ALEC Report Urges States to Align 529 Plan Rules

The American Legislative Exchange Council released a report Wednesday stating that families in 16 U.S. states face state taxes and penalties when using 529 education savings plans for K-12 expenses approved under federal law. The report, titled "Building a Better Path to Education: State 529 Laws After the Working Families Tax Cuts," identifies 11 states—including California, New York, and Illinois—that do not allow 529 funds for any K-12 expenses under state rules. Other states, such as Arkansas and Montana, impose annual caps on tuition.

This misalignment follows the 2025 Working Families Tax Cuts, part of the One Big Beautiful Bill Act, which doubled the annual limit for qualified K-12 expenses to $20,000 and expanded eligible costs to include instructional materials and therapies for students with disabilities. ALEC recommends that states align their statutes and tax rules with federal definitions to prevent families from facing penalties, such as a potential 2.5% tax penalty in California.

ALEC leadership argues that state lawmakers should remove these barriers to ensure families can utilize educational choices available to them. The organization maintains that parents should have the freedom to use education savings to meet their children's needs without facing state tax penalties for expenses already authorized by Congress.