Tax Reform’s Expansion of 529 Plan Benefits

Last month’s passage of the Tax Cuts and Jobs Acts marked the largest overhaul of the United States tax code in more than 30 years. Our 2018 Capital Markets Forecast explores how the new tax law is expected to affect the investment industry as a whole. We will also address specific components of the law in a series of blog posts over the coming months. Our first post in this series, “Tax Reform’s Expansion of 529 Plan Benefits,” originated following a client question.

According to the Wall Street Journal, CPAs were quite popular on the 2017 holiday party circuit as people sought to understand the impacts of the sweeping tax law overhaul. Though much has been written about tax reform’s so-called “winners” and “losers,” your tax advisor is best positioned to help you understand how you’ll actually be affected.

One of the many tax law changes involves 529 plans, an attractive way to save for qualified higher education expenses as they benefit from both tax-free growth and distributions. The new federal tax code has expanded the benefits of 529 plans to include K-12 expenses of up to $10,000 per student each year. While public, private, and homeschool expenses all qualify for this expansion, the full $10,000 withdrawal limit will most likely be used by private school students.

If you anticipate that your child will attend a private school for his or her K-12 education, you’ll need to adjust your planning accordingly, as the benefits of compounding interest will quickly erode if you begin withdrawing $10,000 annually when your child enters kindergarten.

Some states provide a dollar-for-dollar deduction for 529 contributions. If this is the case in your state of residence and you participate in your state’s plan, it will be possible to get a state tax deduction on at least a portion of your child’s tuition. For example, contributions to the Georgia 529 plan of up to $4,000 per beneficiary per year (for those filing a joint return) are deductible in computing Georgia state income taxes. A family can make a $4,000 contribution to their child’s 529 plan, get the deduction, and immediately withdraw the funds to cover a portion of their tuition expense.

Grandparents seeking to reduce the size of their estate can jointly contribute up to $150,000 to a beneficiary’s 529 plan at one time, assuming they do not make a gift to the same beneficiary for the next five years, thereby effectively frontloading five years’ worth of their annual gift tax exclusion. Parents can then use these funds to cover both K-12 expenses as well as college and potentially graduate school. Of course, a grandparent paying tuition directly to a school can be a more effective means to reducing the size of one’s estate while avoiding making taxable gifts. It is important to discuss with your Relationship Manager the most appropriate strategy given your unique circumstances.

Balentine has created a unique approach to financial planning that weaves together leading planning and quantitative risk assessment software with our own customized inputs incorporating our annual Capital Markets Forecast assumptions and proprietary strategies. This dynamic platform helps clients visually understand how changes to inputs impact the likelihood of success in achieving their goals. Please contact your Balentine Relationship Manager if you’d like to see “What If?” scenarios based on various education goals, investment assumptions, and contribution amounts.