Why NC families should hold off on paying K-12 private school costs with 529 plans

Jan. 25--RALEIGH -- A change in federal tax law will now let families use money in 529 college savings plans to pay for K-12 private school costs, but North Carolina families are being urged to hold off for now.

Private school parents around the country have been trying to learn more about how the recent federal tax overhaul allows families to withdraw up to $10,000 a year from 529 plans to pay for K-12 private school expenses. But the change is expected to have less impact in states like North Carolina that don't offer tax breaks for contributing.

Additionally, North Carolina taxpayers could be hit with state tax penalties if they try to use 529 money for K-12 expenses. About 100,000 students attend private schools in North Carolina.

"We're worried that people could risk a tax penalty that they might not have to risk," said Laura Morgan, vice president of communications and savings and legal affairs for the College Foundation of North Carolina, which administers the state's 529 program.

The plans, named for a section in federal tax code, were originally created to help families save for college by investing their money and letting it grow tax free. People don't pay federal or state taxes on the money they withdraw for higher education expenses such as college tuition.

States run their own 529 plans. North Carolina's plan had $2.3 billion invested from 138,764 active accounts as of Jan. 16, according to Morgan.

New questions began to emerge in December when the Republican-led Congress expanded 529 plans to cover K-12 costs, including tuition, at private schools. Supporters of the change say it's a victory for school choice, although efforts to expand 529 plans to cover homeschoolers were rejected.

"Expanding 529s to include any educational option is a common-sense reform that reflects the reality that we must begin to view education as an investment in individual students, not systems," U.S. Education Secretary Betsy DeVos told the Associated Press.

But the new benefit has also drawn complaints from critics who say it's a tax break for wealthy families. Critics also warn that the tax break will result in less federal and state money available for public education.

"The way the tax code is being used to subsidize private K-12 education both undermines our national system of public education and our state systems," said Alexandra Sirota, director of the N.C. Budget & Tax Center at the left-leaning N.C. Justice Center.

Locally, current and prospective parents have been asking about their options, said Timothy Hall, director of academics at Thales Academy, which operates six private schools in Wake County.

"We think that families will use this opportunity to come to Thales since we provide a high-quality education at very affordable cost," Hall said.

North Carolina lawmakers voted in 2013 to end the state tax deduction for contributions to 529 plans. Thirty-four states and the District of Columbia offer tax breaks for people who invest in 529 plans, according to Savingforcollege.com.

North Carolinians who withdraw money from 529 plans for K-12 costs won't be taxed by the federal government. But Schorr Johnson, a spokesman for the state Department of Revenue, said he can't give a definitive answer as to whether the state would tax that withdrawal.

Johnson said the department is waiting to see what changes the General Assembly may make this year to the state tax code.

In the meantime, Morgan said parents who have contacted the College Foundation for guidance on whether K-12 expenses are permitted have been advised to hold off on withdrawing their money until the legislature provides clarity. She said callers have been encouraged to contact a financial adviser.

Gerald Townsend, a financial adviser in Raleigh, said he'd tell his clients that he'd be reluctant to withdraw any 529 money for K-12 costs until he got clear information from the state.

At this point, the federal tax change is more of a symbolic step for private school families, according to Darrell Allison, president of the pro-school choice group Parents for Educational Freedom in North Carolina. But he said anything that expands efforts for families to provide for their K-12 education is a good thing.

"We see this as a small change in the right direction," Allison said. "It will let taxpaying parents save a small amount to defray their expense for K-12 education."

Things could change if the state restored the tax deduction for 529 contributions. If the deduction is restored, Morgan said families will have to weigh the short-term benefits of using 529 plans for K-12 costs versus the long-term strategy of saving money for college.

"This particular investment was set up with long-range investment horizons in mind so it continues to be a valuable resource for college and for time horizons that are further out regardless of whether the K-12 provision is allowable under North Carolina state tax law," she said.

T. Keung Hui: 919-829-4534, @nckhui

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