The Internal Revenue Service says it will issue regulations on some tax law changes that affect 529 college savings plans.
Notice 2018-58 addresses changes included in the 2015 PATH Act (Protecting Americans from Tax Hikes) and the tax reform legislation passed in late 2016 (Tax Cuts and Jobs Act).
Tuition Refunds Clarified
The change in the PATH Act added a rule for beneficiaries of 529 savings plan who get a refund of tuition or some other qualified education expenses. Such refunds can result when a student drops a class mid-semester. If the beneficiary recontributes the refund to a 529 plan within 60 days, the refund is tax-free.
The Treasury Department and IRS say the future regulations will simplify the tax treatment of such transactions. Recontributions would not count toward a plan’s limit on contributions.
529 for K-Through-12
The 2016 legislation allows distributions from 529 savings plans to be used to pay for elementary or secondary schools, whether public, private or religious. The new language allows 529 plans to pay up to a total of $10,000 of tuition per beneficiary, regardless of the number of plans involved.
The tax cut legislation also allows money to be rolled over from a designated beneficiary’s 529 plan to an ABLE (Achieving a Better Life Experience) account for the same beneficiary or a family member. ABLE accounts are tax-favored accounts for certain people who become disabled before age 26, and are designed to enable families to save and pay for disability-related expenses.
The new guidance will limit rollovers from 529 plans and any contributions made to the designated beneficiary’s ABLE account (other than certain permitted contributions of the designated beneficiary’s compensation) can’t exceed the annual contribution cap for an ABLE account. That amount would be $15,000 for 2018.