In our January 3, 2018 blog post, Tax Reform Update, we highlighted a handful of changes to both the Corporate and Individual tax code. Among the many changes for individuals was the expansion of qualified 529 plan distributions to include tuition expenses associated with private K-12 schooling. Traditionally, 529 plans have been available for university, college or vocational school-related expenses – coined by the IRS as Qualified Higher Education Expenses (QHEE). This new expansion creates even more education savings opportunities and opens the door for each 529 plan beneficiary to receive up to $10,000 per year for private K-12 tuition
Be careful though – 529 plans are state operated and many states are encouraging families to pause before making K-12 related distributions until the issue has been taken up at the state level. If a state decided not to conform to the new Federal ruling, it could make a K-12 distribution nonqualified, therefore subjecting the earnings portion of your distribution to ordinary income tax and a 10% penalty.
So, what does this mean for you right now? It may be best to let each state formally address 529 expansion before making any K-12 distributions. If states later conform to the Federal ruling then you can be reimbursed for any eligible expenses incurred.
Walker T. Shelton, CFP® is a financial planner and client advisor in Charlotte, NC. Click here to learn more about Walker.
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