Tax Act provides Christmas gifts to Catholic schools and parents

Just before Christmas, President Trump signed the Tax Cuts and Jobs Act (hereafter “the Act”), which is designed to stimulate growth and employment in the American economy. Included in the Act are some provisions that make K-12 Catholic schools more affordable for parents. Although the law stops well short of providing vouchers for education, Catholic school enrollment nationwide could potentially see a modest uptick due to the law change.

529 plans are currently the most popular vehicle used to save and pay for college. There are no income restrictions to contribute to a 529, and each person can contribute up to $15,000 (beginning in 2018) per child. Arguably the most attractive financial benefit of a 529 plan is that the increase in value of the funds (reinvested dividends, interest, and growth in the underlying securities) is never taxed if used to pay for “qualified educational expenses.” The younger the children are when the 529 accounts are opened, the longer the time the funds have to compound resulting in larger balances to fund education.

While parents do not receive a deduction for 529 contributions on their federal income tax returns (Form 1040), over 30 states do permit a deduction on state returns. Using my home state of Pennsylvania as an example, a $10,000 contribution to a 529 plan would save $307 in state taxes.

529 funds can now be used for Catholic K-12 education. Prior to this calendar year, 529 proceeds could only be used for college. Under the Act, the definition of qualified educational expenses was expanded to include up to $10,000 per student for private (Catholic) K-12 education. Some families that may have been saving money in a 529 for their children’s college can now utilize those funds to pay some or all of their K-12 expenses. That’s great news for Catholic schools, as parents who may be on the financial “bubble” on whether or not to send their children to Catholic schools can use 529 funds to fill any shortfall. Catholic schools should actively educate parents of this new ability to use 529 funds for K-12.

Can you get a state tax deduction for Catholic K-12 expenses? Maybe. Many Catholic parents living in one of the 30+ states that permit a 529 tax deduction might effectively get a state tax deduction for their Catholic school tuition. In other words, instead of paying your $4,000 tuition directly to your local Catholic elementary school, parents may be able to contribute that $4,000 to a 529 plan, get the state tax deduction, then make a withdrawal from the 529 plan weeks later to pay for Catholic school.

Be careful! Since the Act passed late in 2017, states haven’t had a chance to react to these changes. Some of the 30+ states that allow a 529 deduction have language in their law permitting 529 deductions for “college savings” and will either have to change their law or they may choose to disallow 529 withdrawals for private K-12. Specifically, Maine, Nebraska, and Iowa have warned parents not to use 529 funds for private K-12, and others may join. To be safe, you should contact your state before withdrawing any 529 funds for private K-12. Otherwise, you may owe a penalties and state income taxes on these “non-qualified” withdrawals.

Parents need to exercise caution on excessive use of 529 funds for Catholic K-12. College bills will still arrive in your mailbox when your child turns 18, so you don’t want to totally drain junior’s education accounts. Make sure your 529 funding is sufficient to take care of both college and Catholic K-12.

The new tax law has its pros and cons, but it is what it is. Allow the new rules to benefit you where possible. Funding 529s to help pay for Catholic K-12 education will help take the sting out of paying for private school while helping to instill your child with Catholic values.

ROBERT J. FALCON, CPA, CFP® Candidate, is the founder of College Funding Solutions LLC and a financial advisor at OneSource Retirement Advisors in Malvern, Pa. He earned a bachelor of science from Villanova University and an MBA from Kenan-Flagler Business School (UNC-Chapel Hill).

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