Michigan has two types of plans to fund higher education expense, both based on Sec. 529 of the Internal Revenue Code. Recent changes to the federal tax code have now expanded certain benefits to include private elementary and secondary schools, including parochial schools. A brief summary of Michigan’s two 529 plans and the related changes to federal tax law follows.
The Michigan Education Trust (“MET”) is a prepaid tuition plan; it does not cover expenses other than undergraduate tuition and mandatory fees. It does not cover graduate schools, elementary, or secondary schools. Although it can be used for out-of-state colleges, it can only be redeemed for full value at public universities in Michigan. If a student attends an out-of-state college or university, the plan may make payment based on average tuition levels at public universities in Michigan. You fund a MET plan by purchasing credits; you can prepay the entire expense of a four-year college education or purchase lesser amounts, i.e. by semester or by credit hours. There is also an option to purchase a community college plan.
Conversely, the Michigan Education Savings Program (“MESP”) is a savings plan to pre-fund college expenses. MESP qualified education expenses are defined more broadly than permissible MET expenses and include not only tuition and mandatory fees, but also computer technology and equipment, room and board, other fees, and books. Funds may be used at a college or other postsecondary institution, including a vocational school. The MESP has no geographical restriction; funds can even be used for foreign studies. There is no age limit on the beneficiary.
Significantly, the federal tax plan signed into law on December 22, 2017 provides that a MESP plan – but not a MET plan – may also be used to pay tuition at a private elementary or secondary school, although these payments are capped at $10,000 per year per beneficiary. There are two tax benefits related to 529 plans, one of which may be affected if you use MESP funds for private elementary or secondary education expenses:
- Monies in an MESP plan grow tax-free and are not subject to taxation upon withdrawal so long as the withdrawals are used for qualified education expenses.
- Contributions to a MET or MESP of up to $5,000 per year by an individual, and up to $10,000 per year by a married couple filing jointly, are deductible on your Michigan income tax return. Caveat: Michigan’s 1963 Constitution prohibits direct government aid to private schools, so contributions to a MESP for private elementary or secondary schools may not be deductible. At this time, Michigan is reviewing the impact of the federal tax change to determine whether it requires changes to state legislation.
Contact your plan provider for more information.