Under IRS Code, 529 accounts were originally established to allow families to save for college expenses. Contributions could grow, tax free, and distributions could be made, tax free, as long as they were used on qualified expenses like tuition.
Under the Federal Tax Cuts and Jobs Act, effective January 1, 2018, 529 accounts can now be used for K-12 education. This is good news for families who send their children to private K-12 schools and not just the families who can afford to set aside funds to invest in a 529 account for private K-12 education. Even if you have just enough for tuition each year, you can still take advantage of the tax savings of a 529 account.
Under S.B. 22, signed into law on March 30, 2018, the income tax deduction for contributions made to an Ohio 529 was increased to $4,000 per beneficiary per year. In addition, there are unlimited carryforwards, which means that a taxpayer can carryforward to following years any unused deduction. Further, there are no requirements that the contributions stay in the 529 account for any length of time before being distributed. Hence, a taxpayer can essentially funnel their private school tuition for K-12 education through the 529 account and obtain the state income tax deduction.
Let’s illustrate. Bob has three children in private elementary schools in Ohio. He establishes an Ohio 529 Plan and contributes $30,000 this year which he then distributes for tuition this year. He can deduct $12,000 this year from his Ohio income taxes. For simplicity sake, let’s set Bob’s Ohio income tax rate at 4.5%. That means Bob will have an income tax savings of $540 this year, and because of the unlimited carryover, $540 next year and $270 the following year for a tax savings of $1,450 for his one year of private school tuition.
For more information on estate planning of all kinds, contact a Cleveland estate planning lawyer.