On May 14, 2018, the Indiana General Assembly adopted House Bill No. 1316(ss) (HB 1316). This bill included provisions to allow taxpayers the ability to use their Internal Revenue Code Section 529 education savings plans to pay for qualified K-12 education expenses in connection with enrollment or attendance at an elementary or secondary public, private or religious school located in Indiana.
Prior to this change, and prior to the changes brought about by the Tax Cuts and Jobs Act (TCJA), a qualified withdrawal from a §529 education savings plan only included those withdrawals used to pay for higher education expenses at post-secondary institutions. The changes brought about by HB 1316 were made to align in part Indiana’s definition of a “qualified withdrawal” with the new definition of a qualified withdrawal under the TCJA.
An important distinction related to the definition of a qualified withdrawal for federal and Indiana tax purposes is that the definition of a qualified withdrawal for Indiana purposes contains a stipulation that the K-12 institutions be located in the state of Indiana. It should be noted that this stipulation only applies to qualified withdrawals used to pay for K-12 education expenses, and that there is no similar requirement that post-secondary institutions be located within the state. Another important change to note is that beginning January 1, 2019, when a contribution or withdrawal is made from a §529 education savings plan, Indiana will require that the person making the contribution or withdrawal designate whether the contribution will be used for qualified K-12 education expenses or qualified post-secondary education expenses.
HB 1316 also makes changes to the calculation of the tax credit generated for contributions to §529 education savings plans. Under previous law, taxpayers were able to claim 20 percent of their contributions to a §529 education savings plan as a tax credit—capped at a maximum of $1,000—against their current-year Indiana tax liability. For tax years beginning before January 1, 2019, the credit is limited to the lesser of: (1) $1,000 or (2) 20 percent of the total contributions made to a §529 education savings plan that will be used to pay for post-secondary education expenses plus the lesser of: (1) $500 or (2) 10 percent of the contributions that will be used to pay for qualified K-12 education expenses. For tax years beginning after December 31, 2018, the credit shall be the lesser of: (1) $1,000 or (2) 20 percent of the contributions made for qualifying post-secondary education expenses as well as qualified K-12 education expenses.
The ability to transfer unused funds among beneficiaries remains; however, it appears those transferred funds will remain split between the K-12 designation and the post-secondary designation. Any funds not withdrawn for their designated purpose appear to be a nonqualified withdrawal subject to the repayment penalty.
If you have questions regarding these changes for Indiana taxpayers, or questions about how BKD can assist you with your tax planning needs, contact Stephanie, Rich or your trusted BKD advisor.