Read twice and referred to the Committee on Finance.
Last progress January 29, 2025 (1 year ago)
Introduced on January 29, 2025 by Mike Lee
Allows many K–12 education costs to be paid from 529 college-savings accounts as qualified distributions, creates a special gift-tax adjustment to let larger 529 contributions count toward the annual exclusion, and conditions federal tax-exempt status for state and local bonds on states meeting new “minimum school choice” criteria. Some changes take effect immediately for account distributions; other tax-code changes and the new gift-tax treatment start for taxable years or gifts after December 31, 2026; the bond rule applies to bonds issued after the law is enacted.
Amends the Internal Revenue Code by revising Section 529(c)(7) to treat specified elementary and secondary school expenses as part of the term "qualified higher education expense."
Tuition for elementary and secondary public, private, or religious schools is included as a qualified higher education expense.
Curriculum and curricular materials for elementary and secondary students are included as qualified higher education expenses.
Books or other instructional materials for elementary and secondary students are included as qualified higher education expenses.
Online educational materials for elementary and secondary students are included as qualified higher education expenses.
Who is affected and how:
Families and account owners: Families who own 529 accounts or plan to open them can use those accounts for many K–12 expenses, increasing the flexibility of college-savings vehicles for earlier education needs. The change lowers out-of-pocket after-tax cost for those K–12 expenses when paid via 529 distributions.
Students and children: K–12 students whose families use 529 accounts may see federal tax-advantaged support used for tuition, curriculum, tests, dual enrollment, limited tutoring, and educational therapies.
Donors / gift-givers: Individuals who fund 529 accounts for beneficiaries gain a special gift-tax rule: contributions to a 529 may increase the effective annual gift-tax exclusion for that recipient by up to $20,000 in a year (effective for gifts after Dec 31, 2026), enabling larger yearly 529 funding without consuming the donor’s lifetime exemption.
State and local governments: States that do not meet the newly defined “minimum school choice” criteria risk losing federal tax-exempt status for bonds they issue after the law takes effect. That could raise states’ borrowing costs and change fiscal planning. States may feel political and fiscal pressure to adopt or expand qualifying school-choice programs to preserve tax-advantaged financing.
Municipal bond market: Underwriters, investors, and rating agencies will need to evaluate municipal bonds for compliance with the new rule; bonds issued by non-qualifying states could be treated as taxable, changing demand and pricing.
Federal tax administration: The IRS and Treasury will need to update forms, guidance, and reporting rules for 529 distributions, the special gift-tax adjustment, and related tax treatments.
Education sector and private schools: By increasing the tax-preferred funding available for K–12 private/choice options, the measure could shift some education funding from public systems to private or choice-funded options, depending on family behavior and state policy responses.
Fiscal impact: Broader tax-preferred education spending and enhanced gift-tax treatment could reduce federal tax receipts relative to current law; states may face higher borrowing costs if they do not adopt qualifying school-choice programs.
Net effect summary: The legislation expands tax-preferred education spending options for families and creates a powerful incentive (via municipal bond tax treatment) for states to adopt school-choice programs, while raising implementation issues for tax administration and potentially reducing federal tax revenue.
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