Money Matters

presented by: Vision Financial

Having just paid for two children to graduate from Briarwood Christian School, I wish that I could have received better tax breaks for paying for private education for grades K-12. While Coverdell Education Savings accounts allowed tax-free savings for K-12 qualifying expenses, they are also subject to income limits and less generous contribution limits. Under the new Tax Cuts and Jobs Act, saving for a private education just became a little easier by allowing income tax benefits under 529 plans to help fund private K-12 tuition. Let’s look at some of the Federal and State tax treatments for these plans and how they may be coordinated with Coverdell plans and tax credits.

Federal income tax treatment of qualified withdrawals. Contributions to 529 plans are tax deferred. This means that you don’t pay income tax on the plan’s earnings each year. When you take out money and use it to pay for qualified education expenses, the earnings portion of your withdrawal is free from federal income tax. This presents a significant opportunity to help you accumulate funds for college, and now private k-12 education. Qualified education expenses include tuition, fees, and books.

State income tax treatment of qualified withdrawals. States differ in the 529 plan tax benefits they offer to their residents. Some states may offer no tax benefits, while others may exempt earnings on qualified withdrawals from state income tax and/or offer a deduction for contributions. Keep in mind that states may limit their tax benefits to individuals who participate in the in-state 529 plan. Alabama allows you to deduct up to $10,000 on your state income tax per year. In general, you won’t be required to pay income taxes to another state simply because you opened a 529 account in that state. But you’ll probably be taxed in your state of residency on the earnings distributed by your 529 plan (whatever state sponsored it) unless your state grants a specific exemption.

Deducting your contributions to a 529 plan. Unfortunately, you can’t claim a federal income tax deduction for your contributions to a 529 plan. Depending on where you live, though, you may qualify for a deduction on your state income tax return. A number of states now allow a state income tax deduction for contributions to a 529 plan only if you contribute to your own state’s 529 plan. Most of the states that provide a deduction for contributions impose a deduction cap, or limitation, on the amount of the deduction.

Coordination with the Coverdell education savings account and education tax credits. You can fund a Coverdell education savings account and a 529 account in the same year for the same beneficiary without triggering a penalty. You can also claim an education tax credit in the same year you withdraw funds from a 529 plan to pay for qualified education expenses. But your 529 plan withdrawal will not be completely tax free on your federal income tax return if it’s used for the same higher education expenses for which you’re claiming a credit.

Paying for private K-12 education just got less expensive, however navigating the options may seem a little more complicated. See your financial professional for help on how to take advantage of these changes.

Mike Mungenast, Sr. Vice President, Senior Advisor 

Vision Financial Group

4505 Pine Tree Circle, Birmingham, AL 35243

205-970-4909, www.vision-financialgroup.com

 

Investment advisory services offered through Investment Advisors, a division of ProEquities, Inc., a Registered Investment Advisor.  Securities offered through ProEquities Inc., a registered broker-dealer and member of FINRA and SIPC.  Vision Financial Group, Inc. and West Alabama Bank are independent of ProEquities, Inc. Securities and insurance products offered are not bank deposits, have no bank guarantee, are not FDIC insured, and may lose value. Prepared by Broadridge Communication Solutions, Inc.

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