529 Expansion to Include Elementary and Secondary Education?

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Newer Updates on the Tax Cuts and Jobs Act

The Senate version of this provision was accepted.
For the latest updates on the Tax Cuts and Jobs Act, read New 2018 Tax Law (Tax Cuts and Jobs Act).

We’ve been waiting to see what our congressmen and women are going to decide for our 2018 tax law. As we’ve already entered the holiday season and can see the new year in sight, they are certainly cutting it close.

This so-called tax reform has a lot of unfavorable proposals. There are many differences between the House and Senate bills, but so far the two bills agree on repealing the state and local tax deduction, doubling the standard deduction, eliminating exemptions, redoing the income tax brackets, lowering the corporate tax rate, and repealing Roth recharacterizations. Many other details have not been settled between the House and the Senate.

One source of agreement seems to be the expansion of qualified distributions for 529 accounts to including elementary and secondary education expenses.

The House leaves the expansion open ended, simply stating:

Any reference in this subsection to the term ‘qualified higher education expense’ shall include a reference to expenses for tuition in connection with enrollment at an elementary or secondary school.”.

However, the Senate has a short list of valid expenses:

“(7) Treatment of elementary and secondary tuition.–Any reference in this subsection to the term `qualified higher education expense’ shall include a reference to–
“(A) expenses for tuition in connection with enrollment or attendance at an elementary or secondary
public, private, or religious school, and
“(B) expenses for–
“(i) curriculum and curricular materials,
“(ii) books or other instructional materials,
“(iii) online educational materials,
“(iv) tuition for tutoring or educational classes outside of the home (but only if the tutor or instructor is not related to the student),
“(v) dual enrollment in an institution of higher education, and
“(vi) educational therapies for students with disabilities, in connection with a homeschool (whether treated as a homeschool or a private school for purposes of applicable State law).”.

Either way, this could add a whole new method of tax savings.

The 529 plans are still the most cost-efficient way to save for college expenses. If the owner is a Virginia resident, he or she is entitled to a $4,000 state tax deduction, which saves them $230 each year per account. Two grandparents could each open one account for their grandchild and double the savings. This money grows tax deferred and is tax free when withdrawn, akin to a Roth IRA. The 529 plans have the additional benefit of an upfront state tax deduction.

With this proposed expansion, 529 accounts may become the most cost-efficient way to fund all education expenses.

Here is the full text of the relevant section from each of the bills:

Senate Bill:

SEC. 11033. 529 ACCOUNT FUNDING FOR ELEMENTARY AND SECONDARY EDUCATION.

 

(a) In General.–

(1) In general.–Section 529(c) is amended by adding at the end the following new paragraph:
“(7) Treatment of elementary and secondary tuition.–Any reference in this subsection to the term `qualified higher education expense’ shall include a reference to–
“(A) expenses for tuition in connection with enrollment or attendance at an elementary or secondary
public, private, or religious school, and
“(B) expenses for–
“(i) curriculum and curricular materials,
“(ii) books or other instructional materials,
“(iii) online educational materials,
“(iv) tuition for tutoring or educational classes outside of the home (but only if the tutor or instructor is not related to the student),
“(v) dual enrollment in an institution of higher education, and
“(vi) educational therapies for students with disabilities, in connection with a homeschool (whether treated as a homeschool or a private school for purposes of applicable State law).”.

(2) Limitation.–Section 529(e)(3)(A) is amended by adding at the end the following: “The amount of cash distributions from all qualified tuition programs described in subsection (b)(1)(A)(ii) with respect to a beneficiary during any taxable year shall, in the aggregate, include not more than $10,000 in expenses described in subsection (c)(7) incurred during the taxable year.”.

(b) Effective Date.–The amendments made by subsection (a) shall apply to contributions made after December 31, 2017.

(c) Offset.–

(1) Modification of rules relating to hardship withdrawals from cash or deferred arrangements.–Section 401(k) is amended by adding at the end the following:
“(14) Special rules relating to hardship withdrawals.–For purposes of paragraph (2)(B)(i)(IV)–
“(A) Amounts which may be withdrawn.–The following amounts may be distributed upon hardship of
the employee:
“(i) Contributions to a profit-sharing or stock bonus plan to which section 402(e)(3) applies.
“(ii) Qualified nonelective contributions (as defined in subsection (m)(4)(C)).
“(iii) Qualified matching contributions described in paragraph (3)(D)(ii)(I).
“(iv) Earnings on any contributions described in clause (i), (ii), or (iii).
“(B) No requirement to take available loan.–A distribution shall not be treated as failing to be made
upon the hardship of an employee solely because the employee does not take any available loan under the plan.”.”.

(2) Conforming amendment.–Section 401(k)(2)(B)(i)(IV) is amended to read as follows:
“(IV) subject to the provisions of paragraph (14), upon hardship of the employee, or”.”.

(3) Effective date.–The amendments made by this subsection shall apply to plan years beginning after December 31, 2017.

House Bill:

SEC. 1202. Consolidation of education savings rules.

 

(a) No new contributions to Coverdell education savings account.—Section 530(b)(1)(A) is amended to read as follows:

“(A) Except in the case of rollover contributions, no contribution will be accepted after December 31, 2017.”.

 

(b) Limited distribution allowed for elementary and secondary tuition.—

 

(1) IN GENERAL.—Section 529(c) is amended by adding at the end the following new paragraph:

“(7) TREATMENT OF ELEMENTARY AND SECONDARY TUITION.—Any reference in this subsection to the term ‘qualified higher education expense’ shall include a reference to expenses for tuition in connection with enrollment at an elementary or secondary school.”.

 

(2) LIMITATION.—Section 529(e)(3)(A) is amended by adding at the end the following: “The amount of cash distributions from all qualified tuition programs described in subsection (b)(1)(A)(ii) with respect to a beneficiary during any taxable year, shall, in the aggregate, include not more than $10,000 in expenses for tuition incurred during the taxable year in connection with the enrollment or attendance of the beneficiary as an elementary or secondary school student at a public, private, or religious school.”.

 

(c) Rollovers to qualified tuition programs permitted.—Section 530(d)(5) is amended by inserting “, or into (by purchase or contribution) a qualified tuition program (as defined in section 529),” after “into another Coverdell education savings account”.

 

(d) Distributions from qualified tuition programs for certain expenses associated with registered apprenticeship programs.—Section 529(e)(3) is amended by adding at the end the following new subparagraph:

“(C) CERTAIN EXPENSES ASSOCIATED WITH REGISTERED APPRENTICESHIP PROGRAMS.—The term ‘qualified higher education expenses’ shall include books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act (29 U.S.C. 50).”.

 

(e) Unborn children allowed as account beneficiaries.—Section 529(e) is amended by adding at the end the following new paragraph:

“(6) TREATMENT OF UNBORN CHILDREN.—

“(A) IN GENERAL.—Nothing shall prevent an unborn child from being treated as a designated beneficiary or an individual under this section.

“(B) UNBORN CHILD.—For purposes of this paragraph—

“(i) IN GENERAL.—The term ‘unborn child’ means a child in utero.

“(ii) CHILD IN UTERO.—The term ‘child in utero’ means a member of the species homo sapiens, at any stage of development, who is carried in the womb.”.

 

(f) Effective dates.—

(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to contributions made after December 31, 2017.

(2) ROLLOVERS TO QUALIFIED TUITION PROGRAMS.—The amendments made by subsection (b) shall apply to distributions after December 31, 2017.

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Megan Russell has worked with Marotta Wealth Management since 2005. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine