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New tax law gives consumers some useful options

3 min read
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The tax law passed in December might have some useful changes for parents.

Many people saved for college using 529 plans. Under the new law, these can now be used for elementary and high school students. These plans can be helpful if you are approaching the level that limits deductibility for state and local taxes.

The new law limits this deduction to $10,000. These plans can reduce state taxes that are due. Savings can vary from $500 to the total amount of yearly contributions. Pennsylvania gives a state tax deduction even if you invest in a 529 plan in another state. You can contribute up to $10,000 per year, and the money can be used at private or religiously affiliated schools.

Previously, you had to use a Coverdale Education Savings Account to receive a tax-advantaged account for education below the college level. These had income-eligibility limits and a contribution limit of just $2,000 per year. Parents who would like to do a rollover from a Coverdale to a 529 plan can do so without triggering taxes.

The new law also allows a 529 college plan to be rolled over into a 529 ABLE account. An ABLE account stands for “Achieving a Better Life Experience,” and was created at the end of 2014 to help people who were diagnosed as blind or disabled before age 26.

ABLE accounts can be used for education, housing, transportation, employment training, health care, financial management, legal fees and burial expenses. ABLE accounts allow a contribution of up to $14,000 per year. It can grow tax free. Only one ABLE account is allowed for any qualified individual.

An ABLE account can have up to a $100,000 balance and it will not be counted as a financial asset for determining eligibility for most federal assistance programs. If you distribute money in excess of qualified expenses, you will pay income tax plus a 10 percent penalty. These accounts can be an important way to help cover things that government programs may not.

Another important change to the tax law affects people who are divorcing. In the past, child support orders from the court were not taxed to the parent receiving them and were not tax deductible to the person paying the expense. Alimony, however, was taxable to the person receiving the payments and tax deductible to the one making the payments. Because alimony is paid by the former spouse with the higher income, the government was collecting a lower tax rate. This is changing under the new tax law.

Any divorce decrees signed after Dec. 31, 2018, will be under the new law. Ones completed this year or in the past will be grandfathered under the old law. Attorneys will argue that the higher-earning spouse will need to pay lower alimony because he or she will be paying higher taxes and have less net income. This change will collect more tax revenue, but lower family income level.

As always, you should be proactive in planning your tax situation so that you pay the lowest amount legally possible. Remember, it is not just how much you earn, but how much you get to keep that determines your standard of living.

Gary Boatman is a Monessen-based certified financial planner and author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.

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