Question

A client, Todd Jones, has told you that he has heard that a Section 529 account could help him save for his daughter's education expenses. He is interested in saving not only for her college costs but also the costs of her attending a private high school. Todd is a New York State resident. Write a memorandum to your client explaining how Section 529 accounts work, including the Federal and New York State tax benefits of establishing and funding such an account. Also explain the changes made to Section 529 plans enacted by the Tax Cuts and Jobs Act of 2017.

The paper should be 1½ to 2 pages in length (typed, double space), plus an additional page containing a bibliography of articles/sources consulted in writing your paper.

Answer 1

Section 529 plans allow individuals to invest in a predetermined pool of stock and bond investments. Many plans allow you to invest in a given asset allocation determined by your child's age. In general, the asset allocation will be more aggressive for younger children and less aggressive for children nearing college age.

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue code

When you use the 529 plan for post-secondary or higher education expenses, the use of the funds are relatively broad (see the definition of qualified higher education expenses). However, parents need to be careful when using the 529 for elementary or secondary education. Parents may only use the money in these accounts to pay for private school tuition. Yes, just tuition.

To take advantage of this new rule, you’ll simply cash out investments, transfer the funds to your checking account, and use the

Rules Surrounding 529 Plans

529 plans are educational “IRAs” that are administered at the state level. 529 plans are considered tax-advantaged accounts. Savers can invest in the 529 plan, and the gains from the investments are free of capital gains, so long as the funds are used to pay for qualified expenses (which now include up to $10,000 of private elementary and secondary school tuition).

Many states offer tax deductions or credits when parents or grandparents fund 529 accounts. You can see a full list of the deductions by state here. It’s important to note that you won’t get a Federal deduction or credit for funding a 529 plan.

It’s also important to note that your eligibility for a deduction may be contingent on choosing the 529 plan administered by the state where you live. If your state doesn’t offer a deduction or credit, I recommend check out our list of the best places to open a 529 plan.

529 plans don’t have firm limits on funding, but the gift tax limit in 2018 is $15,000. That means that you and a spouse could each contribute $15,000 to a 529 plan (for each child) without triggering any extra taxes. You can also “superfund” a 529 plan by contributing up to $75,000 (five years of gifts) at once.

CHANGES MADE

The late 2017 tax overhaul didn’t just affect Federal income tax brackets. Since the start of this year, 529 plans have changed. Now parents can withdraw up to $10,000 per year to pay for private primary and secondary education tuition

Expenses such as computers, field trips, summer camps, etc., are not covered by this provision. Additionally, the law only covers distributions of up to $10,000 per year (for elementary and secondary education)

DEDUCTIONS

Up to $10,000 is deductible annually from New York State taxable income for married couples filing jointly; single taxpayers can deduct up to $5,000 annually. ... State tax deductions may be subject to recapture in certain circumstances such as rollovers to another state's 529 plan or nonqualified withdrawals.