529 money for K-12 but not in NM


The recent tax rewrite gave a big boost to tax-free college savings plans: The federal tax code now allows you to use money in 529 plans to withdraw up to $10,000 to pay for tuition expenses at K-12 public, private or religious elementary and secondary schools in addition to paying for college tuition and most expenses. The withdrawal amount for qualified

college expenses including tuition room and board, books and computers and educational software will remain the same. But before you jump to withdraw from an account to pay for elementary or high school, beware: You could wind up taking a significant financial hit by doing so. That’s because the New Mexico Legislature first needs to update the tax code in order to let account holders keep all the existing benefits of saving to a 529 account while using the money for K-12 education. Because the current law in New Mexico allows for withdrawals only for “higher education” any withdrawal for K-12 tuition would be considered a ‘nonqualified’ withdrawal resulting in a state income tax liability. During the 2018 Session, Representatives Dennis Roch, Rebecca Dow and Carl Trujillo have introduced a bill to make these changes but with a 30 day session it will be an uphill road toward passage. If this issue is important to you please contact these legislators about supporting HB 241.

College savings accounts, named for Section 529 of the Internal Revenue Code, have been around for more than 20 years. Money invested in the accounts grows tax-free, and when you withdraw the money, you don’t pay any federal or state taxes, as long as the money is used for “qualified expenses.”

That’s where things get wonky: Qualified expenses used to be defined in the Federal Code as higher education tuition, room and board, books, and more recently, computers and software. Now, however, the federal tax code says up to $10,000 a year in K-12 private school tuition is also a qualified expense.

More than 30 states and the District of Columbia offer a benefit at the time money is put into the account: a state income tax deduction or credit for contributions to 529 accounts. New Mexico does not allow for a direct state income tax deduction for saving to a 529 plan but it is one of only four in the country to allow for an "above the line" income adjustment, meaning residents can deduct 100% of the contribution even if they do not itemize their other deductions (opting for the standard deduction).

Yet, as noted above, New Mexico is in a group of 20 states that have language in statute that requires that 529 account be used only for ‘higher education’ and that phrasing could prove troublesome unless HB 241 passes and the state laws are amended.

Meanwhile, it’s not at all certain that states will rush to match the federal definition - especially in New Mexico where only 6% of school age children attend private or religious schools statewide - this may not be an important issue for many. Even nationally, private school enrollment is comparatively small—about 10% of the school population nationally attends private schools, according to the National Center for Education Statistics—and the new federal law effectively now mandates tax-free private school tuition that could cost states millions of dollars in revenue. For example, the change could cost the State of New York, which allows a $10,000 deduction per couple, as much as $200 million in tax revenue. Other states that could take a big hit include Indiana (which could lose $149 million in revenue) and Illinois ($90 million). All three of the states have a broader definition of the educational entities towards which parents could apply the funds, meaning their state legislatures don’t need to act in order for families to get the benefits for K-12 spending. Meanwhile, the law in New Mexico is very clear – 529s may be used for ‘higher education’ only and using the funds for K-12 tuition will require the New Mexico Legislature to change the law.

What should families do if they’d like to use 529 savings for K-12 expenses?

First, call whatever plan you’re invested in and ask about the potential consequences of a withdrawal, says Andrea Feirstein, a 529 plan consultant. The answer will be different depending on where you live and which plan you’re invested in, she adds. Michael Fitzgerald, the state treasurer in Iowa, for example, has already warned families not to use their accounts for K-12 expenses until the law is amended. If they do, the state could recapture any deduction they received in previous years for contributing to the account.

By contrast, Utah’s Educational Savings Plan is ready for K-12 withdrawals, says Executive Director Lynne Ward. She says her office has already received a variety of questions—although none about whether K-12 withdrawals are qualified expenses under Utah law. (Most of the questions are about what’s considered a qualified expense, Ward says: For K-12 costs, it’s only tuition, whereas there’s a broader set of higher education costs allowed.)

How much money is at stake?

The real power of 529s is in the tax elimination on investment gains, and the sooner money is deposited, the better for compounding those gains, says Norman Boone, a financial planner in San Francisco. That means families considering opening a 529 account strictly for K-12 expenses have to weigh the likelihood of changes in state tax law with the value of saving and investing earlier, Boone says. But for parents with existing accounts looking to use money for K-12 expenses, New Mexican parents to private schoolers will have to wait to see whether their state’s law will be updated to match the federal code.

For your reference: Taken directly from the NM Higher Education Department website January 27, 2018.

Tax Benefits for College Savings -

Federal Tax Treatment of State sponsored 529 plans — qualified tuition programs authorized under section 529 of the Internal Revenue Code — that allow taxpayers to either prepay or contribute to an account for paying a student's qualified higher education expenses. Similarly, colleges and groups of colleges sponsor 529 plans that allow them to prepay a student's qualified education expenses. These 529 plans have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is also no income limit for contributors.

529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualify.

For 2009 and 2010, an ARRA change to tax-free college savings plans and prepaid tuition programs added to this list expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature. In general, expenses for computer technology are not qualified expenses for the American opportunity credit, Hope credit, lifetime learning credit or tuition and fees deduction.

To learn more about federal tax benefits for higher education, visit the IRS.GOV Tax Benefits for Education: Information Center

State of New Mexico Income Tax Benefits for College Savings

In addition to federal tax benefits, New Mexico residents can enjoy state tax benefits as well.

  • You can deduct your plan contributions from your New Mexico Income. However, the total deduction cannot exceed the cost of attendance at the applicable eligible higher education institutions as determined by the Board

  • Any earnings grow New Mexico state tax free

  • Qualified withdrawals are exempt from New Mexico state tax. In case of nonqualified withdrawal, the earnings portion of the nonqualified withdrawal is considered to be income for New Mexico state income tax purposes. Also, amounts in a nonqualified withdrawal which are attributable to previous tax deductions are added back to the Account Owner's new Mexico State taxable income in the year of withdrawal

New Mexico residents should consult with a qualified tax advisor regarding the application of New Mexico and federal tax rules to their particular circumstances.


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