When Palmetto Promise Institute introduced the Education Scholarship Account (ESA) concept to South Carolina a few years ago, our conversations with parents and legislators usually began with an explanation of the difference between what we were proposing and existing education savings accounts (also known as 529s). It was a case of mistaken identity.
Here’s the difference. With the future ESA the state puts the amount it spends for a K-12 student into an account that parents control for K-12 educational expenses. In the existing 529, parents can put dollars into an investment account that would grow tax free if the funds are spent for college expenses. The 529 has the additional benefit of having no limit on the dollars a family may put into the account, and no family income limitations.
Until last week, there were clear distinctions between ESA and 529, the most significant being 529s couldn’t be used for K-12 expenses. Not anymore! We are pleased to report that Congress included in HR 1, the Tax Cuts and Jobs Act, which was signed into law on December 22, a provision that would allow 529 funds to be invested and withdrawn for college and K-12 educational expenses. This is cause for celebration for any family who wishes to invest their own funds for the benefit of their children’s education without having to wait nearly 19 years to put those funds to use!
So, what will the State of South Carolina tax man do? The State Treasurer’s Office and Department of Revenue are still reviewing HR 1, but our early analysis shows that 529 deposits, which are deductible for state income tax purposes, would not be taxed by the state either when withdrawn and spent on K-12 educational expenses.
So, celebrate with us…and stay tuned.
Until then, here are some resources PPI recommends to learn more: