New ALEC Report Details State Education Savings Plans Under Federal 529 Expansion
"Nearly 4.7 million education savings plans holding more than $161 billion in assets are in states that have not fully aligned with federal law."
Arlington, VA – The American Legislative Exchange Council (ALEC) today released Building a Better Path to Education: State 529 Laws After the Working Families Tax Cuts, a new report finding that 16 states have not fully aligned their 529 education savings plans with federal law, potentially exposing families to unexpected state taxes and penalties.
“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 B. 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.”
Signed into law on July 4, 2025, the Working Families Tax Cuts doubled the annual limit on qualified K-12 expenses from $10,000 to $20,000 and expanded eligible expenses to include curriculum, instructional materials, tutoring, testing fees, dual-enrollment fees, and educational therapies for students with disabilities.
“Thanks to the Trump Administration’s leadership expanding 529 funds to cover a variety of K-12 educational expenses, families now have a powerful tool to customize their child’s education. Building on this momentum, ALEC’s report offers state leaders a valuable roadmap to put educational decisions back into the hands of families and ensure they can fully maximize their hard-earned savings.” – U.S. Education Assistant Secretary of Elementary and Secondary Education Kirsten Baesler
The report highlights the financial consequences of conflicting state and federal policies. In California, for example, families using 529 funds for federally qualified K-12 expenses may face state income taxes and an additional 2.5% tax penalty.
“Families should not face a state tax penalty simply because they use their education savings for an expense that Congress has already authorized,” said Andrew Handel, report author and Director of ALEC’s Education and Workforce Development Task Force. “Our report provides state policymakers with a roadmap to eliminate these inconsistencies, protect taxpayers, and give parents greater flexibility in meeting their children’s educational needs.”
The ALEC 529 Education Freedom for States Act provides a model policy to ensure consistent treatment of qualified withdrawals and protect families from unexpected state tax penalties. The report also includes a comprehensive state-by-state comparison of 529 tax incentives, allowable K-12 expenses, and statutory provisions.