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Md. officials ponder impact of tax law expansion for college savings accounts

Public school advocates say changes to 529 plans could cost state millions

md-529-planAn element of the new tax law that expands how money in college savings accounts can be spent has left Maryland and education advocates with more questions than answers.

Under a provision of the Tax Cuts and Jobs Act, parents now may spend up to $10,000 each year from 529 college savings accounts for tuition for their elementary- or high school-aged children attending private schools and for the educational costs associated with homeschooling. Previously, the funds could be used only for college costs.

The expansion could encourage more parents to contribute to their children’s college 529 accounts, said Roger Young, a senior financial planner at T. Rowe Price Group, which manages the Maryland College Investment Plan.

“I would expect that, marginally, this would result in more people considering 529s,” he said. “I think it’s another incentive to consider 529 plans certainly. … People want to be careful how they invest that, once they put the money in.”

Money from 529 accounts can be spent tax free when used for education, but is subject to a federal penalty when withdrawn for other expenses.

At the state level, contributing to a 529 plan is tax deductible, up to $2,500 per year per beneficiary in Maryland. There is a clause in the law allowing the state to claw back the deduction if the funds are not used for qualified expenses.

The expansion of qualified expenses for the accounts could mean more parents use the accounts and claim the tax break. Or those already with accounts for college could expand their use for secondary school. Either way, it would reduce the amount of tax revenue flowing to the state treasury.

The Maryland Office of the Comptroller said it is currently analyzing the full federal tax bill, including the 529 provision, with results expected later this month.

In Maryland, there are two college investment options: the Maryland College Investment Plan and the Maryland Prepaid College Trust. The investment plan lets parents and others contribute money to the 529 account, where it sits in a managed investment account. Earnings in college savings accounts are also tax free, as long as they are used on qualified expenses.

The college trust plan allows participants to prepay for college using a payment plan that accounts for semesters and years at universities and community colleges.

As of June 30, 2017, there were nearly 215,000 beneficiaries enrolled in Maryland 529 plans.

Meanwhile, independent school advocates believe this could be a tool for parents, but they have adopted a wait-and-see approach.

“Obviously, it’s a benefit to parents in independent schools to have the option of using some portion of their tax-free savings to support tuition in independent schools,” said Peter Baily, executive director of the Association of Independent Maryland and DC Schools. “We are pleased that that option has become available. We look forward to helping our schools and by extension their families navigate this new opportunity.”

The organization’s membership includes 125 independent schools in Maryland and Washington. The Maryland State Department of Education said that according to the most recent data, 123,541 students were enrolled in nonpublic schools during the 2016-17 school year.

But public school advocates believe the law could hurt the state’s public schools.

“Maryland’s public schools are already underfunded by $3 billion every year, according to independent analysts, especially in communities with high concentrations of poverty,” Sean Johnson, director of legislative affairs for the Maryland State Education Association, said in a statement. “Now, Gov. (Larry) Hogan’s allies in the Republican Congress have given a new tax break to wealthy families who can already afford private school tuition — a move that will likely cost the state millions in revenue — making it much harder to provide a fair shot to every child.” 

Young, the financial planner, said that while more parents could take advantage of the 529 expansion, he does not see a significant additional number likely to do so. That is because he estimates that most parents sending their children to private school would have already started a savings account.

But while the expansion of 529 accounts could benefit the schools, Baily said, the widened standard deduction could encourage less giving to the schools as charitable contributions. The schools often rely on gifts to fund need-based financial aid.

“That’s certainly a concern, and that’s a concern that is spread across all nonprofit organizations,” he said. “With a reduced likelihood that donors in certain income categories will itemize their deductions, there could be a reduction in charitable giving.”

Baily said questions about the tax law, passed as schools were entering winter breaks, have become a top concern for administrators. Many are waiting to see how different provisions will play out and affect their operations.

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