While the new federal tax law passed by the U.S. Congress and signed into law on Dec. 22 allows for the use of state-sponsored 529 savings accounts for K-12 tuition at private and parochial schools, Nebraska State Statutes do not provide favorable tax treatment unless those accounts are used for qualified higher education expenses at colleges, universities, community colleges, technical schools, or graduate programs.
The new federal law expands state-sponsored 529 plans to include tax-free distributions of up to $10,000 per year to pay for tuition at K-12 private and parochial schools. Currently 529 plans offer tax-free withdrawals only for college expenses, including tuition, books, computers, room and board.
The Nebraska State Treasurer’s Office, Trustee of the Nebraska Educational Savings Trust (NEST), is working with the Nebraska Legislature to bring state statutes in line with the new federal provisions regarding the use of 529 savings accounts. Until the Nebraska Legislature adopts authorizing legislation, the use of 529 accounts for private and parochial K-12 schools will be permissible under federal law, but will not receive any state tax benefits.
Specifically, withdrawals from NEST accounts to pay for K-12 tuition will be considered non-qualified withdrawals under current state law and will be subject to recapture of any state income tax deduction previously claimed. Earnings on such withdrawals also will be subject to state income tax under current state law.
The Treasurer’s Office recommends that individuals consult their qualified tax advisors about their personal situations.