A couple of months ago we wrote about some of the major changes taking place with the passage of the Tax Cuts and Jobs Act last December. However, this month we wanted to focus on two aspects in particular and how you may be able to utilize some of the changes for your benefit.
Ways to Save for Education
Before the passage of the Tax Cuts and Jobs Act, distributions from 529 educational savings plans could only be used for qualified higher education expenses if you wanted to maintain their favorable tax status. Essentially, if you wanted to use them to pay for K-12 tuition, you were out of luck. Before the new tax law, the only type of account that could be set up to allow parents to save for K-12 tuition were Coverdell Educations Savings Accounts (ESA). These accounts put strict caps on annual contribution limits and not everyone was eligible to contribute if their income was too high.
The new tax law appears to allow more flexibility to utilize 529 plans to pay not only for qualified higher education expenses, but also tuition at K-12 schools up to $10,000 per year. One very important caveat however, is that this change to 529 plans is at the federal level and not the state level. Not all states follow the federal definition for their 529 plan rules and may still need to update their state plan rules to reflect this change (or they may opt to not update). So long story short, before you take a distribution to pay for K-12 tuition, you should work with a qualified tax advisor who understands both the federal and state treatment of 529 plan distributions.
If states are slow to adopt the new 529 plan rules for qualified K-12 tuition distributions, you could look more closely at Coverdell ESAs as an option for saving for qualified elementary and secondary school expenses. A qualified financial professional can help explain the pros and cons of this type of account.
Charitable Contributions
As we mentioned in a previous article, the standard deduction and itemized deductions have changed greatly under the new tax law. The size of the standard deduction has been increased dramatically, while qualified itemized deductions have been cut dramatically. What this ultimately means is that far fewer people will still qualify to itemize. If you are over 70 ½, subject to required minimum distributions from IRA accounts, and have utilized charitable contributions as part of your itemized deductions in the past, you may consider a Qualified Charitable Distribution (“QCD”) as a way to continue to receive some tax benefits even if you may no longer be able to itemize deductions. The rules around QCDs are complex, but if followed correctly, you may be able to satisfy a portion or all of your required minimum distribution for the year while at the same time be able to exclude the amount donated from your taxable income. Again, rules surrounding QCDs are complex and must be followed exactly in order to reap the benefits, so work with a qualified professional to understand this strategy and see if it meets your personal goals and objectives.
Whether your plans call for setting money aside for a child or grandchild’s future education or for passing money directly to a favorite qualified charity, the new tax law gives us some new benefits and reasons to take a closer look. A little planning can really help out by clarifying the best way to approach these goals. By either setting up an account for future education or contributing directly to your favorite qualified charity, you are proactively taking control and making sure your assets benefit the people or organizations that are most important to you.
Gary E. Croxall, CFP®
Registered Principal of LPL
Soren E. Croxall, CFP®
Registered Representative of LPL
Securities and Advisory Services offered through LPL Financial, member FINRA/SIPC, a Registered Investment Advisor. LPL Financial and Croxall Capital Planning do not provide tax or legal advice. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
