Tax Reform and its Impact on Funding Children’s Education by Joanie B. Stein, CPA
Posted on January 23, 2018 by Joanie Stein
The Tax Cuts and Jobs Act (TCJA) signed into law in December 2017 expands the benefits of 529 college savings plans to cover private school tuition for children in grades K through 12. Effective Jan.1, 2018, the law allows families the opportunity to fund 529 accounts and take tax-free withdrawals of up to $10,000 per year to pay for a child’s non-college-level private or religious school education. This is a significant development, especially when considering the rising costs of a private school education. In fact, according to the Private School Review, the annual cost to send a child to a private school exceeds the cost of one year’s tuition at an in-state public university.
529 college savings plans have long offered families at all income levels a tax-advantaged planning tool for affording the rising costs of a college education. Parents, grandparents or other individuals may contribute to 529s for the benefit of a young child and allow those dollars to grow tax-deferred for the next 18 years or so. When the child reaches college age, he or she may withdraw funds tax-free to pay for qualifying education expenses, including university tuition, books, computers and room and board.
Individual donors receive the flexibility to fund 529 plans in the manner that is most affordable to them, whether that be small monthly installments or larger annual gifts, free of gift taxes without the imposition of federal taxes on the investment gains. Additionally, donors can avoid federal gift tax on their 529 plan contributions when they give $15,000 or less per year, per beneficiary, or up to $30,000 per year, per beneficiary when donors are a married couple that files joint tax returns.
Under the new legislation, parents or grandparents with the financial means may take advantage of existing laws to superfund 529 plans for college and private school tuition for each of their children or grandchildren in one year with five years of tax-free dollars. For a single taxpayer, the maximum annual lump-sum contribution is $75,000 per beneficiary; married couples who file joint tax returns may contribute up to $150,000 to a 529 plan for each of their children or grandchildren. These contributions are free of gift taxes and can grow over the years free of capital gains taxes. Any gifts above these amounts will count against a taxpayer’s lifetime gift tax exclusion, which is doubled from the current level under the tax reform law to $11.2 million for individual filers or $22.4 million for married taxpayers filing joint returns. Theoretically, 529 plan beneficiaries may begin withdrawing up to a maximum of $10,000 per year when they turn kindergarten age to pay for schooling at a private institution or religious school and continue to take distributions at these restricted amounts for the next 13 years until they complete high school. At that time, they will be unrestricted in the amount of funds they withdraw each year for qualifying college-level education expenses, including tuitions, fees, room and board.
However, it is important to note that the use of 529 plan savings to pay for a child’s elementary or secondary school education at a private school or religious school is temporary; this benefit is set to expire on Dec. 31, 2025. That gives taxpayers potentially eight years to take advantage of the expanded use of 529 savings. It is critical that individuals meet with qualified advisors and accountants during the first half of 2018 in order to maintain their financial goals and maximize their tax savings in the current year and beyond.
About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she works with individuals and closely held businesses to implement sound strategies that are intended to preserve wealth and improve tax-efficiency. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org