High school and elementary school tuition can now be paid through a 529 savings plan.
For many families, use of Section 529 plans or “Qualified Tuition Programs” for college tuition planning has provided a great way to exempt the growth of a dedicated asset account when used for qualified education expenses.
The 2017 Tax Cut and Jobs Act made changes to this tool to allow for up to $10,000 in annual expenses for tuition with enrollment or attendance at a qualified elementary or secondary public, private or religious school.
Originally developed in 1996, Section 529 plans were an estate-planning tool to allow grandparents to accelerate the annual gift exemption amount by depositing up to five years of contribution into the qualified education plan for their grandchildren, thereby removing these assets and all related growth from the grandparent’s estate. Upon withdrawal for qualified education expenses, the proceeds would be taxed at the grandchild’s income tax rate that was assumed to be lower than their grandparent’s tax rate.
Later, the plans became even more popular when a change was made to allow the withdrawals to be tax-exempt as long as they were used for qualified education costs required by the school for a student who is enrolled at least half time.
Expenses required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school include tuition, fees, books, supplies and equipment.
Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible post-secondary school as well.
The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts.
- The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
- The actual amount charged if the student is residing in housing owned or operated by the school.
Please contact the eligible educational institution for qualified room and board costs.
In addition to the above other expenses include the purchase of computer or peripheral equipment, computer software, internet access and related services, if it is to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible post secondary school. Please be aware, this does not include expenses for computer software for sports, games or hobbies unless the software is predominantly educational in nature.
Another benefit in using Section 529 plans is the ability to transfer account balances to other family member beneficiaries including:
- Son, daughter, stepchild, foster child, adopted child or a descendant of any of them.
- Brother, sister, stepbrother, or stepsister.
- Father or mother, or ancestor of either.
- Stepfather or stepmother.
- Son or daughter of a brother or sister.
- Brother or sister of father or mother.
- Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
- The spouse of any individual listed above.
- First cousin.
This transfer provision allows families to allocate resources as needed amongst beneficiaries in cases where tuition requirements may be different based upon family member’s choice of school and/or other scholarships available to the student.
Section 529 plans can be set-up by anyone and can designate anyone as a beneficiary of the account. In addition, anyone can contribute to a pre-existing Section 529 plan, and they are not subject to any income restriction in doing so. Contributions are limited to five times the annual gift exclusion of $15,000, or $75,000. If you contribute more than the annual gift exemption of $15,000 there may be gift tax consequences.
With the rising cost of education, Section 529 plans continue to be an excellent education-planning tool! Contact us to learn more about other education-planning tools that are available.
