Student, Education College and K-12 Savings Accounts
There are a few tax-advantaged savings plans to encourage saving (and give tax benefits) for you or your dependent's future education costs:
- Tax-free Refunds for Tuition/Other Qualified Education Expenses: If a 529 plan beneficiary receives a refund from an eligible educational institution for tuition or other qualified expenses, the distribution will be tax-free if it is recontributed to a 529 plan within 60 days. The recontributed refunds must be contributed to a 529 plan for the same beneficiary, but they do not have to be made to the same 529 plans from which they were distributed. These re-contributions do not count against a plan's contribution limit.
- K-12 Education Tuition: This allows an alternative option to use 529 plan distributions for up to $10,000 for elementary or secondary school (Kindergarten through 12th grade) tuition at a public, private, or religious school. The distributions cannot be used for home schooling, computer, or summer camp expenses.
- Rollover Funds to ABLE (Achieving a Better Life Experience) Accounts: This allows funds from a beneficiary's 529 plan to be rolled over within 60 days, tax-free to an ABLE account for the same beneficiary or other qualified family member. The accounts are for persons who have been diagnosed with a significant disability before age 26 with a condition that will last at least 12 consecutive months, and allows them and their families to save and pay for disability-related expenses. The person must also be receiving Social Security Disability Benefits or obtain a disability certificate from their doctor. For Tax Year 2019, the rollovers and any contributions made to the ABLE account should not exceed the $15,000 ABLE contribution limit.
Please contact an eFile.com Taxpert if you have any questions about these education tax savings. If you want to learn more about tax-free education savings accounts, read on.
Types of Eduction Savings Plans for K-12 and College Students
Two education savings accounts are available to K-12 and college students (as well as those paying for someone's education). Theses types of accounts allow you to save money for school expenses and withdraw funds tax-free:
- Qualified Tuition Programs (QTPs), or 529 Plan
- Coverdell Educational Savings Accounts (ESA)
Qualified Tuition Programs (QTPs) (529 Plans)
A Qualified Tuition Program, or 529 Plan (named for the section of the tax code that describes it), is a state-sponsored savings account set up to pre-pay for K-12 and college expenses. The owner of the 529 account can make contributions that may be withdrawn by the beneficiary to pay for qualified education expenses at an eligible educational institution that can participate in a student aid program administered by the Department of Education. These institutions include:
- Public, private, or religious K-12 schools (tuition only)
- Vocational schools
- Other postsecondary institutions
529 Plans have no age or income restrictions for contributions or withdrawals. The only limit on contribution amounts is that the total contributions may not be greater than the amount needed to pay the beneficiary's qualified education expenses.
Qualified Education Expenses
- Tuition for full time and part-time students at a college or university
- Books and supplies required for class attendance (textbooks, lab supplies, pens, paper, printer ink, etc.)
- Fees required by the school (lab, technology, etc.)
- Computers, tablets, educational software, and other technology products (if required for class attendance)
- Internet access (if not provided by the school and required for class attendance)
- On campus/dormitory room and board for student enrolled at least part-time
- Off-campus meal and housing costs up to a college or university's allowance amount in their cost of attendance figures (contact the school for details)
- Special needs services (wheelchairs and transportation costs)
Non-Qualified Education Expenses
- Transportation (airfare, gas, vehicles used for traveling, travel for moving in/out, etc.)
- Health insurance and medical services (even if they're billed by university)
- Student loan repayments
- Cellphones and other electronics for personal use
- Fees for fitness clubs, fraternity/sorority memberships, and other extracurricular activities
- Lifestyle/personal expenses (mini refrigerators, laundry, etc).
- Rent or meals over a college or university's allowance amount in their cost of attendance figures (contact the school for details)
- Home schooling
- Summer camp
Coverdell Educational Savings Accounts (ESAs)
A Coverdell ESA is a savings account sponsored by a bank or other financial institution. The account is set up to pre-pay for K-12, college tuition, and other education expenses. The savings account's beneficiary must be at least age 18 (or a special needs beneficiary) to withdraw Coverdell funds. The beneficiary must withdraw the funds before age 30 or the funds will be distributed and taxed. If the age requirements are met, the funds may be withdrawn tax-free if they are used to pay qualified education expenses. If the beneficiary turns age 30 before withdrawing the funds, they may avoid taxation by transferring the account to another qualifying relative or by rolling the ESA into a 529 Plan.
Qualified Education Expenses for Coverdell ESAs
The following expenses are qualified uses of funds from a Coverdell ESA (note that a computer and internet access are not covered):
- Supplies required for class attendance
- Special needs services and expenses
- Room and board (if the student is enrolled at least half-time)
Coverdell ESA Restrictions and Limits
Coverdell ESAs have certain restrictions that 529 Plans do not have:
- Funds must be withdrawn or transferred after the beneficiary is age 18, but before age 30.
- Qualified expenses do not include computers or internet access.
- You may not contribute if your income is more than $110,000 for Single, Head of Household, and Qualifying Widower filers and $220,000 if Married Filing Jointly.
- There is a maximum annual contribution of $2,000 per beneficiary (not per account and not per contributor).
Education savings accounts can be complicated, so let eFile.com help you with your 529's and/or ESA's if this information overwhelms you. Answer a few simple questions during our tax interview and we will select the right college savings forms for you. Then, we will automatically make the calculations. It's that easy! Contact an eFile.com Taxpert if you have more questions about college savings.
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