Tax Reform Adds Education Benefit

Why are we talking about an education benefit in the middle of the summer?

We know that everyone is in summer vacation mode. No one wants to talk about school now. I mean, the kids are just getting out of school! Well, someone has to bring up the subject to save you money on your education expenses. Therefore, it is time to start making plans for education savings. Even if your child is an infant, you want to think about this subject and ask yourself, “Am I going to send my child to private school?” And, “What if I don’t qualify for scholarships?” After all, scholarships are very competitive. So you want to think about education savings plans.

Types of Tax-advantaged Education Savings Plans 

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There are two types of Education Savings Plans. The Coverdell account and the 529 Savings Plan. Each plan has tax-advantaged savings.

New Tax Law Provides Two Tax-Advantaged Savings Plans

Tax Reform Adds Education Benefit, Coverdell account, 529 Savings Plan, education benefit, tax advantageThe Education benefit under the new tax law provides two tax-advantaged savings plans for the Qualified State Tuition Plan, known as the 529 Plan. You probably want to know what are the similarities and differences?

Similarities Between The Two Education Savings Plans

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The two education savings plans are similar in that contributions to the plans are not tax deductible. We should note that some states do allow a deduction for contributions to their plans and the earnings are tax deferred and tax free if used for qualified education expenses.

Differences In Permitted Contributions 

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The two types of education savings plans are different in that only $2,000 per year can be deposited into a Coverdell account. With regard to contributions to a 529 plan, the only  limit are the gift tax considerations and the cost of attending the state’s highest-cost university. Generally, this means the annual contribution to a 529 plan is limited to the annual gift tax exclusion amount of $15,000 for 2018, in order to avoid gift tax complications. However, the annual gift limit is per contributor and multiple individuals, typically grandparents, can also contribute to a 529 plan. On the other hand, a maximum of only $2,000 can be contributed to a Coverdell account regardless of the number of contributors. Thus, 529 plans typically accept the largest amount of college savings funds.

B. Differences in Qualified Education

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Another difference has been that Coverdell accounts can be used for education in kindergarten and above. The 529 Plans can only be used for post-secondary education. As a practical matter, the $2,000 annual Coverdell contribution limits don’t provide for a substantial amount of savings that can be used for early childhood education.

New $10,000 Allowance

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To alleviate that disparity, the Act amended the 529 plan rules to allow, beginning in 2018, up to $10,000 of 529 plan funds to be used federally tax-free annually, per student, for elementary school and high school education expenses. In addition, the funds can be used to cover the expenses of attending public, private and religious schools. However, some states have not yet adopted the Act’s law change or may need to change the language in their tax codes that define the accounts as “college” savings plans before distributions for elementary and secondary school expenses will qualify as totally state tax free. States that have allowed a deduction for contributions to their plans may decide to scale back some of the tax benefit if distributions are used for expenses in grade K-12.

Do you have questions about the education benefit added by Tax Reform?

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Both a Coverdell and a 529 plan can be established for the same student. This means you can save more money using both the Coverdell and 529 Plan. That is a GREAT education benefit, especially if you plan to attend an out of state college or an expensive private school.

For additional details or assistance in planning for a child’s higher education, why not give Alex Franch, BS EA  a call at 781.849.7200 or email us at contactus@worthtax.com. Better yet, if you are a new business or an entreprenuer contemplating starting a business, why not make an appointment at any one of our locations in Dedham, Weymouth, and Norwell to develop an education financial strategy?

Alex Franch, BS EA

Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning

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