In December 2015, President Obama signed the Protecting Americans from Tax Hikes Act (PATH), which made several changes affecting 529 plans. There are two modifications we’d like to highlight:
The purchase of laptops and certain electronic equipment, such as printers, as well as internet access and computer software are now considered qualified education expenses as long as the primary beneficiary uses them while attending a credible educational institution. However, families should be aware of the amount they spend on these items because spending in excess could trigger a tax audit. The new law is retroactive to expenses incurred since Jan. 1, 2015, so if your beneficiary purchased any of these new qualified items last year, you can use 529 account funds to cover the cost as long as the withdrawal occurred by Dec. 31, 2015.
Another noteworthy addition is the new re-contribution option. With this rule, eligible educational institutions can refund qualified higher-education expenses paid with 529 funds by re-contributing them to the same 529 plan. For example, if an eligible educational institution refunds a portion of the tuition or fees paid to a beneficiary because he or she withdrew from school due to illness or another unforeseen circumstance, the institution can redeposit it into the beneficiary’s 529 account. The IRS won’t deem the initial withdrawal as non-qualified or subject it to any taxes or tax penalties. Account owners who received a refund between Jan. 1, 2015 and Dec. 18, 2015 have until Feb. 16, 2016 to redeposit the money. For any refund received after Dec. 18, 2015, account owners have 60 days from the date of the refund to redeposit that amount. The re-contribution cannot exceed the amount of the refund.
Along with the updated 529 rules, the Department of Education also announced new income reporting rules for the FAFSA (Free Application for Federal Student Aid) starting with the 2017-2018 school year. Previously, income reported on the application has been from the previous year. New regulations state that the “base year” income used on the FAFSA now will be from the prior-prior year. For instance, if your child will start college in the school year 2020-2021, FAFSA will report your 2018 income for benefit determination, rather than 2019.
Author
Annish Nathu
Financial Planner
