It’s Not a Trick… It’s a Treat!
The 529 plan, as we know it, has been improved! Distributions (including earnings) from these tax-advantaged accounts are not included in gross income provided such distributions do not exceed the beneficiary’s qualified higher education expenses (QHEEs). So just what are QHEEs? Prior to January 1, 2018, they were costs required for the plan’s beneficiary to attend a college, university or other eligible post-secondary educational institution. However, the 2017 Tax Cuts and Jobs Act expanded the definition (beginning with the 2018 tax year) to include up to $10,000 of tuition incurred in connection with the beneficiary’s enrollment at an elementary or secondary (K-12) private, public, or religious school.
If you are a Pennsylvania resident, this change to the 529 plan could be a pretty “sweet” deal!
PA residents are allowed a PA income tax deduction for contributions made to a 529 plan up to the annual gifting exclusion — $15,000 per beneficiary per taxpayer in 2018 (or $30,000 per beneficiary for a married couple). This deduction cannot exceed each taxpayer’s PA taxable income and is allowed regardless of whether the contribution is made to a PA 529 plan or to another state’s 529 plan.
If you are already paying or plan to pay for private school tuition, you may want to consider contributing the tuition cost to a 529 plan, then taking a distribution (up to $10,000) to pay the tuition bill. For example, a 529 contribution of $10,000, provided you have sufficient PA taxable income, could provide a tax savings of $307 ($10,000 x 3.07%) just by running the tuition through the 529 plan. Two students? A savings of $614. You’re getting the benefit of a deduction on your PA income tax return based on a contribution for an expense you planned to pay anyway!
One more thing to think about – the PA deduction for 529 plan contributions is not just for parents. Provided a PA resident has sufficient taxable income, they can make a 529 contribution for their grandchild, niece, nephew, or my child (we can talk). Pretty sweet deal, right!?!
(Please note that PA does not have a required holding period for contributions and distributions, however, if you have a non-PA 529 plan, please check your plan for any early withdrawal requirements. In addition, as not all states have conformed to this new 529 change, please confirm with your plan prior to withdrawal.)
2018 is definitely a unique tax year given the numerous tax law changes brought about by the 2017 Tax Cuts and Jobs Act. With these changes comes tax planning opportunities. The ability to withdraw up to $10,000 tax-free from a 529 plan for private elementary or secondary tuition and realize a PA income tax deduction is just a very small example of the benefits of tax planning. The time to plan is now and the tax professionals at Stephano Slack are here to help you minimize your tax bill. Please contact us – you’ll be glad you did!
Jill Zoghby, CPA