Tax Reform Expands Benefit of Tuition Savings, ABLE Programs

Estate Planning Practice Group

By Estate Planning Practice Group

The Tax Cuts and Jobs Act of 2017 (TCJA) introduced a number of changes to the tax code for individual taxpayers. Major changes included lowering individual tax rates, increasing the standard deduction, and increasing the child tax credit.

The legislation also made significant, but often overlooked, changes to the tax treatment of contributions to qualified tuition savings and ABLE programs.

Qualified Tuition Programs (§ 529 Plans)

529 plans are tax-advantaged investment plans designed to encourage saving for the cost of education. 529 plans offer a number of tax benefits:

  • Earnings. As 529 plans grow in value, earnings on investments are not subject to state or federal income tax, so savings grow tax-free.
  • Contributions. In Missouri, owners of 529 plan accounts may deduct up to $8,000 ($16,000 if married filing jointly) of 529 plan contributions from Missouri state income tax.
  • Withdrawals. Funds withdrawn to pay for qualifying educational expenses are not subject to state or federal income tax.

Prior to the TCJA, funds withdrawn from 529 plans could only be used for “qualified higher education expenses,” which included tuition, fees, books, supplies, and other equipment required for attendance at an institution of higher education, most often a college or university.

Beginning in 2018, however, 529 funds may now be used for public, private, or religious K-12 education. With the passage of the TCJA, Congress broadened the definition of “qualified higher education expenses” to include tuition paid in connection with attendance at an elementary school or secondary public, private, or religious school.

Withdrawals for K-12 education expenses are limited to $10,000 each year.

ABLE Programs (Missouri ABLE Accounts)

ABLE accounts are tax-advantaged investment accounts for individuals with disabilities. ABLE accounts allow individuals with disabilities to save and invest money without compromising eligibility for certain public health and benefit programs, such as Medicaid or Supplemental Security Income (SSI).

The TCJA allows a “rollover” of funds from 529 plans to ABLE accounts without federal income tax consequences as long as the designated beneficiary (or member of the beneficiary’s family) of the 529 plan owns the ABLE account. At present, Missouri does not yet allow for tax-free rollovers of 529 funds to Missouri ABLE accounts.

The Missouri legislature may soon act to match federal law. On January 8, Senate Bill 882 was introduced to the legislature to allow Missouri 529 account holders to transfer money from 529 accounts to Missouri ABLE accounts while retaining tax exempt status on any monies transferred.

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