Do you pay K-12 school tuition? Want to receive a tax deduction?
Check out this financial hack for parents! It’s a smart way to put that 529 to good use before your kids even know what the SAT is.
When it’s time to pay K-12 school tuition, consider running the funds through your student’s 529 plan first. Depending on your home state’s 529 plan rules and how much you contribute to the fund per year, back to school could be your next opportunity for a state tax break. Here’s why:
- Many states offer tax deductions for 529 plan contributions.
- Most don’t require you to keep the funds in the 529 plan for any specific amount of time before taking a qualified distribution.
- In addition to paying for college, these accounts allow you to distribute up to $10,000 annually per child for qualified K-12 tuition expense.
This is how you could get a tax benefit for both college savings and qualified K-12 tuition expense in the same year:
Let’s say you live in South Carolina where there is an unlimited state tax deduction for contributions to a 529 plan. Let’s assume that based on your college savings goals, you contribute $12,000 per year into a 529 plan. This year your child will attend first grade at Porter-Gaud in Charleston, SC where the tuition is $22,000. In this example, you could contribute $12,000 as you normally would to meet your college savings goal as well as an additional $10,000 for 2021 fall tuition into the 529 plan. The first $12,000 is invested in the target dated fund for college, and the additional $10,000 is invested in a cash portfolio. As soon as possible (based on your state’s rules) distribute the $10,000 right back out and pay the tuition to Porter Gaud. You have now paid almost half of the year’s tuition AND you qualified for $22,000 in state income tax benefit.
Keep in mind that every state is different and a few of them block this loophole, so check with your CPA or tax preparer to advise on your specific situation. Depending on where you live, you may already be maximizing your state tax deduction with your college savings contributions.
Additionally, the annual gift-tax exclusion is $15,000 per donor to an individual in 2021. As a couple, you may gift up to $30,000 per year to your child without gift tax implications.
To make sure your tax and college savings strategies line up, let’s talk. That private school tuition could end up saving money on your taxes!
529 Plan FAQs
Q: Are 529 distributions subject to tax penalties?
- Qualified college expenses are not subject to Federal taxes and, in most cases, are exempt from state taxes.
- Qualified K-12 expenses up to $10k are not subject to Federal taxes. In most cases, they’re also exempt from state taxes.
- But, since some states have unique rules for 529 distributions, it’s always best check with your tax advisor.
Q: Can I use 529 distributions to pay for books and computers for K-12 expenses?
- Qualified education expenses for K-12 only include tuition.
Q: Can I use 529 distributions to pay for preschool expenses?
- We hear you, because preschool and childcare are not inexpensive! If this situation, consider a Dependent Care FSA plan to help save Federal taxes on preschool and childcare expenses.
Q: If my child lives off-campus in college, are his room and board considered “qualified expenses”?
- Yes! This is a very misunderstood rule, but off-campus room and board expenses are qualified up to an amount as long as certain criteria are met:
- Student must be enrolled at least half time (as defined by the school)
- Expenses do not exceed the university’s off-campus housing allowance (check the university’s website for the amount)
- You are able to provide proof of the expenses (so save your receipts and bank card statements!)
- Reimburse yourself during the year of the charges; for example, you cannot reimburse yourself in February for your fall semester expenses.
Q: Is it possible to overfund a 529 plan?
- With a 529 plan, there’s no need to worry about overfunding or unused money. If 529 funds are not used for education, you only pay taxes on earnings plus a 10 percent penalty on those earnings.
Q: Does my child have to attend school in the same state that sponsors the 529 plan?
- No, you can open a 529 account in any state and use the money to fund education at any school.