"ACE Act" Expands 529 Savings Plans, Ties Tax-Exempt Bonds to School Choice: Homeschooling and Private School Costs Now Covered

The "Achieving Choice in Education Act," or "ACE Act," is shaking up how families can save for education and potentially influencing state education policies. This bill significantly expands the use of 529 savings accounts, traditionally used for college, to cover a wider range of K-12 expenses, including homeschooling. It also ties a state's ability to issue tax-exempt bonds to its implementation of school choice programs.

529 Savings Get a Boost

The ACE Act broadens what counts as a "qualified expense" for 529 plans. Previously limited to college costs and some K-12 tuition, now you can use 529 funds for:

• Homeschooling expenses: Curriculum, books, online resources, and even qualified tutoring (SEC. 2).
• Private school expenses: Tuition, books, and supplies (SEC. 2).
• Other educational costs: Standardized testing fees, AP exams, dual enrollment, and educational therapies for students with disabilities (SEC. 2).

Think of a family with a child needing specialized tutoring or a family choosing to homeschool. They can now tap into their 529 savings to cover these costs, potentially reducing their out-of-pocket expenses. Starting in 2027, the bill also doubles the annual distribution limit for K-12 expenses from $10,000 to $20,000 (SEC. 3). The gift tax exclusion for 529 plan contributions will also get a boost, allowing for larger contributions without triggering gift taxes (SEC. 4).

School Choice and State Bonds: A New Link

Here's where things get interesting. The ACE Act links a state's ability to issue tax-exempt bonds to its adoption of "school choice" programs (SEC. 5). To fully benefit from tax-exempt bond status, a state must be designated a "minimum school choice state." This means:

• At least 40% of school-age children (defined as anyone under 18 residing in the state) must be eligible for a school choice program (SEC. 5).
• The state must spend at least 60% as much on each child eligible for school choice as it does on children not eligible (SEC. 5).

If a state meets an even higher threshold – 65% of children eligible and 75% spending parity – then 100% of the interest on its bonds is tax-exempt. Otherwise, only 50% is tax-exempt (SEC. 5). School choice programs, in this context, include tax credit scholarships, vouchers, education savings accounts, and refundable tax credits for private education (SEC. 5).

Real-World Implications and Potential Challenges

This bill could significantly impact families and states. Families with children in private schools or who homeschool could see substantial tax benefits. However, families who can't afford to contribute much to 529 plans will not gain many benefits. Increased flexibility in 529 usage might incentivize more families to explore alternatives to traditional public schools. The link between tax-exempt bonds and school choice could pressure states to expand or create such programs to maintain full access to tax-exempt financing. This could be a game-changer for state budgets and education policy debates.

The bill defines "specified school-age child" broadly as anyone under 18 in the state (SEC. 5). This broad definition, combined with the spending parity requirements, could create complex accounting and compliance challenges for states. It's also unclear how the IRS will monitor and enforce the expanded use of 529 funds for various homeschooling and educational expenses, opening the door to potential misuse. While the bill aims to increase educational options, the potential for diverting funds from public schools is a real concern.