Big Changes for College Savings PlansSubmitted by Financial Planning Solutions, LLC on January 11th, 2018
The new Tax Cuts and Jobs Act signed into law in December 2017 is bringing many changes to US taxpayers in 2018. And, one of the big benefits to parents with young children at home is that 529 plans can now be used to pay for private elementary and secondary school education.
Prior to the change, 529 plans could only be used for qualified educations expenses such as tuition, room and board, computer equipment and software and certain other expenses at eligible colleges or universities. If a family was planning to send their children to private elementary or secondary school, they could not use a 529 to pay for those expenses.
Up until now, the only vehicle available for K-12 expenses was the Coverdell Education Savings Account. But this account only allows for contributions up to $2,000/year and contributions are phased out for incomes above $110,000 (individual filers) or $220,000 (married filing joint). With no income phase-out, more families may want to save for their child’s K-12 education using a 529 plan.
529 plans will now allow families more flexibility to save and pay for their child’s education. Having worked with families that started their kids out in public school but then realized that private secondary school was a much better fit for their child’s needs, this new flexibility is important. Not every family knows at birth that they are going to send their child to private secondary school. Now they have the freedom to adjust and plan for it.
The tax bill allows up to $10,000 per year in K-12 expenses. So, you still may need to set money aside outside of a 529 if expenses exceed this amount.
Many states offer state income tax deductions for contributions to 529s. In Massachusetts, residents are able to deduct up to $1,000 in contributions to a Massachusetts Education Financing Authority (MEFA) U.Fund from their state income tax, or a $2,000 deduction for married filing jointly, at least until 2021. This equates to a savings of $51 (individual filer) or $102 (joint filer). In order to take this deduction, the MA resident must use the U.Fund plan.
Because there are a wide range of 529 plan programs in each state, one should consider the other features and benefits of the plan—including investment options, performance and fees—in addition to the state tax deduction to determine the best overall college savings program.
‘Have more questions about the new 529 plan rules? Give us a call. We’re here to help.
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