College Savings Plans and Expat Tax Planning

College Savings Plans and Expat Tax Planning
Updated on June 8, 2023

When it comes to expat tax planning, there are many considerations to make in order to get your finances situated from a big move overseas. It’s common to think about bank accounts, mortgages and even retirement accounts – but one thing that you may not have considered is how your children’s college savings accounts (also known as 529 plans) will be affected. Here are some things you should be aware of!

What’s a 529 Plan?

A 529 plan is a college savings and tax-planning tool to help finance higher education. When it comes to how they work, after-tax dollars are contributed to the plan, while account growth and income are exempt from federal and state income tax as long as the funds are used for qualified higher education expenses. The account must also be in control of distributions, changes in beneficiary and naming a successor as an owner. For expat tax planning purposes, these plans are subject to federal and state gift and income tax rules, and the constructive ownership of the account cannot be paralleled in most tax systems outside the US.

How Do I Create a 529 Account?

529 plans must be established in a particular US state, and follow the state’s rules and federal rules. Generally, the account holder must have a US residence in order to establish a 529 plan – so it’s recommended to create these accounts before moving overseas. Otherwise, you could have a trustworthy family member establish an account on behalf of you for your children – just remember that the account holder can change the beneficiary or move the account to someone whom you may not have designated. It’s also important to note that there aren’t residency requirements placed on the beneficiary.

What Do I Need to Know About Contributions?

If you contribute less than $14,000 per tax year, gift taxes are not required. Also, you have the option to front-load up to five times that amount using five years of annual gift tax exemption. Any contribution above this amount will be subject to federal gift reporting, as well as a gift tax or reduction in the lifetime exemption. Expat tax planning tip: there may be gift tax considerations on your contributions in some foreign jurisdictions.

How Are Income Taxes Handled When It Comes to 529 Plans?

As long as funds are in the 529 plan, they are not subject to US taxes. However, outside the US, the earnings in the account may be subject to local income or wealth taxes (which would either be on the account holder or beneficiary, depending on how the local tax system operates). If you want to avoid this situation, one option would be to change the account holder to a family member who lives in the US.

How Do Distributions Work?

As long as the principal and earnings from the 529 plan are used for the beneficiary’s qualified education expenses, they will not be taxed in the US. Such qualified expenses include tuition, fees, supplies and books at accredited institutions. There are more than 350 qualified institutions outside the US, too. Just note that 529 plans are based on the US dollar, so if your child attends a non-US school, there may be a currency exchange discrepancy. Here’s a search tool that allows you to see which schools are 529 eligible.

When it comes to expat tax planning, you should be aware that distributions of 529 income (not principal) that aren’t used on qualified expenses will be subject to US and possibly foreign income tax, in addition to a 10% withdrawal penalty in the US. This can apply to either the account holder or the beneficiary, depending on who is benefiting from the withdrawal.

Distributions of income and principal may be subject to income or gift taxes in foreign countries, so it’s a good idea to do your research and even consult with a tax professional for guidance so you can make the best financial decisions.

Need More Info Expat Tax Planning Tips About College Savings Plans and How They Work?

Contact us today! Our team of expat-expert CPAs and IRS Enrolled Agents are here to help you navigate the often-confusing nature of US expat taxes and make filing a more hassle-free process.

Who doesn’t love a tax break? Use our handy calculator to learn what you can save using the FEIE.

Use our simple excel calculator to get an estimate of how the foreign earned income exclusion will save you money. It will make your day!

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