Mississippi State Treasurer Lynn Fitch wrote a letter to the IRS on November 5, 2018, asking the IRS to include preschool tuition as a qualified expense for 529 plans. The Tax Cuts and Jobs Act of 2017 expanded qualified expenses to include up to $10,000 per year per beneficiary in tuition for elementary and secondary schools. The IRS has proposed regulations that would limit the definition of elementary and secondary school to K-12, excluding Pre-K.
Section 11032 of the Tax Cuts and Jobs Act of 2017 [P.L. 115-97] amended the definition of qualified distributions from a 529 plan to include expenses for tuition “in connection with enrollment or attendance at an elementary or secondary public, private or religious school.” The change is effective beginning on January 1, 2018.
Proposed IRS regulations published in IRS Notice 2018-58: Guidance on Recontributions, Rollovers and Qualified Higher Education Expenses under Section 529 limit qualified education expenses to K-12 tuition, excluding Pre-K tuition.
The IRS argues that the definition of “elementary and secondary school” for 529 plans should be the same as the definition for Coverdell education savings accounts. Using the same definition, according to the IRS, is necessary to coordinate Coverdell education savings accounts and 529 plans, as required by the Internal Revenue Code at 26 USC 530(d)(2)(c)(ii). Coverdell education savings accounts define “elementary and secondary school” as including kindergarten through grade 12, based on the statutory language at 26 USC 530(b)(3)(B).
The IRS argument is weak, however, because the definitions of qualified education expenses for Coverdell education savings accounts and 529 plans differ. For example, qualified elementary and second education expenses for a Coverdell education savings account include tuition, fees, tutoring, special needs services, books, supplies, equipment, room and board, uniforms, transportation and computer equipment, among other expenses. Qualified education expenses for a 529 plan include just tuition.
However, the IRS could argue that the definition of elementary and secondary school as limited to K-12 for Coverdell education savings accounts illustrates the intent of Congress more generally.