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What Parents Should Know About New 529 Tax Rule

By Ceylan Pumphrey, Esq. on March 09, 2018 | Last updated on March 21, 2019

Everyone talks about how raising kids is expensive, and one of the biggest contributing factors to that is providing kids with a good education. This is especially true if you want to send your kids to private school. Well, the Tax Cuts and Jobs Act of 2017 has a significant impact on how many Americans can approach their strategy for funding their children's education. More specifically, the Act now makes 529 plans eligible to be used for private school tuition for grades K-12.

What's a 529 Plan?

A 529 plan is a plan that's operated by a state or educational institution that has various tax advantages to make it easier for parents to save for their children's education. Previously, this was only available for college tuition, but now parents can also use a 529 plan for elementary, middle school, or high school. While contributions are not deductible, earnings aren't subject to federal taxes and may not be subject to state taxes either. So, funds from a 529 plan can be withdrawn penalty and tax free to cover up to $10,000 in annual expenses.

A Couple Caveats

As with most things, there are a couple caveats to be aware of before using funds from a 529 plan for elementary or secondary school. First, for most Americans using 529 funds for education costs related to K-12, would result in less funds being available to pay for college. Thus, depending on your situation, you should make sure you consider how using your 529 investment for your child's K-12 education can affect paying for his or her higher education.

Another thing to be aware of is "piggybacking" rules. Piggybacking occurs when a state conforms to the federal framework on an area of tax. But, states have the option to not conform to the federal system, which would mean that the funds you take out of a 529 plan could be subject to state taxes and possibly a penalty. So, before you decide whether or not to use 529 funds for elementary, middle school, or high school tuition, you should find out if your state will conform to the federal taxation framework.

Tax law is a particularly complicated area of law, so if you'd like help getting a better understanding of the 529 tax rule -- or tax laws in general -- it's a good idea to get in touch with a tax attorney near you.

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