New tax break for private K-12 tuition begins this school year

CT Association of Independent Schools

A classroom at a private school in Connecticut

A new state tax break is available this school year to help parents pay for private K-12 school tuition – a development triggered by the federal tax overhaul.

The state has for years allowed parents to avoid paying state income taxes on up to $10,000 each year that they put into a college savings account, known as a 529 CHET account. In addition, they have not had to pay taxes on the money when it is withdrawn or on the investment earnings when they use it to pay for college.

Now, those state tax benefits have been extended to allow parents and relatives to also use these 529 accounts for private, elementary and secondary school. That’s because the federal tax law that was changed last December on these accounts extends a federal tax benefit to include K-12 tuition.

The state set up its 529 program years ago to align with the federal law, so this recent federal expansion triggered an automatic expanded state tax break for K-12 tuition, the Connecticut Department of Revenue Services recently concluded.

“There is currently no tax statute that changes the Connecticut income tax treatment of CHET distributions,” said Jim Polites, a spokesman for the Department of Revenue Services. “Short of any provision or any change to the law, it’s not taxable.”

The legislature has been in session since the change in federal law, but did not act to prevent this tax break from going into effect.

Rep. Andy Fleischmann, the chairman of the legislature’s Education Committee, said during an interview Monday he was given the impression that the federal change would not trigger an automatic tax break for private school tuition.

“I am disappointed to hear that this is DRS’s interpretation,” the West Hartford Democrat said. “I hope the legislature will take action. … I don’t see why the legislature wouldn’t narrow the state statute to only provide state support for higher education and not for private school tuition.”

The General Assembly’s Office of Legislature Research in January recommended several changes in law the legislature could make to avoid this expansion; including requiring taxpayers to repay the deduction if withdrawals are used for K-12 expenses. However, DRS told the legislative researchers that recapturing such funding could be difficult to enforce since it would have to audit expenditures to verify the withdrawals were only used on higher education expenses.

Currently, 39,5000 tax filers benefited from this deduction last year. These deductions cost the state nearly $12 million in lost revenue each year. It is not clear if there will be an uptick in participation now that the accounts can be used for private school tuition.

About 60,000, or 10 percent, of school-aged children attend private schools in Connecticut, according to 2016 census estimates.

The monetary value of the benefit varies depending on how much a family earns. For example, a married couple filing jointly with a federal adjusted gross income of $90,000 would save approximately $500 on their state income tax filing with a $10,000 CHET deduction. Those in higher tax brackets would save more.

Allowing families to avoid paying state taxes on up to $10,000 in tuition would help middle-class families more, advocates have said. The federal taxes well-off families could avoid are substantial, according to figures compiled for The Connecticut Mirror by the financial services company Vanguard.

The new state tax break could prove controversial. High-income families stand to benefit most, but private school advocates say those sending their children to private school are still paying numerous other taxes that fund public schools and deserve a small break.

Read more on the issue here.

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