OB3: Changes to 529 Plans

This was a welcome change, but left many taxpayers wanting more. For the first time since TCJA, we see an expansion of the definition of elementary and secondary expenses to include, not only tuition, but also:

• Curriculum and curriculum materials
• Books and instructional materials
• Online educational materials
• Tuition for tutoring, provided the tutor is unrelated to the student and is either a licensed teacher, taught at an eligible educational institution, or is a subject matter expert
• Fees for nationally standardized tests, advanced placement exams, or exams related to college or university admission
• Fees for dual enrollment at higher education institutions
• Educational therapies for students with disabilities

While previously it may have been rare for a student in public school to be able to take tax-free 529 plan distributions due to the lack of tuition, many of these students will now qualify to pull some funds out for various other expenditures. It appears that Congress is supporting both struggling and high-achieving students with this expanded list.

The expanded definition of qualified elementary and secondary school expenditures only applies to distributions taken after July 4, 2025. Interestingly enough, the application of this definition has nothing to do with the date on which the expenditure was paid or incurred. Proposed regulations by the IRS generally require the taxpayer to take distributions for the related expenditure within the tax year the expense is paid or by March 31st of the following year. Therefore, this definition may apply to expenses paid earlier than July 4, 2025, so long as the distribution was taken after July 4th and the amounts were paid in 2025. Please note that there are areas within 529 plans that could be considered the “wild west,” and a more aggressive position may be applied that does not follow the IRS position on this issue.

Expenditures for Postsecondary Credentialing

This is a very exciting, brand-new qualifying 529 plan expenditure. OB3 added a new qualified expenditure for postsecondary credentialing. In order to explain why this is such a massive change, it’s essential first to understand the flow of the new law. Feel free to skip to the TLDR to understand the jump that can be made.

Expenditures for postsecondary credentialing include:

• Tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary in a recognized postsecondary credentialing program, or any other expense incurred in connection with enrollment in or attendance at a recognized postsecondary credential program if such expense would, if incurred in connection with enrollment or attendance at an eligible institution be covered under the normal definition of qualified higher education expenses.
• Fees for testing if such testing is required to obtain or maintain a recognized postsecondary credential, and
• Fees for continuing education if such education is required to maintain a recognized postsecondary credential

Recognized postsecondary credential program means any program to obtain a recognized postsecondary credential if:

• Such a program is included on a State list for the Workforce Innovation and Opportunity Act,
• Such a program is listed in the public directory of the Web Enabled Approval Management System (WEAMS) of the Veterans Benefits Administration,
• An examination (developed or administered by an organization widely recognized as providing reputable credentials in the occupation) is required to obtain or maintain such credential, and such organization recognizes such program as providing training or education that prepares individuals to take such examination, or
• Such a program is identified by the Secretary of the Treasury as being a reputable program for obtaining a recognized postsecondary credential.

A recognized postsecondary credential means:

• Any postsecondary employment credential that is industry-recognized and is:
• Any postsecondary employment credential issued by a program that is accredited by the Institute for Credentialing Excellence, the National Commission on Certifying Agencies, or the American National Standards Institute
• Any postsecondary employment credential that is included in the Credentialing Opportunities On-Line directory maintained by the DoD or any branch of the Armed Forces
• Any postsecondary employment credential identified for purposes of this clause by the Secretary as being industry recognized
• Any certificate of completion of an apprenticeship that is registered and certified with the Secretary of Labor
• Any occupational or professional license issued or recognized by a State or the Federal Government (and any certification that satisfies a condition for obtaining such a license), and
• Any recognized postsecondary credential as defined in the Workforce Innovation and Opportunity Act

TLDR for Postsecondary Credentialing

This change may make it possible for tax professionals with a professional designation to receive qualified tax-free 529 plan distributions for:

• Fees to take the Enrolled Agent, CPA, CTEC, or other tax designation exam required by a state
• Continuing education for tax professionals with one of these designations to the extent required to maintain the license

Does this change make Brass Tax continuing education courses 529 eligible expenditures? It may depend on the designation of the tax professional and how many continuing education hours they need to obtain in a given year.

As with the change to elementary and secondary educational expenditures, the definition change for postsecondary credentialing is only available for 529 distributions taken after July 4, 2025. See the discussion above regarding the timing of when an expense was paid.

Conclusion

These expansions to 529 plans are going to allow more taxpayers than ever to qualify to take tax-free distributions from 529 accounts. It’s time for a radical rethink in how we view these plans. We’ll cover these 529 plan changes and more in our upcoming Update for 2025 Returns seminar in December and January, in-person at over a dozen cities in California, plus Reno and Vegas. We’ll see you there!