Blog · 16 October 2026

529 Plans for K-12 and Homeschool Costs: The $20,000 Limit, OBBBA’s New Expenses and State Recapture Traps for CPA Firms

By Keshav Bansal, CA

The 529 K-12 rules just changed, and homeschool families are asking what it means for them. The One Big Beautiful Bill Act (P.L. 119-21, §70413) raised the federal K-12 limit from $10,000 to $20,000 per beneficiary for tax years beginning after December 31, 2025. It also widened the list of K-12 expenses for distributions made after July 4, 2025. An Every Homeschool guide (updated October 8, 2026) points out the catch: the statute still ties every one of those expenses to a school and never uses the word “homeschool.” For US CPA firms, every K-12 withdrawal now needs two answers: does it qualify federally, and does the client’s state agree?

529 basics your clients may have forgotten

A 529 plan (the Code calls it a qualified tuition program) is funded with after-tax dollars. The IRS’s 529 plans Q&A is direct: “Contributions to a 529 plan, however, are not deductible” for federal purposes. Earnings grow without current tax. Per IRS Publication 970, no tax is due on a distribution unless it is larger than the beneficiary’s adjusted qualified education expenses (AQEE).

• Form 1099-Q splits each gross distribution (box 1) into earnings (box 2) and basis, or return of investment (box 3).
• When distributions exceed AQEE, only the earnings portion of the excess goes into gross income. Under §529(c)(3), it is taxed in the manner provided under §72.
• Pub. 970 says the taxable amount generally also carries a 10% additional tax. §529(c)(6) applies the Coverdell rule in §530(d)(4) for this.

What §70413 changed for K-12

Before OBBBA, §529(c)(7) covered only tuition at an elementary or secondary public, private or religious school. As amended, it now lists eight categories “in connection with enrollment or attendance at, or for students enrolled at or attending, an elementary or secondary public, private, or religious school” (26 U.S.C. §529(c)(7)):

• Tuition.
• Curriculum and curricular materials.
• Books or other instructional materials.
• Online educational materials.
• Tuition for tutoring or educational classes outside of the home, including at a tutoring facility. The tutor or instructor must not be related to the student, and must be licensed as a teacher in any state, have taught at an eligible educational institution, or be a subject matter expert in the relevant subject.
• Fees for standardized achievement tests, AP exams and college-admission exams.
• Fees for dual enrollment in an institution of higher education.
• Educational therapies for students with disabilities provided by a licensed or accredited practitioner or provider.

The timing is split. Under §70413(a)(2), the expanded list applies to distributions made after July 4, 2025, the date of enactment. Under §70413(b)(2), the higher dollar cap applies to taxable years beginning after December 31, 2025. So for 2025, the new categories were available but capped at $10,000. That is why the 2025 Publication 970 (page last reviewed April 30, 2026) still shows the $10,000 figure.

How the $20,000 limit works

The limit in §529(e)(3)(A) applies per beneficiary, not per account or per contributor. Cash distributions “from all qualified tuition programs” for a beneficiary during a taxable year may, “in the aggregate,” include no more than $20,000 of K-12 expenses. A grandparent’s plan and a parent’s plan for the same child share one cap, and K-12 spending above it is not a qualified expense.

Front-loading is a gift-tax question: §529(c)(2)(B) lets a donor elect to spread contributions above the annual exclusion over five years. Our gift tax annual exclusion 2026 article covers the $19,000 exclusion and Form 709 reporting.

The homeschool question is unsettled

Nothing in §529 mentions home education. Publication 970 defines an eligible elementary or secondary school as “any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law.” Every Homeschool reports that homeschool language proposed in the 2017 tax bill was struck under the Senate’s Byrd Rule, while K-12 tuition stayed in.

The guide sets out the argument that, in states that treat a home school as a private school (it cites North Carolina and California’s private school affidavit), expenses may be “in connection with” a private school. It also quotes commentary that this theory “has not been tested in IRS enforcement actions.” Either way, tutoring must happen outside the home with an unrelated tutor, so a parent can’t pay themselves as the tutor.

Our reading: don’t tell a client that homeschool curriculum is definitely a qualified 529 expense. Until the IRS addresses it, write the position down, keep receipts and tutor credentials, and size the downside. The downside is the earnings portion taxed plus the 10% additional tax, and possibly state recapture.

State treatment: tax-free federally, taxable at home

Federal qualification does not settle the state result. Three examples from official state plan and revenue sources:

• California. The ScholarShare 529 FAQ says K-12 withdrawals are free from federal tax. For California taxpayers, though, “any earnings portion of these withdrawals are subject to state income tax and an additional 2.5% California tax.”
• Nebraska. NEST 529 says Nebraska law does not treat K-12 expenses as Nebraska qualified expenses. A withdrawal for them may recapture a prior Nebraska deduction, and the earnings are subject to Nebraska income tax. Beginning January 1, 2029, K-12 expenses “are set to be treated as Nebraska Qualified Expenses.”
• Indiana. Indiana DOR Income Tax Information Bulletin #98 (January 2026) recognizes K-12 tuition up to $20,000 starting in 2026, but only at an in-state school. It treats non-tuition K-12 expenses as nonqualified withdrawals for recapture of the Indiana 529 credit.

Every Homeschool’s table lists more states where K-12 withdrawals can be taxed or recaptured. Confirm against each state’s current plan disclosure. As Indiana shows, tuition conformity and conformity on the new categories are separate questions.

Checklist for US CPA firms (TY2026)

• Gather every Form 1099-Q for the beneficiary and add up all K-12 distributions across plans against the single $20,000 cap.
• Match each distribution to a category in §529(c)(7). Keep invoices, the school connection, tutor credentials and provider licenses.
• For homeschool clients, record your position on the school-connection question and how the state classifies the home school. Don’t promise qualified treatment.
• Check state add-back, recapture and any state additional tax before the withdrawal.
• Coordinate benefits. Pub. 970 requires expenses used for an AOTC or Lifetime Learning Credit claim to be subtracted before figuring the 529’s tax-free amount, and the separate §25F Education Freedom Tax Credit scholarship program is not a 529 benefit.

Where Tax Brew fits

Tax Brew provides bookkeeping, cleanup and tax prep support for US CPA firms, including a first 20 hours free for qualifying engagements. Source documents arrive organized, and your team keeps the advice and sign-off. See our services, or email info@taxbrewglobal.com.

Sources: 26 U.S.C. §529 (Cornell LII), incl. amendment and effective-date notes; P.L. 119-21 §70413 (139 Stat. 218–219); IRS Publication 970 (2025); IRS — 529 plans: Questions and answers; Every Homeschool — Using a 529 for Homeschooling (updated Oct. 8, 2026); ScholarShare 529 FAQ (California); NEST 529 — Use of funds (Nebraska); Indiana DOR Income Tax Information Bulletin #98. General information, not tax or legal advice.