Can I use the new tax law to help with private school?

Question

We live in a city that has a very low rated school system, therefore we have been enrolling our 2 children in a private school that costs $12,000 per year per child. This comes with quite a bit of sacrifice, including driving older cars, never buying things we don't need, and living in a relatively inexpensive house. We don't know if it will ever pay off, but we would rather they have the education, and not need it rather then need it and not have it.

With the proposed tax plan, it appears there are some revisions to the 529 plan. A summary outline from Forbes states:

529 Plans. Currently, putting money in a 529 plan won't result in a deduction, but neither the earnings nor distributions in 529 plans are taxable for federal purposes so long as the plan is used for costs associated with college like tuition and room and board as well as fees, books, supplies, and equipment.

Under the House bill, parents may set up 529 plans for unborn children. Additionally, up to $10,000 per year of plan funds could be used for private elementary and secondary school expenses.

Under the Senate bill, 529 savings plans could be used for public, private and religious elementary and secondary schools, as well as home school students.

Although it seems as though you cannot simply deduct the cost of private school from taxes, what limitations are there with placing the $20,000 into the 529, deducting that amount, then immediately taking it out to use for school tuition? Our state is New Mexico.

Edit - Although the quote provided directly states that putting money into a 529 will not result in a deduction, I wanted to leave my question as-is because it might be appropriate for state taxes.

Answer 1

I think you are misunderstanding how a 529 plan works. Contributions to a 529 plan are not tax deductible on your federal return. The money you put in there is after tax. The tax advantage comes as the account grows. The earnings are not taxed, as long as you spend the money on the right things (education).

If you were to contribute money to the account and then immediately withdraw to spend on education, there would be no earnings, and therefore there would be no tax advantage.

However, if your state does have a tax deduction for your 529 contributions, then you might be able to make a state tax-deductible contribution and then spend it right away on education (depending on the rules in your state). Starting in 2018, Federal guidelines allow 529 money to be spent on elementary education, so if your state allows it, you may be able to get a discount on your state taxes by doing this.

Each state has different rules and deduction limits, but in New Mexico, you are in luck: If you are contributing to your own state's plan, the state tax deduction is unlimited.