Tax Reform Adds Education Benefit

Article Highlights:

  • Tax Benefits 
  • Types of Tax-advantaged Education Savings Plans 
  • Differences in Permitted Contributions 
  • Differences in Qualified Education
  • New $10,000 Allowance 
Note: This one of a series of articles explaining how the various tax changes in the GOP’s Tax Cuts & Jobs Act (referred to as “the Act” in this article), which passed in late December of 2017, could affect you and your family, both in 2018 and in future years. This series offers strategies that you can employ to reduce your tax liability under the new law.

Tax law provides two tax-advantaged savings plans for the Qualified State Tuition Plan (commonly referred to as a 529 Plan). They are similar in that contributions to the plans are not tax deductible (although some states do allow a deduction for contributions to their plans) and the earnings are tax deferred and tax free if used for qualified education expenses.

They are different in that only $2,000 per year can be deposited into a Coverdell account, whereas contributions to a 529 plan are only limited by gift tax considerations and the cost of attending the state’s highest-cost university. This generally means the annual contribution to a 529 plan is limited to the annual gift tax exclusion amount ($15,000 for 2018) in order to avoid gift tax complications. However, the annual gift limit is per contributor and multiple individuals, typically grandparents, can also contribute to a 529 plan. On the other hand, a maximum of only $2,000 can be contributed to a Coverdell account regardless of the number of contributors. Thus, 529 plans typically accept the largest amount of college savings funds.

Another difference has been that Coverdell accounts can be used for education in kindergarten and above, while 529 plans can only be used for post-secondary education. As a practical matter, the $2,000 annual Coverdell contribution limits don’t provide for a substantial amount of savings that can be used for early childhood education.

To alleviate that disparity, the Act amended the 529 plan rules to allow, beginning in 2018, up to $10,000 of 529 plan funds to be used federally tax-free annually, per student, for elementary school and high school education expenses. In addition the funds can be used to cover the expenses of attending public, private and religious schools. However, some states have not yet adopted the Act’s law change or may need to change the language in their tax codes that define the accounts as “college” savings plans before distributions for elementary and secondary school expenses will qualify as totally state tax free. States that have allowed a deduction for contributions to their plans may decide to scale back some of the tax benefit if distributions are used for expenses in grade K-12.

Both a Coverdell and a 529 plan can be established for the same student, and the combination allows more funds to be accumulated.

For additional details or assistance in planning for a child’s higher education, please give this office a call.


Share this article...

Sign up for our newsletter.

Each month, we will send you a roundup of our latest blog content covering the tax and accounting tips & insights you need to know.

I confirm this is a service inquiry and not an advertising message or solicitation. By clicking “Submit”, I acknowledge and agree to the creation of an account and to the and .

We care about the protection of your data.

Get in Touch with Bearden Stroup Advisors & CPAs

You can count on us for professional, timely and reliable tax and accounting services. If you’re ready to get started, just fill out this form and we’ll be in touch.

2915 Bob Wallace Avenue, Suite A,
Huntsville, Alabama 35805
I confirm this is a service inquiry and not an advertising message or solicitation. By clicking “Submit”, I acknowledge and agree to the creation of an account and to the and .
I consent to receive SMS messages and agree with the