Contributing to the 529 plans in a number of high-tax states that allow a state tax deduction for their plans (including New York, Connecticut, Massachusetts and Maryland, to name a few) could be one of the remaining ways to reduce taxes that are no longer federally deductible, he says.
Families should also bear in mind, he says, that the big hike in the standard deduction on federal returns (now $24,000 for married couples filing jointly) could help buffer some of their lost state tax deductions.
Beloff, who works with many special needs families, is glad 529 assets can now be rolled into ABLE accounts, but he advises waiting for guidance from 529 and ABLE account companies before doing so. The maximum annual contribution for ABLE accounts, including those rollovers, is $15,000. Families who wish to move assets from one child’s 529 plan to another child’s ABLE account must first transfer the 529 plan to the child with disabilities because the tax law requires the accounts to have the same beneficiary.
A Multigenerational Endeavor
Peter Faust, a CFP and head of the family financial consulting program at Houston-based Tanglewood Total Wealth Management, is studying the ways the recent tax changes could affect the multiple generations of college savers the firm works with.
He’s helping participants in the program, the adult children of the firm’s wealth management clients, analyze their cash flows. They’re making mortgage payments, saving for their children’s education and sometimes still repaying their own student loans. “They want to get that elephant off their shoulders,” he says.
Some of Tanglewood’s wealth management clients have front-loaded five years of annual exclusion gifts to their grandchildren’s 529 plans—a strategy that remains available under the new law. The Internal Revenue Service bumped up the annual gift tax exclusion to $15,000 per recipient in 2018. Feirstein, the 529 plan consultant, says she is seeing a lot of prefunding of 529 plans.
Faust is curious to see how 529 plans adapt to the tax reform. “Will their investment platforms change?” he asks. “Will it result in lower fees if more assets do come in?” Tanglewood performs an annual analysis of states’ 529 plans and currently uses T. Rowe Price’s Alaska-based 529 plan because the firm thinks it offers reasonable fees and the best investment choices for its Texas-based clients, he says.
Faust is talking to clients about the benefits and unintended consequences of using 529 plans to fund K-12 private school. Tanglewood has developed an internal tool that helps families analyze how much it could cost them to send their children to K-12 private school and to public or private college and graduate school. “We look at it from an all-in, as best we can, educational cost framework,” he says.
Larry Pon, a CPA and CFP who runs the tax planning and financial planning firm Pon & Associates in Redwood City, Calif., was relieved the education tax credits survived Congress’s chopping block. Most of his clients have taken the American Opportunity Tax Credit and many also take the Lifetime Learning Credit.