Under the Tax Cuts and Jobs Act of 2017, the new law expanded the definition of qualified distributions for a 529 plan. Under previous law, qualified distributions were distributions for tuition, books, room & board, fees and supplies for higher education. Qualified distributions were tax-free at the federal and state level and avoided a 10% federal penalty. With the tax law change, the definition of qualified distributions has spread to K-12 tuition (tuition only, not textbooks, supplies, etc.) up to $10,000 per taxable year. There is a big distinction to be made, though. The tax and penalty-free distributions are at the federal level. At the state level, it is not as clear. While the 10% penalty was a federal issue that will not apply to K-12 tuition costs, state income taxes may still be imposed on the earnings. Some states have conformed with the federal law, allowing for tax-free distributions for K-12 tuition, others (Illinois being one of them), have not. Until legislation has been adopted, residents in states that have not conformed with the federal law should use caution in considering distributions from a 529 plan for K-12 tuition as a qualified distribution.
June 13, 2018