529s Becoming the Valedictorian for Families at Private Schools

| February 7, 2018

Do your children attend a private school or do you know someone whose children do?

Parents of children attending primary and secondary may be applauding recent tax law changes concerning 529 education savings plans.  New this year, families can use 529 education savings plans for private schools, and they may receive a state income tax deduction for doing so.

In the past, 529 education savings plans (so called because of their tax code section) were used for college tuition, books, and sometimes room and board.  Parents, grandparents, or guardians could contribute money into 529s after paying federal income taxes and have the money grow tax-free as long as the money was used for college education.

The recent tax overhaul has changed that.  Now 529s can also be used for private primary and secondary school tuition for withdrawals up to $10,000 a year per student.

Here is what parents of private school students may like most of all: If they first contribute the money into a 529 plan and then forward it on to their tuition, they may now receive a state tax deduction for the year of the contribution.  This could provide them with a tax deduction they otherwise would not have received.  Not all states offer tax deductions and the amount they offer can be different.

For example, the state of Maryland offers a state income tax deduction of up to $2,500 per student per year for individual taxpayers and $5,000 per student per year for married tax payers.  So if a married couple contributed $5,000 for a child, they would receive a $5,000 state income tax deduction that may be used that year.  Or if contributions were made in excess of the $5,000 it could be carried forward for up to 10 years.

As the new federal income taxes are limiting deductibility of state income taxes, sales, and property taxes on federal returns, parents may be looking for such a strategy.

States are quickly trying to adapt to the new tax law changes and additional details are still forthcoming.

When it comes to 529 plans, parents often have many questions.  Which schools qualify?  Can the school be out of state?  What happens if the money is not used for education expenses?  How much can I contribute?  What options do I have available?  The details are important to know.

There is an education of sorts required for 529 plans.  Not all plans are the same.  States may offer different providers and additional types of accounts such as 529 investment or pre-paid tuition accounts.

Still, an education no matter where it is gained, often provides greater opportunities.  It is worth the investment of time; to secure the investment in education.

 

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses and 529 Product Program Description, which can be obtained from a financial professional and should be read carefully before investing. Depending on your state of residence, there may be an in-state plan that offers tax and other benefits which may include financial aid, scholarship funds, and protection from creditors.  Before investing in any state’s 529 plan, investors should consult a tax advisor. If withdrawals from 529 plans are used for purposes other than higher education, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax.

This is for informational purposes only and should not be construed as personalized investment advice or legal/tax advice. Please consult your advisor/attorney/tax advisor. Registered Representative, Securities offered through Cambridge Investment Research Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor.  Cambridge and Sojourn Wealth Advisory are not affiliated.

 


Category: Finances

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Email | Website | Sean M. Williams is a Certified Financial Planner™ (CFP®) practitioner with Sojourn Wealth Advisory LLC in Timonium, Maryland. Sean serves families and business owners. You can connect with him at sojournwealth.com.