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Learning about 529 education savings plan changes

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Photo by NeONBRAND on Unsplash 

If you thought those back-to-school tax holidays were a bit too early, think again. Classes at several Texas colleges start in a couple of weeks. So do those at our local elementary, middle and high schools.

So much for summer lasting until the long Labor Day weekend.

The resumption of classes means that in addition to purchasing the clothing, books and other supplies the students of all ages need, youngsters and their families also are doing some 2018 school year homework on how to pay for all the school-related costs.

529s to the educational rescue: One of the most popular methods is through the funds saved in a tax-favored 529 plan.

These educational savings accounts get their name from the Internal Revenue Code section that governs their federal tax treatment. The plans, however, are administered by states.

While contributions to 529 plans are not tax deductible — at least not on the federal level; check with your state tax officials about this possibility or peruse Saving for College's state tax deduction or credit list — the money does grow tax-free and withdrawals aren't taxed as long as they are used to pay for qualified school expenses.

529 plans originated as a way to help pay college costs. But recent tax code changes have opened up the accounts so that the money is available for some secondary and even elementary school expenses.

The Internal Revenue Service today issued a notice alerting students and their parents of three key changes so that they don't miss out on any 529 plan benefits.

The official word, Notice 2018-58, examines a change included in the Protecting Americans From Tax Hikes (PATH) Act, which was enacted in 2015, and two changes that are part of the Tax Cuts and Jobs Act (TCJA), which became law in late December 2017.

The IRS says it and the Treasury Department will issue more detailed regulations on these changes soon. Until then, here's the scoop.

Tuition refunds: The PATH Act change added a special rule for a beneficiary of a 529 plan, usually a student, who receives a refund of tuition or other qualified education expenses.

This can occur when a student drops a class mid-semester. If the beneficiary recontributes the refund to any of his or her 529 plans within 60 days, the refund is tax-free.

Re-contributions also won't count against the plan’s contribution limit.

School lists display at local grocery story_Kay Bell photoK-12 now covered, too: A TCJA change now allows 529 plan funds to be used to pay up to $10,000 of tuition for elementary or secondary classes at public, private or religious schools.

Note that right now home schooling costs are not eligible for 529 plan reimbursement.

However, an outline of proposed additional tax law changes, known as Tax Reform 2.0 by the Republican lawmakers on Capitol Hill pushing the legislation, does add home schooling to the 529 mix. Stay tuned.

For now, though, the 10 grand total that can be used to pay eligible Kindergarten to grade 12 tuition is per student, or beneficiary in 529 parlance. That amount is firm, regardless of how many such accounts have been created to help meet the youngster's schooling costs.

Many states automatically follow federal 529 legislation changes, but you should check with your plan(s)' administrators to ensure that you don't run into any problems in getting the cash for your child's pre-college costs.

Rollovers to an ABLE account: The TCJA also revised the account's rules to allow funds to be rolled over from a designated beneficiary’s 529 plan to Achieving a Better Life Experience (ABLE) plan.

An ABLE plan is a tax-favored savings account for eligible blind or disabled individuals. Like 529 plans, the ABLE-eligible person is the designated beneficiary and owner of the account.

The money in ABLE accounts help the beneficiaries and their families to save and pay for disability-related expenses. You can find out about ABLE plans offered in your state at the ABLE National Resource Center (ANRC).

Under the new tax law, rollovers from 529 plans, together with most contributions made to the ABLE account, cannot exceed the annual ABLE contribution limit. That's $15,000 for tax year 2018.

Again, Treasury and the IRS will be issued more specific regulations about these 529 rules.

But today's IRS notice should suffice for now as families review their budgets and look for ways to cover the coming school year's costs.

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