ACE Act Doubles K-12 Tax-Free Savings and Ties State Bond Benefits to New School Choice Requirements

The Achieving Choice in Education (ACE) Act proposes a major overhaul of how families pay for K-12 education and how states qualify for federal tax breaks. Under this bill, the annual limit for tax-free withdrawals from 529 savings accounts for elementary and secondary school expenses would jump from $10,000 to $20,000 per student starting in 2025. It also broadens what counts as a 'qualified expense' to include homeschooling costs, private tutoring from licensed teachers or subject matter experts, and educational therapies for students with disabilities. Essentially, it turns the 529 plan—originally designed for college—into a high-powered tool for K-12 private and home education.

More Than Just Tuition

This bill goes beyond just covering private school tuition. It allows families to use 529 funds for curriculum materials, online educational tools, and even AP exam fees (Section 2). For a family homeschooling their child, this means tax-free dollars could now pay for a math curriculum or a specialized speech therapist. However, the bill is somewhat vague on what qualifies a 'subject matter expert' for tutoring, which could lead to some creative interpretations of who gets paid. Additionally, the bill introduces a new gift tax exclusion (Section 4), meaning grandparents or friends can contribute to a child’s 529 plan without those funds counting toward their standard annual gift tax limit, making it easier for wealthy families to move larger sums of money into these tax-advantaged accounts.

The Bond Market Ultimatum

Perhaps the most aggressive part of the bill is how it handles state and local government bonds. Currently, the interest on these bonds is usually tax-exempt, making them a cheap way for cities to fund roads or bridges. The ACE Act changes the rules: after enactment, interest on these bonds only stays tax-exempt if the state implements specific 'school choice' programs like vouchers or tax-credit scholarships (Section 5). To get the full tax break, a state must ensure at least 65% of its children are eligible for these programs and spend at least 75% as much on 'choice' students as they do on traditional public school students. If a state doesn't meet these benchmarks, bondholders might only be able to shield 50% of their interest from taxes—or nothing at all.

Real-World Ripples

For a parent already using a 529 plan, this bill offers a significant financial boost and more flexibility in how they educate their kids. But for the average taxpayer in a state that chooses not to adopt these school choice laws, the impact could be felt at the local level. If a state loses its tax-exempt bond status, it becomes more expensive for that state to borrow money for infrastructure. This could lead to higher local taxes or delayed projects. Furthermore, while families with the means to save in a 529 plan see a clear win, there is a risk that public school systems could see a shift in resources and enrollment, potentially leaving those who rely solely on traditional public education with fewer resources as funding follows students to private or home settings.