The Tax Cuts and Jobs Act (the Act) was signed into law by President Trump on Dec. 22, 2017 representing one of the most significant revisions to the Internal Revenue Code in more than 30 years. The following addresses provisions in the Act that may expand the benefits of 529 savings plans.

529 Plans

A 529 plan is an education savings plan designed to help families set aside money for future education expenses. Earnings grow free from federal income tax, which adds up significantly over time, and Michigan also offers a state income tax deduction for contributions on Michigan 529 plans . As long as withdrawals are used for qualifying expenses, then they are tax free at both the state and federal level.

529 Plans Post Tax Reform

The Act has made it possible for families to send their child to private elementary, middle and high school using 529 plan distributions. According to Section 11032 of the Act:

“Treatment of Elementary and Secondary Tuition – Any reference in this subsection to the term ‘qualified higher education expense’ shall include a reference to expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private or religious school.”

The new tax bill allows for $10,000 of 529 plan distributions to be utilized for qualified K-12 education expenses. According to Section 11032 the Act:

Limitations – Section 529(e)(3)(A) is amended by adding at the end the following: “The amount of cash distributions from all qualified tuition programs described in subsection (b)(l)(A)(ii) with respect to a beneficiary during any taxable year shall, in the aggregate, include not more than $10,000 in expenses described in subsection (c)(7) incurred during the taxable year.”

The amendments to the Internal Revenue Code related to 529 plans apply to distributions made after Dec. 31, 2017.

It is important to note only the federal tax treatment for qualified distributions was changed by the Act.  At this time, several states (including Michigan) are reviewing the impact of the federal tax change to determine whether they required changes to state legislation. As of the writing of this article, Governor Rick Snyder is seeking an opinion from the Attorney General Bill Schuette on whether the recent federal expansion of tax savings to help pay for K-12 private school expenses would violate the state constitution if put to use in Michigan. Additional updates pertaining to the state tax treatment for K-12 withdrawals are forthcoming.

Practice Tips for Family Law Practitioners

The new laws enacted under the Act as they relate to 529 plans should be carefully reviewed on a case-by-case basis and a tax expert should be consulted as necessary.

  1. Consider opening a second 529 account to use for K-12 education expenses. This will help keep better track of contribution goals and allow for selecting the appropriate investments based on the applicable withdrawal schedules.
  2. Contributions to a 529 plan can be made up to $15,000 per year per parent ($30,000 per couple) without being considered a taxable gift or using the lifetime gift-tax exemption.
  3. 529 plans can be superfunded up to $75,000 up front ($150,000 per couple). Note this uses up the annual gift-tax exclusion for the next five years.
  4. Prior to the new tax bill, Coverall Education Savings Accounts were the only investment vehicle that allowed for K-12 tax-free withdrawals. If families currently have Coverall Education Savings Accounts, they will be allowed to rollover their funds to a 529 plan without being subject to any taxes in the process.
  5. The new tax bill also allows for 529 plans to be rolled over into 529 ABLE Accounts. ABLE accounts are a relatively new investment vehicle helping individuals with disabilities and their families to save for their future expenses while maintaining eligibility for Medicaid and other programs. Families who originally saved toward 529 plans are now able to rollover up to $15,000 each year from a 529 plan to an ABLE account. This has allowed families to be exempt from the 10 percent tax on the withdrawal for non-education purposes that was previously in place prior to the Act passing.
  6. Prior to using 529 funds for K-12 education expenses, consider consulting with a tax professional, like those at Doeren Mayhew, to determine any potential income taxes and/or penalties at the state level. As of the date of this article, it’s unclear how several states (including Michigan) will treat 529 withdrawals for state tax purposes when used for K-12 education expenses.

Need assistance in navigating the ins and outs of the recent tax reform and changes to 529 plans for your clients? Rely on the assistance of Doeren Mayhew’s tax advisors and litigation support advisors. Contact them today!

About the Authors

Jason W. LeRoy, ASA CVA, CFE – Shareholder, Valuation and Litigation Support Group
Dominic G. Polidori – Consultant, Valuation and Litigation Support Group

Jason LeRoy and Dominic Polidori specialize in preparing business valuations for litigation and non-litigation purposes, and providing expert witness testimony and marital dissolution consulting services, as well as fraud and forensic accounting services. Jason can be contacted directly at leroy@doeren.com or 248.244.3177 and Dominic can be reached at polidori@doeren.com or 248.434.6316.