Tax law change for 529 college savings plan.

[Coronita]

So…assuming 529k can be used now used to pay for private tuition at K-12 to any “family member”, and assuming 529k contributions are not limited….I could essentially take a distribution to pay for a niece or nephew’s K-12, up to $10k per year per kid? Yes/no?

[spdrun]

Is it truly “any family” or “tax family” i.e. household?

[Oni Koroshi]

I didn’t think there was a limit on the distribution amount but you can only change the beneficiary once per year.

[Coronita]

[quote=Oni Koroshi]I didn’t think there was a limit on the distribution amount but you can only change the beneficiary once per year.[/quote]

I think with the proposed tax reform concerning 529 plans, you are allowed to use $10k per year per student for K-12 private tuition. For college, I’m assuming it’s still unlimited.

There are some contributions limits too. The IRS rule of contribution limit is loosely defined as : “Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary.”

https://www.irs.gov/newsroom/529-plans-questions-and-answers

Also, there is a maximum aggregated 529k balance per beneficiary set by each state (if any)… In CA, the maximum balance is $475k per beneficiary.

https://www.scholarshare.com/help/faq/?q=475

So if it’s K-12 + 4 years college + 2 years of grad school… I guess one could argue reasonable cost is 13*$10k (maximum allowed for K-12 per year) + $100×4 (assuming private college room and board) + $100×2 for grad school….which is greater than the CA balance limit of $475k/year. Also, I guess if you start withdrawing and using the funds from the 529k start at K, you probably won’t hit the maximum cap set by CA.

I’m not following why one would need to change the beneficiary often. One probably doesn’t want to anyway, as depending on the entire account balance, that might trigger the need to report the account amount over the allowed $14k per year per person ($28k if couple is gifting), and that amount over might count against ones estate tax exemption when you die….maybe…

Instead, you open a new account with a different family beneficiary and you rollover money from your first 529 account to your second, roughly $10k per year (the K-12 limit). Rolling money from one 529 account you own to another you own for a beneficiary “in the family” is also allowed with the current rules with no tax consequences, I believe…..

https://www.bogleheads.org/wiki/529_plan_account_transfers

You are allowed to rollover one 529 plan into another 529 plan. If a rollover conforms to the following conditions you will pay no tax on the transfer:

You are allowed only one rollover to another 529 plan per twelve month period for the same beneficiary.

You are allowed to rollover a 529 plan to a family member of the beneficiary. There is no restriction on the number of times this can occur per twelve month period.

The rollover must occur within 60 days of the distribution for the distribution to not be considered a taxable distribution.

You are also allowed to change the beneficiary of a 529 plan as long as the new beneficiary is a member of the family of the old beneficiary. There is no restriction on the number of times this can occur per twelve month period. If you change the beneficiary to a generation below the generation of the old beneficiary, there may be gift tax implications.

And if if you only rollover $10k/year per beneficiary, you also stay under the $14k gift rule…not to mention if you have trust issues with your reciprocating relative, you only jeopardize $10k/year per kid, not your entire balance of the account.

You rollover into a relative’s kid’s account that is in the family, and use that rolled over amount to pay for tuition now, indirectly taking a distribution on any sort of capital gains you have now (not a decade or so later when your kid is old and god knows what tax laws exist at that point)….The reciprocating parent can gift back money, subject to the $14k gift tax exemption per person per year. ($28k, per person per year if both spouse gifts)…That too is by the books…Anyone can gift anyone else $14k/year and not subject to gift tax. And there are no strings attached to the gifted money, so once you get it you can do whatever you want with it, including reinvesting it back into the first 529 account….then rinse and repeat for next year….

All this has been the big pitch for the 529k plan from all the fund managers for a long time now. Open an account for your grandkid, your niece, nephew,etc……Example: https://investor.vanguard.com/college-savings-plans/grandchild-niece-nephew

You could in theory do this right now, so long as your 529 distributions are qualified. The challenge right now is that 529 plans only apply to colleges, so that’s only 4-6 years where you can maximize the capital gains tax benefit…As stupid as the tax reforms are, changing the rules to apply to K-12 private tuition + college, that’s like 17-23 years of tax free distributions, which works great for folks that started a 529 plan years/decade ago, and hasn’t been able to take a distribution on any of the capital gains accumulated so far because we’re waiting for kid(s) to go to college.

Where else are you going to get tax free capital gains besides selling a primary home (which now the rules are going to change and require to you live more than 2 years???)

[Coronita]

….and now onto my next research topic. Minimizing my AMT tax hit with the college access tax credit…..

https://www.ftb.ca.gov/individuals/College_Access_Tax_Credit.shtml

Don’t know if it works out for me….And unfortunately I missed the 2017 deadline anyway..But might be useful in 2018…maybe….

Unrelated…

It would be nice if CA decides setup a “charitable donation” for the state coffer such that for every $1 donated to that charitable donation, you get a state tax credit of 90 cents against your state taxes. Doing that, would give the Federal government the middle finger as it kills two birds with one stone.

1. It gets around the $10k SALT limit…because instead of people itemizing the state tax deduction capped at $10k, they would itemize the “charitable donation”, which is currently not capped…..

2. Those of us paying AMT would have an extra bonus, because unlike state/property taxes that are AMT limited, charitable contributions are not limited under AMT…..So getting an $90 cents state tax credit for every $1 of charitable donation to the state, it would still probably work out better…..

[SK in CV]

[quote=flu]It would be nice if CA decides setup a “charitable donation” for the state coffer such that for every $1 donated to that charitable donation, you get a state tax credit of 90 cents against your state taxes. Doing that, would give the Federal government the middle finger as it kills two birds with one stone.

1. It gets around the $10k SALT limit…because instead of people itemizing the state tax deduction capped at $10k, they would itemize the “charitable donation”, which is currently not capped…..

2. Those of us paying AMT would have an extra bonus, because unlike state/property taxes that are AMT limited, charitable contributions are not limited under AMT…..So getting an $90 cents state tax credit for every $1 of charitable donation to the state, it would still probably work out better…..[/quote]

Great thinking there. Arizona has that, though it’s limited to about $4,800, among multiple credits. It’s dollar for dollar and some of them can even be paid up to the due date of the return. Unused credits, similar to over-payments of state taxes, can be carried over to future years.

[Coronita]

[quote=SK in CV][quote=flu]It would be nice if CA decides setup a “charitable donation” for the state coffer such that for every $1 donated to that charitable donation, you get a state tax credit of 90 cents against your state taxes. Doing that, would give the Federal government the middle finger as it kills two birds with one stone.

1. It gets around the $10k SALT limit…because instead of people itemizing the state tax deduction capped at $10k, they would itemize the “charitable donation”, which is currently not capped…..

2. Those of us paying AMT would have an extra bonus, because unlike state/property taxes that are AMT limited, charitable contributions are not limited under AMT…..So getting an $90 cents state tax credit for every $1 of charitable donation to the state, it would still probably work out better…..[/quote]

Great thinking there. Arizona has that, though it’s limited to about $4,800, among multiple credits. It’s dollar for dollar and some of them can even be paid up to the due date of the return. Unused credits, similar to over-payments of state taxes, can be carried over to future years.[/quote]

Lol… I think I found a new hobby. Besides cars, trying to understand taxes better…. Lol…

[Escoguy]

One step further, allow for DAF (donor advised funds) to make the contribution.

[Author]

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