The Tax Cut & Jobs Act signed into law by president Trump on December 22, 2017 allows for withdrawal of upto $10,000 from a 529 plan for tuition paid towards elementary and secondary school education. This is in addition to withdrawal allowed for college education.
You can now pay upto $10,000 for the following tuition expenses for each kid out of the 529 plan
- Elementary schools
- Secondary schools
- Religious Schools
To understand it better, let’s discuss it with perspective to NYS 529 plan. The way it works is you open a NYS 529 plan account by going online to https://www.nysaves.org/home/open-ny-529-account.html?. You must open an account in your name and make your kids beneficiaries of that account. It is important to note that you can take the NYS tax deduction on your tax return only when the account is in your name. You can now make contribution into the account for each of your kids. You can then withdraw money from it to pay for their tuition. The amount you can withdraw is upto $10,000 each year for each kid to pay for their tution.
The question that comes up is why would you do that? Why not keep paying for kids tuition directly as you have been doing so far. The answer to it is the following tax savings you get by doing so:
- The earnings (interest, dividends and capital gains) in the account grow tax free.
- The earnings (interest, dividends and capital gains) on this money is not subject to Federal and state tax when it is withdrawn.
- And the biggest and the most beneficial reason is NYS provides upto $10,000 in tax deduction ($5,000 if single) on contribute made to NYS 529 plan.
Let’s take an example to get a better understanding of the same
Anna opens a NYS 529 plan account in 2017 with her son Daniel as a beneficiary. She contributes $12,000 to the account in 2017. The interest and dividends earned in the account are $500 during 2017. Assuming she is filing a joint return with her spouse she will not report $500 income on her tax return. Assuming her highest tax bracket is 24% federal and 6.45% NYS she will save $152 in taxes on this investment (500 * (24%+6.45%) = 152). In addition she will get a deduction of $10,000 on her NYS tax return which essentially means a tax savings of $645 ($10,000*6.45%).
Further let’s assume Daniel goes to kindergarten in a private school in 2018. The tuition for it is $1,000 per month. She can withdraw upto $10,000 from the plan account to pay for it. She will not be required to include any income on it on her tax return.
If you did not open a NYS 529 plan account in 2017 you can still open one in 2018. You can than contribute the money into the account and then withdraw it to pay for your kids tuition. This way even if you do not earn any interest, divined or capital gain income you can still get a deduction of upto $10,000 on that contribution for NYS tax purposes. Simply said just by contributing and then withdrawing the money from the plan to pay for your kids tuition you can save upto $600 to $700 in NYS taxes.
For example Sam contributes $24,000 to the NYS 529 plan in 2018. $12,000 for each of his daughters who are in grade 2 and 4 in a private school. He can withdraw upto $10,000 from each account for a total of $20,000. He can only deduct upto $10,000 on his NYS tax return for the contribution he made to her Daughter’s 529 plan account (assumed it’s a joint return).
Grandparents can also open a 529 plan account in their name and contribute to it for the benefit of their grandkids and get NYS tax deduction upto $10,000 on that contribution. Please consult your tax advisor.
The conclusion is that, if your kids are going to primary, secondary or religious schools and you are paying for their tuition you must consider opening a 529 plan account. This will provide you with substantial federal and state tax savings.
By Mariya Luqmani, CPA, MST