529 education savings plans are no longer limited to covering qualified higher education expenses. Beginning in 2026, 529 account owners may withdraw up to $20,000 per beneficiary per year to pay K–12 qualified education expenses at eligible elementary or secondary schools,
including public, private and religious institutions. For Michigan families and donors who have funded or are considering contributing to the Michigan Education Savings Program (MESP), MI 529 Advisor Plan (MAP) or Michigan Education Trust (MET), this expanded use raises important questions about the state and federal tax consequences.
Federal Tax Treatment
At the federal level, contributions to a 529 plan are made with after-tax dollars and are not deductible on your federal income tax return. However, the earnings within the account grow tax free, and distributions used for K–12 qualified education expenses up to $20,000 per year per beneficiary are excluded from federal gross income.
"Before directing Michigan 529 plan assets toward elementary or secondary school tuition, donors and their advisors should carefully model the state tax consequences.”
This means if a donor contributes to a Michigan 529 plan and later uses those funds for a child’s or grandchild’s private or parochial school tuition, the investment growth on those contributions will not be subject to federal income tax, provided the distribution does not exceed the annual $20,000 limit. Amounts withdrawn in excess of that threshold for K–12 qualified education expenses would be treated as nonqualified distributions, subjecting the earnings portion to ordinary income tax and
a 10% penalty.
Michigan Does Not Conform to Federal K–12 Treatment
Michigan’s treatment of 529 plan contributions and distributions for K–12 qualified education expenses requires caution. Michigan offers a state income tax deduction for contributions to the MESP, MAP and MET. For 2026, the maximum annual deduction is $5,000 per taxpayer or $10,000 for married couples filing jointly. This deduction reduces Michigan taxable income in the year of contribution and is one of the primary incentives for using a Michigan-based plan.
However, Michigan does not conform to the federal provision allowing tax-free 529 distributions for K–12 qualified education expenses. Under Michigan law, a distribution used to pay elementary or secondary school tuition is treated as a nonqualified withdrawal for state income tax purposes. This means the earnings portion of any such distribution is subject to Michigan income tax at the flat rate of 4.25 percent.
Additionally, and critically, if a donor claims the Michigan income tax deduction for contributions and then uses those funds for K–12 qualified education expenses within the same tax year or shortly thereafter, the previously claimed deduction may need to be “recaptured.” In effect, the donor would be required to add back the deducted contribution amount to Michigan taxable income in the year of the nonqualified distribution. This recapture provision can significantly diminish or eliminate the state tax benefit that motivated the original contribution.
The ability to use 529 plan funds for K–12 tuition is a welcome expansion of flexibility at the federal level, but Michigan’s nonconformity creates a potential tax trap for unwary donors. Before directing Michigan 529 plan assets toward elementary or secondary school tuition, donors and their advisors should carefully model the state tax consequences and evaluate whether alternative savings or gifting strategies may be more appropriate.
Reach out to our Trusts and Estates group with any questions about how these rules may affect your family’s education funding strategy.
