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: