New Tax Law
New Tax Law, 529 Plans and Save4College State Contribution Program
New Tax Law
The recently passed Federal tax law is arguably the most significant change to the US tax system in a generation. The changes include an increase in the standardized deduction, the elimination or limits on items that were previously available for itemized deductions, lower tax rates in higher brackets, and doubling of the estate and gift tax exemptions. The overall impact on individual taxpayers may not be clear for some time. Along with all of the IRS regulations that are still being written, states are revisiting their own laws regarding the tax deductions in light of the new Federal tax regime.
Impact on Families
Berman appreciates that each family has its own unique tax situation. While some families may benefit from the new tax regime, other may find it more burdensome than the prior law. We recognize that there is a lot of uncertainty that may not be clarified for another year when families fill out their 2018 taxes.
Financial Aid Considerations
The Financial Aid committee is committed to working with families who find their financial situation has changed and we encourage families to contact us if they need a re-assessment. Berman will work with every family to make sure that a Jewish education is within reach for every member of our community.
The US tax code allows parents to establish state-run educational investment accounts on behalf of their children. These accounts are generally referred to as 529 Plans. The principal invested in these accounts grows tax-free. These accounts were previously restricted to fund only college or post-college education. Withdrawals for these purposes are called qualified distributions. In addition, contributions to these investment accounts may be tax deductible for state tax purposes.
For example, Maryland has 529 Plans and parents may deduct their actual contributions from their state income up to $2500/child/year. Principal grows tax free and then may be withdrawn to pay for college or post-college education. Also, account holders may change the beneficiary as long as the new beneficiary is related to original beneficiary.
Save4College State Contribution Program
The Save4College State Contribution Program is designed to help lower- to middle-income families in Maryland save money for higher education. Individuals who open or have opened a new Maryland College Investment Plan (MCIP) after December 31, 2016, file an application prior June 1, 2018, and make at least the minimum contribution to the account, may receive a $250 contribution by the State. For more information on this program, please visit https://maryland529.com/MDMatch250.
Change in Law
The recently passed overhaul to the tax code includes changes to the types of educational expenses the Federal Government will permit from 529 Plans. The new law permits parents to use up to $10,000 per year, per student for K-12 education. Many states, including Maryland, have 529 plans which use the federal definitions for qualified distributions. Consequently, the change in the federal tax law has impacted Maryland 529 account holders. These accounts can now be used to pay for K-12 education. A summary chart is shown below:
Qualified distributions for college or post-college education
Qualified distributions, for federal purposes, now include K-12 education expenses
No federal or state tax on distribution
30 states (including Maryland) have language that is compatible with the new law, including K-12. 20 still have to make changes to legislation to comply (NY, IL)
Possible State Legislative Reaction to Federal Tax Changes
The change in the federal law has led to a reconsideration by many states of the state rules related to the 529 Plans. Although the Maryland General Assembly reviewed the rules regarding 529 Plans, no changes were made to the tax rules limiting withdrawals from 529 Plans which are used to fund K-12 education.
Berman appreciates the changes in the tax laws may affect families in different ways. Families should consult their own tax advisors, but if you come to the conclusion that payment of tuition by 529 Plans is best for your circumstance, Berman will work with you to facilitate these payments. The Business Office has already accepted payment using this method and is happy to speak to other families who are interested in taking advantage of this tuition payment option. For more information please email firstname.lastname@example.org.
As part of our commitment to the community, we will continue to send periodic updates on other items which impact families and the financial sustainability of the school. Our recent communication on the BOOST program can also be found here.