A bill to give Nebraskans the full benefits of changes in federal tax law regarding state-sponsored 529 educational savings plans, specifically the Nebraska Educational Savings Trust (NEST), was introduced today in the 2018 Legislature by Sen. Lydia Brasch, Nebraska State Treasurer Don Stenberg said. The effective date on the proposed legislation is January 2020.
The new federal tax law passed by the U.S. Congress and signed into law on December 22 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. Nebraska State Statutes currently provide favorable tax treatment for NEST accounts only if they are used for qualified higher education expenses at colleges, universities, community colleges, technical schools, or graduate programs.
“As Trustee of the Nebraska Educational Savings Trust, I am working with Senator Brasch to bring state statutes in line with the new federal provisions regarding the use of 529 savings accounts,” Treasurer Stenberg said. “Until the Nebraska Legislature adopts authorizing legislation, the use of 529 accounts for private and parochial K-12 schools, while permissible under federal law, will not receive any state tax benefits in Nebraska.”
Specifically, withdrawals from NEST accounts to pay for K-12 tuition currently are considered non-qualified withdrawals under current state law and are subject to recapture of any state income tax deduction previously claimed. Earnings on such withdrawals also are subject to state income tax under current state law, Stenberg said.
Stenberg said since the proposed effective date is January 2020, there will be no fiscal impact on the state’s budget in the current biennium. The Legislative Fiscal Office and the Nebraska Department of Revenue will determine the fiscal impact after the bill is introduced, he said.
"It's exciting to help encourage Nebraskans to save for education through the 529 NEST and introduce the Nebraska bill to accomplish this,” said Sen. Brasch. “This bill brings state tax law into line with the new federal law, creating tax relief through direct investment into Nebraska's future. Establishing an effective date of 2020 heeds the seriousness of our current budget situation while also empowering Nebraskans to prioritize their children's education."
NEST currently provides for tax-free withdrawals only for education expenses, including tuition, books, computers, room and board, at institutions of higher learning. NEST savings accounts can be used at state colleges such as the University of Nebraska-Lincoln, private colleges such as Harvard, and colleges founded by religious organizations such as Creighton University, Nebraska Wesleyan University, and Concordia University. NEST accounts can be used at public and private institutions of higher learning throughout the United States and in some other countries.
Federal tax benefits associated with state-sponsored 529 college savings programs remain in place, Stenberg said. Those include tax-deferred earnings from federal income tax and tax-free withdrawals when funds are used for qualified expenses. Currently an account owner could make a withdrawal that is for a qualified expense on the federal level, but that is considered a non-qualified expense on the state level, he explained. For instance, under current Nebraska law, a withdrawal for tuition at an elementary or secondary private or parochial school would be considered a non-qualified withdrawal and subject to recapture of any state income tax deduction previously claimed.
Stenberg recommended Nebraskans consult their qualified tax advisors about their personal situations.