The Tax Cuts and Jobs Act expands the definition of qualified higher education expenses as it applies to 529 college savings plans.

Prior Law

Through December 31, 2017

529 college savings accounts could only be used for qualified higher education expenses. If funds were withdrawn from the account for other purposes, each withdrawal was treated as containing a pro-rata portion of earnings and principal. The earnings portion of a nonqualified withdrawal was taxable as ordinary income and subject to a 10% withdrawal penalty unless an exception applied.

Qualified higher education expenses include tuition, fees, books, supplies, and required equipment, as well as reasonable room and board if the student was enrolled at least half-time. Eligible schools included colleges, universities, vocational schools, and other postsecondary schools eligible to participate in a student aid program of the Department of Education. This included nearly all accredited public, nonprofit, and proprietary postsecondary institutions.

New Law

Effective for tax years beginning after December 31, 2017

Distributions of qualified higher education expenses include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year.

Commentary

Contributions to 529 plans are not tax deductible for federal purposes. Most states allow a state tax deduction and/or credit for contributions to the plan. Minnesota is allowing a credit or deduction starting in 2017.

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Lance Campbell
I am the partner-in-charge of the Rochester, MN office. I provide tax services to individuals, businesses and agricultural clients. I also provide compilation services and am QuickBooks Certified ProAdvisor.

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