Iowa 529 Plan Highlights
Tax Break Using 529 Plans for K-12 Tuition Expenses
The following information is not intended as tax or legal advice. If you are considering the use of an Iowa 529 Plan for K-12 tuition expenses, please seek guidance from your tax professional before acting. Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.
Federal tax law change
As part of the Tax Cuts and Jobs Act that passed in December of 2017, federal tax law now allows 529 plans to pay up to $10,000/year in K-12 tuition expenses per child. Qualified withdrawals were previously limited to higher education expenses. The new rule broadens scope of those who may benefit. However, this change was only at the federal level, while each state was left to adopt its own policy.
Iowa tax law change
The good news for Iowa residents is that in June of 2018, Iowa approved legislation to align with the federal tax law. The law was made retroactive to January 1, 2018. In summary, if there were qualified education expenses in 2018, those expenses may qualify for tax-free withdrawals. Limitations do apply to contributions and withdrawals, so please continue reading.
Tax deductions for Iowa taxpayers*
Iowa taxpayers who are Participants can deduct up to $3,319 for 2018 (adjusted annually for inflation) of their contributions per Beneficiary, including rollovers, in determining their adjusted gross income for Iowa income tax purposes. This deduction applies to each Beneficiary account they own and contribute to. For example, married Participants who contribute to separate accounts on behalf of their two children can deduct up to $13,276 (4 x $3,319) in 2018.**
Note: Iowa taxpayers can contribute to their College Savings Iowa 529 accounts until the Iowa state income tax-filing deadline, which is generally April 30.
*Information obtained from:
Clarification on the K-12 Tuition and Textbook Credit
In recent years, there has been a 25% tax credit available for the first $1,000 of expenses per dependent for qualifying tuition and textbook payments. It was initially uncertain whether participants could claim both the credit and withdraw funds from a 529 Plan for the same expense. The Iowa Department of Revenue recently provided favorable guidance on the issue: “If expenses qualify for both the tuition and textbook credit and 529 Plan, taxpayers may claim both.”
For the full guidance, please refer to: https://tax.iowa.gov/sites/files/idr/documents/TaxReformGuidance_529
Important note about tax filing status:
Married Iowa residents often elect to file “married filing jointly” on their federal income tax return, but file “married filing separately” on their state income tax return. In the case of “married filing separately,” the tax rate is determined by the earnings of each spouse. In which case, the higher earning spouse would likely pay a higher marginal tax rate. For the largest benefit, it may be more beneficial to open an account under the higher earning spouse first.
In 2018, John and Jane incurred $5,000 of qualified K-12 tuition expenses for their only child, Jenny. John earns $80,000 and pays an Iowa marginal tax rate of 8.98%. Jane earns $40,000 and pays an Iowa marginal tax rate of 6.80%. John opens an Iowa 529 account, with Jenny as the beneficiary, and contributes $3,000. Jane also opens an Iowa 529 account, with Jenny as beneficiary, and contributes $2,000. Their potential tax savings would be:
|Account Owner||Beneficiary||Amount||Iowa Marginal Tax Rate||Iowa Tax Savings|
Iowa Alliance for Choice in Education:
College Savings Iowa 529 Plan – Highlights:
College Savings Iowa 529 Plan – How to make withdrawals:
**If withdrawals are not qualified, the deductions must be added back to Iowa taxable income. Adjusted annually for inflation.