The Tax Cuts and Jobs Act (TCJA) has had a significant impact on divorcing couples. Many divorcing couples and their attorneys are aware of the elimination of the alimony deduction under the TCJA, but fewer are aware of the changes related to 529 plan funds.
According to the U.S. Securities and Exchange Commission, a 529 plan is a, “tax-advantaged savings plan designed to encourage saving for future education costs.” In the past, 529 plan funds paid for college or other post-secondary expenses and disallowed payment of expenses related to K-12 education. However, under the TCJA, 529 plan distributions of up to $10,000 per year per student can now also pay for K-12 school tuition. This is a significant change that creates new tax advantages for those saving for education expenses using 529 plans, but also may have unintended future consequences for divorcing couples.
Qualified Distributions
Qualified distributions from 529 plans are not subject to taxation, but there are differences between qualified expenses for K-12 education and qualified expenses for college. Qualified expenses for K-12 education only include tuition costs. Qualified expenses for college includes tuition, fees, books, supplies and room and board. Distributions for K-12 expenses also can’t exceed $10,000 per student per year annually, but there isn’t an annual cap on distributions for college related expenses.
The owner of the 529 account has the ability to direct the use of the funds, including changing the beneficiary or even taking a non-qualified distribution.
Questions for Divorcing Couples
When dealing with 529 plans in a divorce, there are several questions that couples and attorneys should ask themselves, including:
- What is the intent of the parties for the use of the 529 funds?
- Could funds previously intended for college be used earlier to pay for K-12 education?
- What if one parent is obligated to pay for private school tuition and the divorce or separation agreement is silent on the use of 529 funds?
- Could a parent distribute funds from the 529 plan to pay their obligation for private school tuition if the agreement doesn’t specify? What if that distribution reduces the funds intended for college?
As with any law change, it is easy to overlook simple questions that need to be answered. A well-structured divorce or settlement agreement will properly address the future use of 529 funds, ensuring that it aligns with the intent and needs of both parties.
Reconsider Your Financial Strategies for Divorcing Clients
Our team of litigation support professionals can help family law attorneys form financial strategies for their divorcing couples in light of the new tax law. Contact us online or call 800.899.4623.
