Amid the uncertainty regarding all the items wrapped up in the Tax Cuts and Jobs Act passed by Congress in December, a glimmer of fortune shines within by allowing tax-free 529 plan savings for college to be used for private K-12 education.
However, Arkansas’ law controlling 529 plans does not yet match new federal rules, meaning parents who withdraw before the legislature makes the change in language could be taxed. There is no timetable for when the legislature might make this change.
“If the Arkansas legislature chooses to edit the language of the statute to include K-12 private schools, account owners will then, and only then, be able to make a withdrawal from an Arkansas 529 plan without incurring tax for the purpose of funding private schools,” Stacy Peterson, treasurer of state communications director, said in an email.
The state treasurer’s office administers Arkansas 529 plans.
“In other words, as the statute is currently written, account owners can only make a tax-free withdrawal for ‘qualified higher education expenses.’”
529 plans allow people to build savings for a child’s college education tax free. Once a child attends a college or university, whether they attend a vocational school, in-state or out-of-state colleges, withdrawals from the account are free from federal income tax, according to Arkansas529.org. Aside from parents, relatives or friends can also contribute money to the account starting with as little as $25, according to a 2017 Arkansas Democrat-Gazette article.
If the wording of the statute is changed by the Arkansas Legislature, up to $10,000 can be taken out tax free each year to use toward private schooling from kindergarten to 12th grade, while also still saving for college, according to federal legislation.
More than 30 states have tax deductions for households contributing to a 529 plan, including Arkansas, which allows families to deduct up to $5,000 — up to $10,000 for married couples — of the plan contributions from “adjusted gross income, with any unused excess contribution in a tax year being carried over to the next succeeding four tax years, beginning Jan. 1, 2017,” Arkansas 529 stated.
As of Jan. 31, there are 37,203 plans open in Arkansas, with 21,947 opened by in-state residents, Peterson said. The program has grown $257.5 million since 2015.
Tax breaks are currently available for out-of-state plans in Arizona, Kansas, Maine, Missouri, Montana and Pennsylvania, according to usnews.org. Families with 529 plans in other states must research whether those state laws are currently compliant with the new ruling.
Peterson said the Arkansas treasurer’s office “encourages account owners to talk with their financial advisors or a certified public accountant for best practices on how to manage their account in light of this change.”
For the 2017-2018 school year, there are 6,706 students enrolled in the 27 Catholic schools in Arkansas, according to the Office of Catholic Schools statistics.
The average annual cost of tuition for elementary school is $3,711 for one Catholic child, $6,336 for secondary schools and $7,832 for a non-Catholic student.
Vernell Bowen, superintendent of Catholic Schools, said her office will watch what legislators do with the statute language.
For more information on 529 plans in Arkansas, visit arkansas 529.org.
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