President Trump’s 2025 Working Families Tax Cuts, part of the One Big Beautiful Bill Act, doubled the annual limit for qualified K‑12 expenses in 529 education savings plans from $10,000 to $20,000. The change also broadened eligible costs to include instructional materials and educational therapies for students with disabilities, giving families greater flexibility to use their hard‑earned savings for their children’s education.
State laws lag behind federal expansion
A recent report from the American Legislative Exchange Council (ALEC) titled “Building a Better Path to Education: State 529 Laws After the Working Families Tax Cuts” finds that 16 states have not fully aligned their statutes with the expanded federal rules. In those states, families could still be subject to state income taxes and penalties when they use 529 funds for K‑12 expenses that are permissible under federal law.
The report lists the states that currently restrict K‑12 use of 529 plans. Eleven states—California, Colorado, Delaware, Hawaii, Illinois, Michigan, Minnesota, Nebraska, New York, Oregon and Vermont—do not allow any K‑12 expenses under their state rules. Arkansas, Kentucky and Louisiana permit K‑12 tuition but cap the benefit at $10,000 per year. Indiana and Montana allow up to $20,000 for tuition but do not cover the broader range of expenses authorized by the federal law.
Impact on families
As of the end of 2025, 529 plans held 4.7 million accounts nationwide, with $161.3 billion in assets under management. For families in the states listed above, the mismatch could mean unexpected state tax liabilities or a 2.5% penalty, as illustrated by California’s potential additional tax on K‑12 withdrawals that meet federal criteria but not state criteria.
“Parents should have the freedom to use their hard‑earned education savings in ways that best meet their children’s needs,” said ALEC CEO Lisa Nelson. “Congress has expanded the opportunities available to families through 529 savings plans, but too many states continue to impose burdensome restrictions. State lawmakers have an opportunity to remove these barriers and ensure families can take full advantage of the educational choices available to them.”
Why alignment matters
The federal expansion was designed to help families manage the rising cost of education, which now sits alongside a national student‑loan debt total of $1.9 trillion. By allowing a broader set of qualified expenses, the Working Families Tax Cuts aim to reduce reliance on high‑interest loans and give parents more control over their children’s educational pathways.
Andrew Handel, director of ALEC’s Education and Workforce Development Task Force and author of the report, emphasized that “families should not face a state tax penalty simply because they use their education savings for an expense that Congress has already authorized.” He called on state legislators to revise statutes, tax codes, and program guidance to match the full federal definition of qualified expenses.
What’s next for state policymakers?
The ALEC report recommends that each of the 16 states review and amend their 529 statutes to eliminate the tax and penalty gaps. Aligning state rules with federal law would protect families from unexpected costs and reinforce the intent of the Trump administration’s tax reforms.
State legislators who act quickly can position their jurisdictions as supportive of family financial security and educational choice—core values championed by the Trump administration and embraced by many faith‑centered, family‑focused communities across the country.
Original reporting: KTBS 3 (Shreveport) — read the source article.
