529 Savings Plans and the new tax law
Posted on February 27, 2018 16:31 pm CST
By Congressman Billy Long,
In 1985, the average cost for a degree from a four-year university was $11,548 a year. As of 2015, that number had increased to $25,409. With that being said, some parents are paying for education before their child sets foot on a college campus. With private schools, books, technology and supplies, parents are forking over thousands of dollars throughout their child’s K-12 years. I, like many of you, know firsthand how these costs can add up. Last December, President Trump signed the Tax Cuts and Jobs Act into law. This bill not only promised lower taxes, but it also expanded benefits for hard-working taxpayers, such as 529 Savings Plans. These higher education savings plans are now expanded to cover not only higher education costs, such as tuition, fees and room and board, but K-12 education costs, such as private school tuition, books and supplies.
In 1996, Congress created 529 Savings Plans to incentivize parents to save for their child’s education. These plans are operated by either states or educational institutions. Although contributions made to 529 Savings Plans are not eligible for federal income tax deductions, some states offer a state income tax perk. Many states, including Missouri, allow an individual to deduct up to a certain amount of their 529 contributions when filing state income taxes. In Missouri, those numbers are $8,000 for an individual and $16,000 for married couples filing jointly. However, any earnings gained are exempt from both state and federal income taxes. For example, if a parent deposits $2,000 in a 529 that grows at 5 percent, at the end of the year the parent will have made $100, which will not be taxed.
However, there are limits on how much money parents can contribute to these savings plans. To avoid being hit with the federal gift tax, a single tax filer is only able to contribute up to $15,000 a year to a plan or $30,000 for married couples filing jointly.
Now that these plans have been expanded to include K-12 education, parents can invest in their child’s education even earlier. A parent now has the choice to withdraw up to $10,000 a year to cover tuition, at both private and religious schools, or fees connected to enrollment or attendance. With the average cost of private school being $10,302 a year, having the ability to dip into this money to cover those costs is crucial. And that’s just tuition. That number doesn’t include books, fees, technology and other items.
529 Savings Plans are a helpful tool for both parents and students when it comes to affording a quality education. The expansion of these plans allows parents more choice and control over their child’s education, which they rightfully deserve.