Client Tip for February 2018: 529 TAX-ADVANTAGED SAVINGS PLANS

 In Client Tips

529 TAX-ADVANTAGED SAVINGS PLANS

Originally created to encourage saving for college costs. Dollars contributed grow tax-free and distributions are also tax free – if used for qualified college expenses.  Qualified college expenses include:  tuition, room and board (off campus limited), books, fees if required by school (i.e., administrative, lab, technology), and technology (computer, software, printers, internet, class related programs).  Certain expenses of students with special needs may also qualify.  Some states (30 states) including Missouri allow a deduction (or credit) when the money is contributed to the 529 account annually (Missouri deduction is $8,000 single and $16,000 married).  Each individual can contribute up to $15,000 annually for each beneficiary.  Also, you can advance fund 5 years at one time.

More good news comes.  The Tax cuts and Jobs Act tax reform legislation of 2017 allows up to $10,000 per year to be used annually for tuition, books, and tutoring for kindergarten through high school (K-12) for each student.

Cautions:

  • Check your plan as some plans may not allow for K-12 distributions.
  • Check your state as all states do not follow Federal law (Missouri does follow and Illinois does not).
  • 529 accounts (student or parent) reduces eligibility for student aid by 5.64% of the account’s value.
  • 529 withdrawals must be used to reimburse qualified expenses paid in the same year.
  • 529 withdrawals not used for qualified expenses are subject to income tax plus 10% penalty, both paid on the earnings withdrawn. (Special rule for scholarship recipients – withdraw can match scholarship and only pay income tax on the earnings; no penalty.)

Have a question? Call us and we will help you avoid tax issues.

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