March is here, spring is coming, and the days are finally getting longer! Daylight savings time begins this Saturday, March 10, so don’t forget to set those clocks forward an hour! The promise of spring means that “Tax Day” is quickly approaching – 41 days if you’re counting.
Lately, we have been digging in to all of the changes the Tax Cuts and Jobs Act or TCJA (better known as “Tax Reform”) brought with it. Today, we will be talking about all of the changes to 529 Plans.
For those of you not familiar, up until now, 529 Plans were specialized “savings” accounts that could 
be used to pay for higher education – which was always considered college, until now. These qualified expenses included tuition, room, board, and books.
One of the changes with TCJA is the change to the definition of “qualified expenses” in relation to 529 Plans. The definition has been tweaked and 529 Plans now, on a federal level, are allowed to help to pay for up to $10,000 per year in private school tuition for K-12. Notice how I mentioned that these are FEDERAL level changes – more on that in just a minute.
Although contributions to 529 Plans don’t qualify for any sort of deductions on a federal level, contributions do grow federal tax-free and aren’t taxed when the money is withdrawn to pay for qualifying expenses (discussed above). However, depending on the state in which you live, you may be eligible for state income tax deductions.
For residents in Maryland, each account holder or contributor is allowed to deduct $2,500 in contributions each year. That means if you have 2 accounts, you can deduct $5,000 and so on. Maryland also allows any payments in excess of the $2,500 deduction amount per year to be deducted in subsequent years.
For Pennsylvania residents, each resident can deduct up to $14,000 per beneficiary per year ($28,000 if married filing jointly, as long as each spouse has at least $14,000 of earned income).
Other states have different amounts and limitations, so you will need to check your individual state for details.
Earlier, I mentioned that 529 Plans now qualify to pay for private school tuition up to $10,000 per 
year for K-12 on a FEDERAL level. Although the federal tax policy has changed, many states have not updated their policies to reflect the new regulations imposed at the federal level. In other words, most states still only recognize “qualifying expenses” as college expenses, like they always have. This means that if you live in a state that has not updated its definition of “qualifying expenses” and withdraw money to pay for private school for your ninth grader, you’ll likely have to repay a state tax deduction that you already received as well as pay income tax on that money along with a 10% penalty.
The majority of states have not given any indication that they plan to update their definition of qualifying expenses which means withdrawing money prematurely to cover tuition for your elementary or high school student may not be in your best interest, financially speaking.
Luckily for Maryland residents, our state is one of the 14 (along with Alaska, Delaware, Georgia, Kentucky, Mississippi, Missouri, Nevada, South Carolina, Tennessee, Utah, Virginia, West Virginia, and Wisconsin) that have announced that they will go along with the federal change and update their definition of qualifying expenses to include K-12 tuition. Pennsylvania residents weren’t so lucky, at least so far.
If you have questions about how a 529 Plan could benefit you or have questions about whether withdrawing from an already established account for elementary or high school tuition could impact you, give our office a call today! Our tax and financial experts would be happy to answer all of your questions and help you to develop a solid plan to pay for those educational expenses. Best of all? The consultation is completely free! Give our office a call today!
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For those of you planning to use Wealth Builders as your tax preparer this year, in order to meet the Tuesday, April 17 deadline to file, make sure to have your tax data to our office no later than Friday, March 30 to ensure that an extension need not be filed.
Clark, Ken. “Pennsylvania’s 529 College Savings Plan.” The Balance, 26 Feb. 2018, www.thebalance.com/pa-529-tax-benefits-795340.
Clark, Ken. “What Are the Options for 529 Plans in Maryland?” The Balance, 18 Mar. 2017, www.thebalance.com/what-are-the-options-for-529-plans-in-maryland-795327.
Leamy, Elisabeth. “You Can Now Use a 529 to Pay for K-12 Tuition – So Should You?” The Washington Post, 28 Feb. 2018, www.washingtonpost.com/lifestyle/on-parenting/you-can-now-use-a-529-to-pay-for-k-12-tuition–so-should-you/2018/02/27/885fb5a4-1aff-11e89de1-147dd2df3829_story.html?utm_term=.5a0391d98c45