Saving on K-12 Tuition With a 529 Plan

A lot of our friends and clients here in the Kansas City area send their children to private schools and pay dearly for the privilege. According to privateschoolreview.com, the average yearly tuition for elementary school is over $6,000, and the average for high school tuition is over $11,000. What many don’t realize, however, is that it’s possible to deduct such tuition on their state taxes and essentially get refunded a portion of the tuition when they file their taxes, but only if certain steps are taken.

The ability to deduct K-12 tuition fees results from changes made by the 2017 Tax Cuts and Jobs Act (“TCJA”). Rather than creating a new deduction, state tax savings were created indirectly by changing the rules to “529 Plans.”

529 Plans are tax-preferred investment accounts which were invented by states to help parents better save for their children’s college tuition. In all states with 529 Plans, when a parent withdrew money to pay their child’s college tuition (or other “qualified expenses” such as textbooks, etc), such distributions weren’t taxable on the state level. Congress got on board around 2001, and since then such distributions also haven’t been taxable at the Federal level. Some states such as Missouri and Kansas go beyond this, however, and provide a state tax deduction when money is initially placed into the plan.

So, what does a college savings plan have to do with K-12 tuition? As part of the TCJA, the definition for “qualified expenses” was expanded to include up to $10,000 per year of K-12 tuition, meaning that distributions used to pay such tuition would still be tax-free at the Federal level just like distributions to pay college tuition. Following this, several states (including Kansas and Missouri) modified their own rules to match the Federal treatment.

This means that if a resident of Kansas or Missouri were to put their money into a 529 Plan, and then pay tuition from that 529 Plan in the same or later year, such amounts would be deductible on their state returns. In Missouri, 529 Plan contributions are limited to $8,000 per year for an individual, or $16,000 per year for a married couple. If a couple were to put $10,000 into a plan in 2018, and immediately spend the full amount on their child’s tuition, they would get a state tax deduction of $10,000, which at a 6% tax rate would save them $600 on their state taxes. In Kansas, where couples are limited to a $6,000 contribution and their tax rate is 6.5%, they would save $390. And remember, if your child’s tuition is less than your contribution, you can still put the money in now to spend on K-12 or college tuition in future years.

If you live in Kansas or Missouri, you could be receiving a tax break of hundreds of dollars per year on your children’s private school tuition, but it isn’t automatic. People with children in private school, or who will be going to private school in the future, should look into the use of a 529 plan in order to take advantage of these savings.

Our team of estate planning attorneys can guide you through the 529 plan process to ensure you’re maximizing your savings. Send us a message to schedule a consultation.