In late 2017, the U.S. Congress passed the federal Tax Cuts and Jobs Act (TCJA). Some months later, the Ohio legislature passed, and the governor signed into law, S.B. 22, which incorporated into Ohio income tax law some of the changes in federal tax law. Among the contents of S.B. 22 were provisions that will have an impact on Ohio's 529 plan and taxes. The changes are favorable for Ohio taxpayers, so if you missed them in the wake of all the other tax changes at the time, it is worth taking a look going forward.
Many of the changes to federal and Ohio tax law benefited businesses, but there was good news for individual taxpayers and families, too. If you are among the Ohio taxpayers who has paid into a 529 plan for your child's education, you probably did so with an eye toward paying for college expenses. However, the changes in the law have expanded your options for using those funds.
There are two types of 529 plans, named for the section of the Tax Code that authorizes them. One is a prepaid tuition plan; the other is an investment account in which a parent, grandparent or other person can save for a beneficiary’s future qualified higher education expenses. Over time, the investment account variety of 529 plan has become the more widely-used option, with most people using the funds to pay not only college tuition, but other qualified expenses such as room and board and mandatory fees.
529 savings plans vary from state to state, and you need not live in a particular state to save and invest with that state's plan. For example, Ohio's 529 plan, called CollegeAdvantage, can be used by both Ohioans and those outside the state. 529 plans work by investing your financial contribution in mutual-fund based investments. Your account value is based on the performance of the investments. Some plans, including CollegeAdvantage, also offer FDIC-insured banking options for savers who are more risk-averse.
Funds from a 529 savings plan can be used at almost any U.S. college or university, as well as some outside of the country. However, the funds in a 529 plan account can also be put toward tuition at a public, private, or religious elementary or secondary school, grades K-12. The limitation for such payments is $10,000 per beneficiary, per year.
Part of the reason for the popularity of 529 plans was that their earnings were exempt from federal and state income tax; if you invested when your child was small, and later used the earnings to pay for college expenses, you would realize a tremendous tax benefit. But until the recent changes in the law, those earnings were income tax-exempt only to the extent that they were applied to qualified higher education expenses for a beneficiary.
In other words, earnings in a 529 investment account could be used to pay for K-12 educational expenses, but they would be subject to federal and state income tax. Unsurprisingly, this rule made funds from a 529 plan account much less attractive to use for elementary or secondary school expenses.
The TCJA allows account owners to use 529 plan earnings for qualifying K-12 tuition and expenses. S.B. 22 extends the favorable tax treatment enjoyed for payment of college expenses to these primary and secondary school payments. Without the provisions of S.B. 22, those payments would be required to be added back to Ohio adjusted gross income (AGI), stripping them of much of their benefit. Considering that parents may be paying these expenses for multiple children for more than a decade, the changes created by S.B. 22 are good news for Ohio families.
Tax laws are constantly evolving. In order to plan for your loved ones' future while realizing the greatest tax benefit, it is helpful to schedule periodic consultations with an experienced estate planning and tax planning attorney. If you have questions about tax planning or 529 plans, we invite you to contact Gudorf Law Group.
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