Federal Tax Law Changes
As a result of recent federal tax law changes, the definition of "Qualified Higher Education Expenses" under Section 529 of the Internal Revenue Code has 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 plan 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.
Important notice to New Mexico Taxpayers
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 and the earnings on such contributions may not be subject to New Mexico income tax. In certain circumstances, the amounts deducted may be recaptured in subsequent years.
By letter, the New Mexico Education Trust Board requested the New Mexico Taxation and Revenue Department to rule on the New Mexico tax consequences pertaining to transfers from New Mexico 529 accounts to ABLE accounts and distributions from such 529 accounts to pay tuition expenses for K-12 Schools. The Board recently received an advisory letter in response to its request.
According to the advisory letter, despite the new federal tax law changes for tuition expenses for K-12 Schools, 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, the advisory letter clarifies that amounts 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), will be subject to New Mexico income tax on earnings and distributed amounts previously deducted for New Mexico income tax purposes must be recaptured.
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.