As you may be aware from information we have provided, the newly enacted federal tax law contains a provision that the Orthodox Union Advocacy Center promoted – the expansion of 529 Savings Accounts to be utilized for K-12 education expenses, including those of non-public parochial schools. As of the start of 2018, this law is in effect at the federal level.
We have received many questions about this new federal provision and will seek to review the basics and provide general answers in this FAQ. However, this information should not be taken as a substitute for individualized tax guidance. You should consult with your personal accountant or financial adviser who can better address your specific situation.
What is a “529” plan?
A 529 plan is a special, tax-advantaged account originally designed to encourage saving for college and other higher-education expenses. Parents, grandparents, guardians and others deposit post-tax funds into an account for each child. The funds are invested by professional account managers in mutual fund portfolios.
For a broad overview of 529 plans and links to each state’s 529 plan, see: http://www.savingforcollege.com
529 Funds Enjoy Federal Tax Benefits
The gains accrued to the account are tax free. Additionally, contributions to the accounts enjoy exemptions from the federal gift tax (up to certain amounts and along special time considerations).
529 Funds Enjoy State Tax Benefits
Like the federal law, states treat the gains on 529 investments as tax free.
Moreover, most states offer tax benefits for using the state’s 529 plan as well; typically in the form of a deduction on state income taxes for a portion of the funds deposited into the accounts. The size of the state income tax deduction varies. For example, New York provides a state tax deduction of up to a total of $10,000 per year for donations to 529 Accounts. Maryland provides a state tax deduction of up to $5,000 per child per year for donations to 529 Accounts. (New Jersey is one of the few states that provides no state tax deduction for 529 contributions.) Etcetera.
Each state 529 plan has its own website with a great deal of information about its specifics. It is very worthwhile to visit your state’s 529 plan website in addition to the general website linked to above. Here are a few:
New York https://www.nysaves.org/home.html
New Jersey https://www.njbest.com/
Are there limits to when I can use the funds in order to receive the state tax deduction?
Again, you should consult with your personal tax adviser on this question. But our research indicates only a handful of states currently require a significant “holding period” for the funds to remain in the account before they are withdrawn for qualified expenses.
(But it is also worth bearing in mind – and discussing with your tax adviser — that the most significant financial benefit over the long-term is likely to come from allowing the funds deposited in 529 accounts to be left to accrue gains over a period of years.)
IMPORTANT UPDATE FOR NY STATE (Jan. 18, 2018)
Does the federal tax law change to include K-12 expenses mean that states will provide the state tax deduction for 529 funds used for that purpose?
The answer to this important question varies by state and is one you should discuss with your personal financial adviser. Some state tax laws or regulations are written in a manner that automatically adopts the federal tax law’s definition of which expenses are eligible for 529 accounts’ use, while other states’ laws will require modification. OU Advocacy and its affiliated TEACH Network are already working in key state capitals to ensure the state tax deduction is available (and, ideally, increased) to benefit our community.
On January 17, the New York State Department of Taxation and Finance issued a preliminary report on various aspects of the new federal tax law. Within that report, the Dept. of Tax & Finance states “it appears that distributions [of 529 funds] for K-12 tuition expenses would not be considered qualified distributions under…New York statutes.” Accordingly, any New York State tax benefits would be recaptured at the time a distribution is made from a NY 529 account to fund K-12 expenses (i.e.: the NY tax deduction and any earnings on contributions would be subject to NY tax).
The memo further says the Dept. of Tax & Finance “will continue to review the federal law’s provisions on 529 plans….and welcome discussion for possible solutions and alternatives.”
OU Advocacy and its affiliated TEACH NYS project are exploring the best strategies to engage with Albany (and federal) policymakers on this matter.
In the interim, we advise you to consult with your personal accountant or financial adviser before investing funds in a 529 account that you must withdraw for your children’s K-12 expenses.
With the new federal tax law provisions now in effect, we encourage you to speak with your personal financial adviser about whether utilizing a 529 Savings Plan is right for you and your family.