Some states, including Mississippi, even allow contributions to be deducted against state income tax. Prior to the recently signed Tax Cuts & Jobs Act (TCJA), these plans were used exclusively for college-related expenses. Now, however, 529 plans can be used for K-12 education expenses.
529 plans are simple to set up, and taxpayers can contribute funds until the account reaches a maximum limit, which vary by plan. Mississippi’s account balance limit is $235,000 in account value. While contributions to the plan are not tax deductible on your federal income tax return, the earnings can be tax-free. The owner of the 529 plans names the beneficiary who can be a child, niece, grandchild or even the owner himself. Beneficiaries can be changed at the discretion of the account owner without limitation. For example, if one child doesn’t use all or any of the funds in the 529 account, the beneficiary can be changed to a sibling or other qualifying family member. There is no time limit to use the funds in the account, so the assets can be used for post-graduate school or even passed down to other generations.
A 529 plan distribution has always been tax-free if it is used to pay for “qualified higher education expenses” of the beneficiary (student). The TCJA provides that higher education expenses now include expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private or religious school. There is a $10,000 per beneficiary, per year limit on distributions from 529 plans for K-12 education expenses.
Clearly, the enhanced 529 plan applicability will benefit many taxpayers. There are several opportunities for using 529 plans in conjunction with your individual income tax planning strategies to reap the benefits of the new provisions while achieving your goals for education funding. Consult with your professional tax advisor to discuss the impact on your particular situation.
Jessica L. Cooley, CPA
Jessica Cooley is a member with GranthamPoole PLLC and is focused in the field of estate and trust taxation, having worked with many clients to successfully navigate trust, gift and estate matters. Please contact Jessica at firstname.lastname@example.org, www.linkedin.com/in/jessicacooleycpa, or 601-499-2400. CPA License #5815
***The above does not represent tax advice. Each situation is fact-dependent, and you should seek the advice of a competent advisor. GranthamPoole PLLC is a provider of tax, accounting, advisory and strategic services, partnering with clients across a broad spectrum of industries and sizes.