Capitol Fax.com - Your Illinois News Radar

Frerichs: Don’t use new federal rules on 529 programs for state taxes

Posted in:

Illinois

* Education Week on the new federal tax laws…

The Tax Cuts and Jobs Act creates a new wrinkle for 529 college savings plans, which are tax advantaged. The bill would allow parents to use them for K-12 expenses, including private school choice, as well as postsecondary costs. The bill puts a $10,000 cap on the money people can set aside for K-12 in these plans.

U.S. Secretary of Education Betsy DeVos and others have applauded the move, although DeVos said Tuesday the move has limitations. But others argue it will mainly help wealthier parents who can afford to set money aside, and those already sending their children to private schools.

In a last-minute twist, the Senate parliamentarian on Tuesday ruled that the slice of this provision that allowed 529 plan dollars to be spent on home schooling violated the chamber’s rule. The Senate and then the House voted to approve the bill without this provision covering home schooling costs.

* But Treasurer Frerichs just sent out a warning…

Families that use their Bright Start or Bright Directions college savings accounts to pay for tuition, fees or other expenses at private or parochial schools, including Catholic schools, would violate Illinois’ tax code, Illinois State Treasurer Michael Frerichs cautioned today. Frerichs also emphasized that federal tax reform did not change any of the benefits for using Bright Start or Bright Directions to save or pay for higher education.

Illinois’ tax code specifically limits tax-free growth in Bright Start and Bright Directions accounts when used for qualified higher education expenses. As such, a distribution from a 529 plan for K-12 costs is not a qualified expense for Illinois tax purposes. Families who claim the deduction could face state tax penalties if caught by a state tax auditor.

“Our analysis concludes that families who use Bright Start or Bright Directions money on elementary or high school expenses and then cite those expenditures when seeking tax relief will be in conflict with state law and could incur tax penalties if audited by state authorities,” Frerichs said.

In Illinois, the 529 Bright Start and Bright Directions plans are managed by the state treasurer’s office. The recently passed federal tax package allows states to expand 529 programs to private and religious K‑12 tuition expenses in 2018 and beyond. The federal legislation took effect Jan. 1 and could affect tax filers in 2019.

Here is how the tax break works for Bright Start and Bright Directions college savers who are Illinois taxpayers: Contributions to the accounts reduce a taxpayer’s Illinois adjusted gross income up to $10,000 for individuals and $20,000 for married couples filing jointly. At the federal level, the earnings generated within Bright Start and Bright Directions are not subject to federal income taxes while they accumulate. Also, distributions from these plans are not subject to federal or state income taxes when used for qualified higher education costs such as tuition, mandatory fees, certain room and board, computers and required supplies.

posted by Rich Miller
Thursday, Jan 18, 18 @ 9:56 am

Comments

Parents: Hands-off your kids college savings. They’ll have enough fiscal hurdles in their future. Don’t add another one.

Comment by City Zen Thursday, Jan 18, 18 @ 10:21 am
Well so long as it is THAT simple, problem solved!

Comment by Touré's Latte Thursday, Jan 18, 18 @ 10:30 am
But my kids’ Catholic elementary school costs more than I spent for my college education.

Comment by 47th Ward Thursday, Jan 18, 18 @ 11:15 am
Come onTreasurer Frerichs, these 529 programs are federal creations and are OUR money. Make it work or people will transfer their accounts to other states that ALLOW us to use OUR funds. We are not “seeking tax relief” , we are trying to use our money to pay for our kids schooling. How about helping?

Comment by 44th Ward Thursday, Jan 18, 18 @ 12:20 pm
It’s up to the State to opine on deductibility on an Illinois tax return. So what- you get the fed deduction so it’s still worth doing. All the Treasurer will do is anger some voters who probably don’t vote for D’s

Comment by Sue Thursday, Jan 18, 18 @ 12:33 pm
44 - he isn’t saying you can’t access the money. He is saying you can’t deduct contributions on your Illinois return. Moving the 529 way bt work unless you move out of State. Leave it to Illinois to thwart the benefit for its taxpayers

Comment by Sue Thursday, Jan 18, 18 @ 12:41 pm
**We are not “seeking tax relief” , we are trying to use our money to pay for our kids schooling.**

No. The entire purpose of 529’s is to avoid paying taxes on that money.

Comment by JoeMaddon Thursday, Jan 18, 18 @ 12:46 pm
The Treasurer isn’t doing anything other than informing people what Illinois state law says. If you aren’t happy with the law in Illinois then don’t use the Illinois 529 plan. Get another account.

Comment by Demoralized Thursday, Jan 18, 18 @ 4:36 pm
I’m moving my kids’ 529 accounts tomorrow. Although I’m guessing the state will be moving to line-up with the new federal rules for the 529 plans. It would be foolish not to.

Comment by Dave W Thursday, Jan 18, 18 @ 6:14 pm
The treasurer has no problem making social statements with our money in our 529 accounts, but I’m not allowed to use the money per federal guidelines? Another reason to leave Illinois.

Comment by Boo Thursday, Jan 18, 18 @ 8:30 pm
I was under the impression the only way to take advantage of the state tax deduction was to be in one of the Bright programs is that not true ??

Comment by the Cardinal Friday, Jan 19, 18 @ 4:02 am
nteresting, Missouri allows the 529 plan as the federal law is intended. I have no idea if Frerichs is reading the law correctly. The act he didn’t say he would work to make the Illinois law support the federal changes really pisses me off. I just reached out to Sen Cullerton. Lets see what he has to say. Seems an easy no brainer fix if its really a problem.

Comment by 44th Friday, Jan 19, 18 @ 10:18 am