2021 Lane Reports

Biden Tax Policy Likely to Make Section 529 Plans Even More Valuable

Tuesday, March 2, 2021 10:00 am
by Marc J. Lane

Biden Tax Policy Likely to Make Section 529 Plans Even More Valuable

By Jeremy Kritt, JD

The average tuition and fees at public universities in the United States has grown by 212% over the past 20 years. And private education at every level is growing increasingly expensive.

President Joe Biden has consistently signaled his intentions to attack this problem with programs like student debt forgiveness and free tuition programs. However, regardless of what the Biden Administration does to reduce the price of college, parents at all income levels who want to prepare for their children’s future would be wise to take advantage of the tools currently available to them.

Section 529 of the Internal Revenue Code allows for parents or others to avail themselves if tax-advantaged savings plans that can be applied to future education costs. These state-sponsored investment plans allow for after-tax dollars to grow and be withdrawn tax-free, provided that the money is taken out to pay for the beneficiary’s qualified education expenses. Expenses that qualify for tax-free withdrawal include not only all of the basic expenses of sending a child to college, such as tuition, books, and room and board, but also a limited amount toward other education-related expenses, such as student loan payments or tuition at private, public or religious elementary and secondary schools.

While withdrawing money for non-qualified education expenses will trigger a regular income tax on gains plus a penalty fee, the plans offer donors a level of flexibility and control that are not provided by other investment vehicles. The donor contributes money to the account on behalf of a named beneficiary, but that donor maintains complete control over the account, with the beneficiary having no right to the funds. And if the named beneficiary does not ultimately use the funds, the donor can easily change the beneficiary to another qualifying family member, which is defined broadly to include siblings, other children, nieces and nephews and more. Moreover, unlike, for example, traditional Roth IRAs, 529 plans have no income limits, age limits or annual contribution limits.

Donors should be aware that contributions to a 529 plan are treated as gifts to the named beneficiary for gift and estate tax purposes. However, contributions do qualify for the annual gift tax exclusion, which means up to $15,000 can be contributed gift tax-free in 2021. Moreover, 529 plans allow for 5-year gift tax averaging on contributions, meaning that a donor can make a lump sum contribution worth up to 5 times the annual gift tax exclusion - $75,000 - and it will be spread evenly over a 5-year period for gift tax purposes. This has the dual advantage of more quickly decreasing one’s taxable estate and allowing tax-free earnings to accumulate faster.

For wealthier Americans, proposed changes to the tax laws by the Biden Administration will only increase the necessity of a 529 plan. President Biden has proposed overhauling the estate and gift tax regime, such as by reducing the annual exemption amount and increasing the estate tax rate, which would cut current estate tax benefits. Mr. Biden has also proposed raising the highest income tax rates and treating capital gains and qualified dividends on income above $1 million as ordinary income, to be taxed at the increased rate. Should these proposed changes begin to take effect, the tax benefits for high earners of contributing to a 529 plan and enjoying tax-free growth of investments and, ultimately, tax-free withdrawals of those appreciated investments to pay for qualified education expenses, will only continue to grow in importance.

If you’re interested in exploring the benefits of Section 529 plans for yourself and your family, please reach out, in confidence, to Marc Lane at mlane@MarcJLane.com or 312/372-1040.

Jeremy Kritt is an Associate Attorney with The Law Offices of Marc J. Lane, P.C.


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