What Are Qualified Tuition Plans?
American society holds education in high esteem. Yes, costs of private school and higher education have skyrocketed with schools and universities having to adjust to the rising costs of staffing, student housing, campus amenities, and other factors. As a result, saving for private school and college has become increasingly difficult even as the need for higher education becomes more essential in the modern economy.
Accordingly, the Internal Revenue Code has been amended to create specific savings vehicles dedicated to higher education, known as qualified tuition plans (QTP). QTPs function similarly to retirement savings programs such as a Roth IRA. A QTP—also known as 529 plan—allows parents to invest funds to pay for their child’s future college expenses. Significantly, investment gains from a 529 used to pay for “qualified higher education expenses” such as books, housing, and tuition-free of tax. States such as Michigan offer a similar program called the Michigan Education Trust (MET) which allows parents to pre-purchase college education at today’s prices even though tuition will be higher when the child goes to school.
Reforms from the recently enacted Tax Cuts and Jobs Act recognized this trend and broadened the use of QTPs to cover educational expenses associated with the costs of enrolling a child in private elementary, secondary, and religious school. Now parents can establish a QTP early in a child’s life and use them to reduce the tax liability of educating their children.
Although funds withdrawn from a TCP and used for qualified higher education expenses are not taxed, the Tax Cuts and Jobs Act caps tax-free distributions at $10,000 a year.
As with any tax planning situation, it is important to consult with a tax professional prior to making this type of investment.
Possible Affect on Child Support
A parent has a legal duty to provide their child with the necessary financial support to address their food, shelter, health care, and other basic needs. In Michigan, this duty does not require contribution toward private or post-high school education unless the parents agree to include that in the final order. Thus, the duty to provide a child with financial support generally expires when a child reaches the age of 18 or graduates from high school, whichever comes later. However, a parent’s obligation can extend to cover the expenses of a child’s private school or college education when the parties have agreed in their divorce or custody order to include such a provision.
Child support is calculated to cover the various needs of a child, including their educational needs. Now that the Tax Cuts and Jobs Act has expanded the definition of “qualified educational expenses” to public and private primary and secondary school costs, parties can consider allocating a portion of child support obligations to fund a 529 plan, prepaid tuition plan, or other QTP.
Notably, child support is not tax-deductible nor is it considered income to the custodial parent. Child support is considered to be a family expense that parents would have to pay regardless of their marital or divorce status. However, if funding a QTP could satisfy part of a parent’s child support obligation, it could allow parents to take advantage a tax-favorable method of satisfying their child support payments and meeting the family goal of providing the best education for the children.
Looking for Legal Advice About Your Divorce?
Being a divorced or separated father has its financial hardships. If you need legal advice about your parental obligations as a divorced or separated father of a minor child, you should consult the American Divorce Association for Men. We proudly advise and advocate on behalf of divorced fathers throughout Michigan for over 31 years. You can count on us to provide compassionate and effective legal advocacy to protect your rights and interests as a father.
To learn more about how our legal team can help you, call our office at or contact us online today.