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If you use your 529 for this, you may get a tax surprise

  • The Tax Cuts and Jobs Act allows families to use 529 savings plans for kindergarten through 12th grade educational expenses.
  • Not all states will follow the federal law's interpretation, so you may face taxes if you pull money for K-12 costs.
  • How the law applies to you is determined by where you live, not the state in which your 529 plan is based.
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If you were hoping to game your 529 plan so that you can collect a tax break and cover the cost of elementary and middle school, you may want to rethink that.

That's because while the Tax Cuts and Jobs Act now allows you to tap your tax-favored college savings plan to the tune of $10,000 a year for kindergarten through 12th grade tuition expenses, your state's tax laws may not permit it.

A 529 plan provides families with the opportunity to save for educational costs, allowing contributions to grow free of taxes and for tax-free withdrawals provided the money goes toward qualified educational expenses.

More than 30 states offer their residents a deduction or a credit on their state tax return for saving in a 529 plan, according to Savingforcollege.com.

Though federal law has expanded families' ability to use 529 plans for expenses other than higher education, not all states are on board.

In fact, some jurisdictions, including New York and Vermont, have said savers may face taxes, penalties and a clawback of their tax breaks if they use their 529 savings to cover K-12 tuition costs.

"If you took the money out and used it for something other than college, then it's a non-qualified withdrawal and at least a portion of it will be considered income," said Tim Steffen, director of advanced planning at Robert W. Baird & Co. in Milwaukee.

Here's what you should know before you raid your child's college fund for near-term elementary school expenses.

Harmonizing statutes

Premium: children getting on a school bus
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So far, more than 20 states permit K-12 tuition to be a "qualified educational expense," reflecting the federal law.

These include Alaska, Arkansas, Delaware, Georgia, Idaho, Kansas, Kentucky, Maryland, Massachusetts, Mississippi, Missouri, Nevada, New Jersey, North Dakota, Oklahoma, Pennsylvania, South Carolina, Tennessee, Utah, Virginia, West Virginia and Wisconsin, according to Savingforcollege.com.

States where residents may see penalties and clawbacks of tax benefits for using their funds on K-12 costs include Iowa, New York, Oregon and Vermont.

Nebraska doesn't yet permit its plans to be used for elementary and middle school costs, but the state treasurer's office is working with state legislators to have the statutes reflect what's in federal law.

Until lawmakers in that state adopt these changes, accountholders who use their funds for K-12 tuition will face the recapture of their tax deductions.

A number of other jurisdictions have yet to announce whether they will maintain their state statutes or change them to reflect federal law.

Before you tap your account

Students walk through the hallway after classes were dismissed at Senn High School on Wednesday, May 10, 2017 in Chicago, Illinois.
Joshua Lott | The Washington Post | Getty Images
Students walk through the hallway after classes were dismissed at Senn High School on Wednesday, May 10, 2017 in Chicago, Illinois.

Keep these points in mind before you raid your 529 plan to cover the more immediate cost of private school tuition — which runs an average of $10,203 per year, according to Private School Review.

• Talk to your accountant: "The state tax implications depend on the state you reside in," said James Shagawat, founder of Windfall Wealth Advisors in Paramus, New Jersey. "You want to be sure your state views the withdrawal as a qualified educational expense and not taxable income."

Know what a "qualified educational expense" is: The Tax Cuts and Jobs Act says that you can only pull up to $10,000 from a 529 for elementary and secondary tuition costs. If you tap your account for college, however, "qualified expenses" include tuition, fees, books, room and board.

"If you're using the 529 for K-12, you have a limited set of expenses and not as much flexibility," said Steffen of Baird.

Don't lose sight of college: Even if your state allows you to keep your tax breaks, your child misses out on years of compounding interest if you withdraw money for primary and secondary school. Less savings now could translate into more borrowing once college rolls around.

"Your eight-month-old has 17 years of tax-deferred growth if you don't tap your 529 plan," said Shagawat. "You miss out on a decade of growth if you do."

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