The 2017 Tax Cuts and Jobs Act (TCJA) resulted in massive tax reform. The changes impact many areas of tax law, including how we save for college. The new tax law has directly impacted 529 education savings plans.
This piece will provide basic information on these changes and help taxpayers navigate this specific area and mitigate the risk of unforeseen tax obligations.
How did the TCJA impact 529 plans? The Internal Revenue Service (IRS) recently provided some guidance on two changes that impact 529 education savings plans. These changes include:
- Expanded use. Originally, these savings plans provided funds for secondary education expenses. The TCJA removed this restriction and allows funds to apply for costs associated with k-12 educational expenses as well. The law specifically allows for up to $10,000 of tuition costs per child per year towards public, private or religious school expenses.
- Rollovers. The TCJA also allows taxpayers to rollover 529 funds into an Achieving a Better Life Experience (ABLE) program account for the same beneficiaries or other family members. These accounts cover disability-related expenses for those who become disabled prior to reaching age 26. Families can now rollover 529 funds into these accounts. The transfers are limited to the current ABLE contribution limit, set at $15,000.
A failure to use these funds within the bounds of the law can result in unforeseen tax bills and penalties. Anyone that receives a notice from the IRS of an impending audit due to the transfer of or use of 529 funds is wise to seek legal counsel. An attorney experienced in navigating these tax disputes can provide guidance and mitigate your risk of additional tax obligations.