College Funds Can Now Pay For Grade School and High School
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Thanks to recent federal tax reform, you can now use your kids’ college funds, or 529 plans, to pay for up to $10,000 a year for primary and high school expenses.
Each state has its own 529 plan, which offers substantial tax advantages because they allow tax-free earnings growth and distributions if used for qualified education expenses. Depending on the plan, a state tax deduction or credit may be allowed for current year contributions.
A contribution to a 529 plan is considered a gift. The annual gift tax exclusion amount for 2018 is $15,000. If your gifts exceed that, you should file a gift-tax return. Gifts exceeding your annual exclusion will be applied against your lifetime exemption, which has increased to $11.2 million per person or $22.4 million for a married couple.
There is a special rule for gifts to 529 plans that effectively allows you to treat a one-time gift as if you made it over five years for gift tax purposes. In 2018, you could make a $75,000 contribution to a 529 plan and elect on the 2018 gift tax return (Form 709) to treat it as if utilizing the $15,000 annual exclusion for years 2018–2023. If you decide this is how you want to utilize your annual exclusion, the frontloading of the plan is a good way to maximize your tax-free earnings, assuming it is eventually distributed to pay for qualified education expenses.
Before taking a distribution for K-12 expenses verify the tax treatment of your state. States may have to modify their legislation to conform to the new federal definition of qualified higher education expenses.
This information is for general information use only. It is not tailored to any specific situation, is not intended to be investment, tax, financial, legal, or other advice and should not be relied on as such. AMG’s opinions are subject to change without notice, and this report may not be updated to reflect changes in opinion. Forecasts, estimates, and certain other information contained herein are based on proprietary research and should not be considered investment advice or a recommendation to buy, sell or hold any particular security, strategy, or investment product.
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