As a result of recent federal tax law changes, the definition of "Qualified Higher Education Expenses" under Section 529 of the Internal Revenue Code have been expanded to include tuition expenses for K-12 Schools. K-12 Schools are elementary or secondary public, private or religious schools.
Effective January 1, this change in the federal tax law permits Account Owners to withdraw up to $10,000 for tuition expenses from a 529 college savings account for K-12 Schools free of federal taxes. This limitation applies on a per-student basis, rather than a per-account basis. Although an individual may be the designated beneficiary of multiple accounts, that individual may receive a maximum of $10,000 in distributions free of federal tax, regardless of whether the funds are distributed from multiple accounts.
The recent federal tax law changes also permit transfers from a 529 account to an account in a Qualified ABLE Program made before January 1, 2026, without subjecting the transferred amount to federal income tax on earnings, provided certain conditions are met. ABLE accounts are subject to an annual contribution limit (currently $15,000). Transfers from a 529 account that cause the ABLE account to exceed the $15,000 limit will be subject to federal tax. This provision applies to 529 to ABLE transfers made after December 22, 2017.
Under current New Mexico tax law, contributions to the New Mexico 529 plans by a New Mexico individual taxpayer may be deducted for New Mexico individual income tax purposes. In certain circumstances, the amounts deducted may be recaptured in subsequent years.
Despite the new federal law changes for tuition expenses for K-12 Schools, it is possible that such K-12 tuition expenses will not constitute Qualified Higher Education Expenses under the New Mexico tax code, thereby resulting in a recapture of any deduction related to amounts distributed for such K-12 tuition expenses.
In addition, amounts previously deducted for New Mexico income tax purposes will be recaptured if they are distributed from a New Mexico 529 plan account to a Qualified ABLE program, including the ABLE program offered in the State of New Mexico (notwithstanding that such a transfer is a Qualified Withdrawal for federal tax purposes).
Account Owners who are New Mexico taxpayers should consult their own tax advisors before making withdrawals from a New Mexico 529 plan for K-12 tuition expenses or transferring funds from a New Mexico 529 Plan to a Qualified ABLE Program.
It pays to live in New Mexico. While you don't need to live in the state or even go to college there, New Mexico residents enjoy some additional state tax benefits by saving with The Education Plan:
- Contributions to the Plan are deductible from New Mexico state taxable income.
- Any earnings grow free from New Mexico state taxes.
- Qualified withdrawals are exempt from New Mexico state tax.
1. When withdrawals are used for other purposes, the earnings portion of the withdrawal is subject to federal income taxes and any applicable state income tax, as well as an additional 10% federal tax and the "recapture" of all previous New Mexico tax deductions taken for contributions to an account.