PATH Act: Improving Tax Benefits for Saving for Education, Retirement and Living with Disabilities

September 27, 2016 : Annelise Wiens

Summary

The Protecting Americans from Tax Hikes (PATH) Act made dozens of changes to the tax code. A few of these changes expanded current tax benefits to make it easier for taxpayers to save for their education, retirement and the costs associated with living with disabilities.

Save for education with a 529 account

Qualified tuition plans, also known as 529 accounts, already grow tax free and allow tax-free distributions for qualified expenses. They may also have state income tax benefits, such as a deduction or credit for contributions. Parents, grandparents and even unrelated people can contribute to these accounts for future college students to use for qualified higher education expenses which include tuition, fees, books and room and board.

The PATH Act expanded “qualified higher education expenses” to include computer equipment and technology. Half of college students will spend an estimated $11.54 billion on electronics for school.

“The cost of computers and technology is a rising share of education expenses, so this is a tax benefit that could help 529 account beneficiaries buy their computers and software for school,” said Alison Flores, principal tax research analyst at The Tax Institute at H&R Block. “It will also help students who don’t have other qualifying expenses, like a student who lives at home and has a scholarship that covers tuition but not computer equipment.”

Another PATH Act change allows taxpayers 60 days to re-contribute a tuition distribution to a 529 account if their tuition payment is refunded.

Save for retirement with a SIMPLE rollover

SIMPLE plans are individual retirement accounts (IRAs) established by small employers. Compared to other employer plans, they typically have lower administrative costs and no annual reporting requirements. This helps small employers offer matching retirement savings to their employees. The PATH Act allows taxpayers to rollover funds from other employer-sponsored retirement plans, such as a 401(k) plans, to a SIMPLE plan if the plan has existed for at least two years.

“Taxpayers may want to consolidate their retirement accounts for a number of reasons, but they have to be careful how they do it,” said Flores. “If they don’t execute a rollover correctly, they could incur a tax on the ‘distribution’ or exceed their contribution limit.”

Save for living with disabilities in any state in the country

Individuals who have been certified as disabled and their families also have a tax-advantaged way to save and pay for the costs of living with a disability by opening and contributing to an ABLE account. Similar to a qualified tuition plan, ABLE accounts grow tax free and funds used to pay for qualified expenses are distributed tax free. The accounts may have state income tax benefits as well.

The PATH Act eliminated the requirement that the ABLE account be located in the beneficiary’s state of residency. This means taxpayers can set up an ABLE account in any state they want. As ABLE programs become available in more states, individuals with disabilities and their families will have the opportunity to select the plan that best suits their needs.

Taxpayers can learn more about qualified tuition plans in IRS publication 970 or get more information about SIMPLE rollovers in the IRS FAQ. To learn more about ABLE accounts, taxpayers can read Flores’ Four things taxpayers need to know before opening an ABLE account.

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Annelise Wiens

Annelise Wiens

Editor and Producer

As the newsroom editor, Annelise Wiens is interested in more than just tax and industry news, but the stories of H&R Block's 80,000 associates, their communities and H&R Block's world headquarters in Kansas City, Missouri. Wiens joined H&R Block in 2014 from a public relations agency, where she worked with clients in the financial services industry. Before that, she worked as a communicator for a senior member of the United States House of Representatives. She graduated from Biola University in La Mirada, CA with a bachelor's degree in history.

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