Will a 529 withdrawal for K-12 tuition be taxable?

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Q. I’m the mother of a 10-year old who attends a private school in New Jersey. We opened a 529 plan in New York state. New Jersey allows for using a 529 plan to pay for K-12 tuition but New York does not. Will I owe New York money if I take the distribution or am I prohibited from taking any distribution? Also, I would like to make a $1700 distribution from the 529 to our son’s savings plan. Would it be subject to the Kiddie Tax?
— Dad

A. We’re glad you’re asking.

The last thing you want when you make a 529 plan transaction is an unexpected tax bill.

The 2017 Tax Cut and Jobs Act expanded the use of 529 savings plans to allow a family to use up to $10,000 per year for private K-12 education, and treat it as a qualified, tax-free withdrawal from the 529, said Michael Cocco, a certified financial planner with Beacon Wealth Partners in Nutley.

However, not all states have adopted this federal rule, including New York, which does not recognize K-12 educational expenses to be a qualified expense for 529 purposes, he said. That means any distributions may be subject to New York State tax, even though those qualified distributions are tax-free on the federal level, Cocco said

“Now that you live in New Jersey, and New Jersey does recognize K-12 educational expenses as a qualified disbursement, you should not have to pay taxes on $10,000 per year that you use for qualified K-12 education,” Cocco said. “It matters where you live and file taxes at the time of the disbursement, not which state’s 529 you use.”

As to the second part of your question, we’re assuming that when you say your “son’s savings plan,” you mean his personal savings account at a bank and not a 529 plan.

If this is the case, if you are the owner of the 529 and make this withdrawal, any gains as part of the $1,700 would be subject to ordinary income tax and a 10% penalty, Cocco said.

“If your son is the owner of the 529 — an UTMA 529 account — then yes, he would be taxed on it and then the kiddie tax rules would come into effect,’ Cocco said. “To find out how much of the $1,700 you may take out would be considered gains, please contact the custodian of the 529 plan to get this information.”

You should also work with a tax preparer who knows your financial situation to make sure there are no surprises.

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This story was originally published on Sept. 29, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.