Sending a child to a private elementary or secondary school isn’t a decision that should be taken lightly. After all, the average cost for one year of private school tuition worked out to $11,658 nationally this year, which is more than a year of tuition at a public four-year, in-state college or university.
Have a big family? Multiple that figure by how many children you have, then again by the number of years you plan to pay for private education. When you add it all up, it's easy to see how some families spend hundreds of thousands of dollars to avoid sending their kids to public school.
The number of families making this choice appears to be on the rise, even soaring, as a result of COVID-19. Due to the way many public school systems have handled the pandemic, it's possible that private school enrollment could stay high for the near future.
How can parents who took the plunge to pay for private school make the entire experience more affordable? Thanks to a handful of tax law changes that have taken place over the last five years, there are some newer ways to take the sting out of private school tuition.
How To Use A 529 Savings Plan To Pay For Private School
While many parents may not know this, the Tax Cuts and Jobs Act of 2017 paved the way for using 529 plans for private school tuition. Specifically, this law allows families to pay for up to $10,000 in private school tuition at elementary or secondary schools from funds in a 529 savings account. Just keep in mind that private school expenses other than tuition do not count toward this rule.
Also remember that families can use $10,000 per year from a 529 plan for each year their kid is in school and for each child in attendance. This means that a family with three children in private K-12 schools could withdraw $30,000 from a 529 college savings plan and use it for private school tuition within a single year.
Withdrawals made for private school tuition are tax-free on a federal level, but you should note that states actually oversee 529 plans. With that in mind, you should know that state rules regarding taxation of these funds can vary from state to state. For example:
- Some states expanded their tax deduction so it includes contributions that are later used for K-12 private school education
- Some states that don't offer state-specific deductions or credits for 529 contributions let families take distributions for K-12 tuition on a tax-free basis
- Some states do not follow federal rules on withdrawals, meaning money taken out of a 529 is subject to state income taxes on the earning portions of the withdrawal, or even penalties
With these rules in mind, it's smart to figure out whether your state is following the federal guidelines on withdrawals from 529 plans for private school tuition — or whether they have gone rogue.
Obviously, you'll benefit more from this strategy if you live in a state where you don't have to pay state taxes on money you take out, such as Alabama, Connecticut, or Massachusetts.
Benefits Of Using A 529 Plan
You may be wondering how you can benefit from using a 529 plan to save for private school in the first place. Once again, the perks of using this account to pay for K-12 school can vary depending on where you live.
According to SavingforCollege.com, 30 different states offer a tax deduction or credit for people who contribute to a 529 college savings plan. However, they point out that these state tax breaks are only applicable for expenses the state considers qualified, which may or may not include private school tuition.
What kind of tax deductions or credits can you receive? In the state of Indiana, for example, you can get a tax credit worth 20% on up to $5,000 in contributions to a 529 plan each year. This translates into up to $1,000 in credits on your state tax return.
In the state of Georgia, a tax deduction of up to $2,000 can be taken for eligible contributions to a 529 plan, or $4,000 for a married couple filing jointly.
In South Carolina, on the other hand, contributions to a South Carolina 529 plan are fully deductible.
In addition to state-level benefits, 529 plans also come with additional advantages. For example, money in a 529 plan grows on a tax-free basis on the federal level and potentially in your state provided you use the funds for qualified expenses. You can also invest the funds in your 529 account in various investment options like mutual funds or target date funds, which can help your money grow over time.
You can also change the beneficiary on a 529 account if the person you were saving for doesn't need the money. For example, you can change the beneficiary of a 529 savings plan from one kid to another, or from a dependent to yourself or another family member.
The Bottom Line
If you are struggling to keep up with the costs of private school education, opening a 529 savings plan could be a smart move. If you have money in this type of account already, you can also consider using it early for private school instead of for higher education expenses.
With that being said, you should make sure you know how your state treats withdrawals used for private school tuition ahead of time. And if your state taxes earnings on withdrawals you make to pay for private school, you should have a general idea of how those extra taxes might impact you come tax time.
In the meantime, you should weigh the pros and cons of draining your 529 plan to pay for grade school when the crushing costs of college may only be a few years away. Using your savings for private school now be the easiest thing to do, but you could live to regret it later on.
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Tax Breaks To Pay For Private School - Forbes
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