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.