Before the One, Big, Beautiful Bill Act (OBBBA), 529 withdrawals for K-12 were capped at $10,000, and permitted only for tuition at public, private, or religious schools. The new law doubles that, upping the annual limit to $20,000 per student, effective beginning in tax year 2026.
But it’s not just the cap that changed—the definition of “qualified” expenses expanded dramatically to now include:
The expanded tutoring provisions include specific qualification requirements for clients:
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The expanded definition of qualified K-12 expenses and the increased $20,000 annual limit starting in 2026 deliver clear advantages to several groups of families and taxpayers:
The OBBBA doesn’t stop at K-12. Tax‑free distributions from 529 accounts now cover postsecondary credential programs. That includes tuition, exam fees, books, materials, and continuing education tied to recognized credentials from WIOA programs to apprenticeships, and state‑licensed certifications.
To qualify for 529 distributions, credential programs must be one of the following:
These changes help adult learners, career‑changers, and professionals pursuing technical or license‑based credentials. This transforms the 529 from a college‑only vehicle into a career‑investment tool.
Encourage families who have the financial capability to fund k-12 as well as college to utilize enhanced K-12 flexibility. The expanded use of tutoring, dual-enrollment, and therapies can have a meaningful, tax‑efficient impact.
For nontraditional careers or workforce training, 529s now cover much more. Frame 529s as tools for your client’s lifelong professional development.
Many states do not conform to the federal changes introduced by OBBBA, including the increased $20,000 annual limit on K-12 qualified withdrawals and the expanded definition of qualified K-12 expenses. This means that while distributions may be federally tax-free, they could be subject to state income tax or subject to recapture of prior state tax benefits if your client’s state does not recognize these changes.
State tax benefits for 529 plan contributions continue to vary. Always review state-specific rules carefully and advise clients accordingly, especially those with out-of-state 529 accounts or residency in states with stricter conformity rules:
Tax Practitioner Planning: The Saving for College website remains a valuable resource for the most current state tax treatment summaries
The estate and gift tax rules applying to educational IRAs also apply to contributions to qualified tuition programs. Contributions to a qualified tuition program will be treated as a completed gift of a present interest from the contributor to the beneficiary at the time of the contribution. Annual contributions are eligible for the present law gift tax exclusion provided by §2503(b) and also are excludable for purposes of the generation-skipping transfer tax, provided that the contribution, when combined with any other contributions made by the donor to that same beneficiary, does not exceed the annual gift tax exclusion limit of $19,000, or $38,000 in the case of a married couple, in 2025.
Special rule for 2025 contributions exceeding $19,000/$38,000 limit ($95,000/$190,000 for five-year gift): If a contribution in excess of $19,000 ($38,000 in the case of a married couple) is made in one year, the contributor may elect to have the contribution treated as if made ratably over five years beginning in the year the contribution is made. This rule allows donors to contribute up to $95,000 every five years ($190,000 in the case of a married couple) with no gift tax consequences, assuming no other gifts are made from the donor to the beneficiary in the five-year period. A gift tax return must be filed with respect to any contribution in excess of the annual gift-tax exclusion limit, and the election for five-year averaging must be made on the contributor’s gift tax return. If a donor making an over $19,000 contribution dies during the five-year averaging period, the portion of the contribution that has not been allocated to the years prior to death is includible in the donor’s estate.
Tax Practitioner Planning: The 3.8% NII tax can be avoided if the income is used tax-free for college expenses.
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