As another school year, the associated costs of education continues to rise. A way to prepare for these costs is to participate in a Qualified Tuition Program (QTP), also called a Section 529 plan, which allows a taxpayer to make contributions to an account or program to be used to pay qualified education costs.
Prior to the enactment of the Tax Cut and Jobs Act of 2017 (TCJA), 529 plans could be used only for eligible colleges and universities. Qualified education expenses include tuition, fees, books, supplies, equipment, including computers, and reasonable costs of room and board while attending an eligible school.
The TCJA changed the definition of qualified higher education expenses to include tuition for attending an elementary or secondary public, private or religious school. The TCJA also limited distributions for elementary and secondary school tuition to $10,000 for each designated beneficiary per year from all QTPs of the designated beneficiary. Both of these amendments apply to distributions made after December 31, 2017.
Contributions to 529 plans are not subject to any adjusted gross income limitations of the contributor. The contribution is considered a gift, and contributors can elect to take contributions larger than the annual gift exclusion into account ratably over five years. Contributions to a QTP are not deductible for federal tax but are deductible for some states. Pennsylvania, for example, currently does allow a deduction for contributions up to $15,000 per beneficiary, and the contributions for the $10,000 costs for elementary and secondary school tuition qualify as well. Further, the principal grows tax-free and can act as a savings vehicle for future tuition costs.
If you feel 529 plans may benefit you, we encourage you to contact our tax advisors, who would be happy to help. Something to consider for next term!
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.