CONGRESS ADDS MORE USES FOR COLLEGE SAVINGS PLANS (SEC 529 PLANS)

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CONGRESS ADDS MORE USES FOR COLLEGE SAVINGS PLANS
(SEC 529 PLANS)
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• Congress originally created the Qualified
  State Tuition Plan, often referred to as the Sec
  529 Plan, as a tax-beneficial incentive for
  parents, grandparents, and others to save money
  for an individuals future college tuition and
  fees. There is no federal tax deduction for
  making contributions, but taxes on the earnings
  within a plan are not only tax-deferred while
  they are held in the account, they are tax-free
  when withdrawn to pay for qualified education
  expenses. Thus, the real tax benefit of these
  plans is the earnings within the plan
  accumulating tax-deferred and then being tax-free
  when withdrawn if used for college tuition and
  related qualified expenses.

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• Contributions - To maximize the tax benefits of a
  plan, it should be established for a child as
  soon after birth as possible when funds are
  available for contribution. For tax purposes,
  there is no limit on the amount that can be
  contributed, but contributions are considered
  gifts and each individual contributing to a plan
  would have to file a gift tax return if the gift
  exceeds the annual inflation-adjusted gift tax
  exclusion, which is 15,000 for 2020.

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• There is also a special gift provision that
  permits a contributor to contribute up to 5 times
  the annual gift tax exclusion amount to a
  qualified tuition account in a single year and
  treat the contribution as having been made rat
  ably over the five-year period beginning with the
  calendar year in which the contribution is made.
  Thus, this provision permits front loading of
  contributions and accelerates the accumulation of
  earnings within the account. When this special
  provision is used, a gift tax return is required
  in the year of contribution, and any amount
  contributed that is all o cable to the years
  within the five-year period remaining after the
  year of the contributors death are includible in
  the contributors gross estate.

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• However, while the income and gift tax laws dont
  cap how much can be contributed to a qualified
  tuition plan, the 529 plans do limit the maximum
  amount that can be contributed per beneficiary
  based on the projected cost of a college
  education, and the maximum amount will vary
  between plans, though most have limits in excess
  of 200,000, with some topping 475,000.
  Generally, once an account reaches that level,
  additional contributions cannot be made, but that
  doesnt prevent the account from continuing to
  grow.
• More recently, as part of the Tax Cuts Jobs Act
  and beginning in 2018, the following qualified
  expenses were added

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• Up to 10,000 of 529 plan funds to be used
  federally tax-free annually, per student, for
  elementary school and high school tuition
  expenses to attend public, private, and religious
  schools.
• Now, as part of the Appropriations Act of 2020,
  and effective for distributions made after 2018,
  the eligible use of a plans funds will include
• Qualified higher education expenses associated
  with registered apprenticeship programs certified
  by the Secretary of Labor under Sec 1 of the
  National Apprenticeship Act.
• Payment of education loans up to a maximum of
  10,000 (reduced by the amount of distributions
  so treated for all prior taxable years) including
  those for siblings.

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• Be Cautious  Remember, the tax benefit of these
  plans is amassing tax-deferred investment income,
  which then can be withdrawn tax-free to pay
  qualified education expenses. Using these funds
  too early will not achieve the desired goal of
  accumulating and compounding investment income.
  Thus, you should carefully consider whether to
  use the funds for elementary and secondary school
  education expenses or to wait and tap the account
  for post-secondary education, with the latter
  choice maximizing investment income.

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• There are also tax credits to help fund a childs
  college education. For example, one favorable
  twist of the tax code allows a grandparent (or
  others) to directly pay the childs tuition
  without being subject to the gift limitations or
  reporting. On top of that, assuming the child is
  a dependent of their parent, the parent may
  qualify for the higher education credit even
  though the grandparent paid the tuition. The
  parents eligibility is affected by their income,
  since the credits phase out once the adjusted
  gross income of the individual claiming the
  credit exceeds an amount based on filing status
  and the type of credit claimed.
• If you need assistance with long-term education
  planning, give this office a call.

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