By Liz Belcher, CPA
Manager, Tax Services
The new tax law signed by the president at the end of last year included some significant changes to 529 plans that taxpayers need to know.
As most are aware, a 529 plan distribution is tax-free if it is used to pay for “qualified higher education expenses” of the beneficiary. Before the recent tax legislation was passed, tuition for elementary or secondary schools was not considered a “qualified higher education expense” for 529 plan distribution purposes.
Federal 529 Plan Changes
The new tax law provides that qualified higher education expenses now include expenses for tuition in connection with an elementary or secondary public, private or religious school (i.e. K-12 tuition). Thus, tax-free distributions from 529 plans can now be received by beneficiaries who pay these expenses, effective for distributions from 529 plans after 2017.
It’s important to be aware that there is a limit to how much of a distribution can be taken from a 529 plan for elementary and secondary tuition expenses. The amount of cash distributions from all 529 plans per single beneficiary during any tax year can’t, when combined, include more than $10,000 for elementary school and secondary school tuition incurred during the tax year.
Indiana 529 Plan Changes
In addition to the federal tax law, Indiana also made changes to its 529 plan program that taxpayers need to keep in mind, especially those claiming an Indiana tax credit for 529 plan contributions.
In May 2018, Indiana amended its code to create a tax credit for those saving tuition expenses in connection with enrollment or attendance at an elementary or secondary public, private or religious school located in Indiana (K-12 tuition).
For the tax year beginning January 1, 2018, Indiana taxpayers may receive a 10% state income tax credit against their adjusted gross income tax liability. This credit cannot exceed $500 for contributions to an account that will be used to pay for Indiana K-12 tuition. When combined with the state income tax credit taken for qualified higher education expenses (i.e. post-secondary expenses), the maximum annual income tax credit cannot exceed $1,000.
Effective January 1, 2019, the income tax credit for contributions made to an account being used to pay Indiana K-12 tuition increases to 20% — up to a maximum of $1,000 when combined with any Indiana income tax credit taken for qualified higher education expenses. Also at the time a contribution is made to an Account, the contributor must designate whether the contribution is made for (I) Qualified Expenses that are not Indiana K-12 Tuition; or (II) Indiana K-12 Tuition. Likewise, at the time of withdrawal from an account, the account owner must designate whether the withdrawal will be used for (I) Qualified Expenses that are not Indiana K-12 Tuition; or (II) Indiana K-12 Tuition. It’s important for taxpayers to understand the Indiana rules for which a credit is claimed as a non-qualified distribution will result in the repayment of a previously claimed Indiana credit.
If you have any questions about how the new 529 plan changes will impact you, please call Liz Belcher at (317) 613-7846 or e-mail firstname.lastname@example.org.