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529 funds can be used for K-12 tuition, but Minnesotans should approach with caution

July 22, 2019  |  Carolyn LaViolette

529 funds can be used for K-12 tuition, but Minnesotans should approach with caution Back-to-school shopping season is upon us, which means kids will be returning to school before we know it. For some, this can be a financially stressful time as families balance the budget for much-needed school supplies, school tuition, childcare, and/or everyday necessities.

The Tax Cuts and Jobs Act of 2017 (TCJA) provided some help for families with Qualified Tuition Plans (529 plans). According to IRS guidance, the use of 529 plans was expanded under federal law to include K-12 school tuition up to $10,000 per student per tax year. That means a family member can make a tax-free distribution from their 529 plan to help cover kindergarten through post-secondary tuition expenses.

But, for Minnesota families, that allowance comes with a word of caution.

“Minnesota doesn’t recognize K-12 expenses as a qualified expense,” said Laura Bereiter, CPA, CFP ® , director of tax and financial planning at White Oaks Wealth in Minneapolis. “So, while you may use your 529 plan toward K-12 tuition and not see a penalty or additional income on the federal side, Minnesota requires those distributions be added back to your federal adjusted gross income.  Minnesota taxpayers may also find themselves paying back deductions or credits received in the past for 529 plan contributions if the funds are used for K-12 expenses.”

This is one of several items Minnesota did not conform to in its 2019 tax bill that was signed into law during this year’s special session. While this isn’t new compared to previous tax years, there’s potential for confusion as Minnesotans hear that the state tax code conformed to some parts of the TCJA.

“Not everything is in full agreeance between Minnesota and federal tax codes. So, it’s still quite complex,” added Bereiter. “That’s why it’s important to consult a tax professional, such as a certified public accountant, to determine what new tax changes were passed in Minnesota and how it’ll affect your family.”

With this in mind, Bereiter offers the following advice to families preparing for the school year:
  1. Consider saving the funds in the 529 plan for college expenses and using other resources to pay for K-12 tuition. Not only will this allow the account balance more time for tax-deferred growth, but it won’t negatively impact your Minnesota tax situation.
  2. If you find yourself needing to use your 529 plan for K-12 tuition, work with a CPA to project the impact the withdrawal would have on your 2019 Minnesota tax return. Do you need to increase your withholding or make an estimated tax payment to cover any additional tax liability and minimize underpayment penalties?
  3. Many families can take advantage of the Minnesota K-12 education subtraction or credit. This applies to qualified education expenses (not just tuition) related to a child in kindergarten through 12th grade. No 529 plan is necessary to receive this benefit on your Minnesota income tax return, but the credit is subject to limits and phases out. The subtraction doesn't have these same restrictions. A CPA can help you determine which one works best with your financial situation.
Thank you to Laura Bereiter of White Oaks Wealth for her contributions to this blog post.

Topics: Taxation-Individual, Personal Financial Planning

Carolyn LaViolette

Carolyn LaViolette is the MNCPA communications manager, working to enhance members’ professional reputations through content, media relations and public affairs. She is also the MNCPA’s unofficial pianist and has tickled the ivories at multiple MNCPA events. Outside of her love for writing and music, Carolyn spends her time playing with her two daughters, attending Tommie football games with her husband, and memorizing the lyrics to musicals. If you can’t get tickets to Hamilton, she is happy to sing the soundtrack for you. Carolyn can be reached at 952-885-5530 or claviolette@mncpa.org.

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