You can use a 529 plan to pay for private school in California, including K-12 tuition, but the state will tax you for it. California did not adopt the federal rule that makes K-12 tuition a qualified 529 expense, so the earnings portion of your withdrawal is subject to California income tax plus an additional 2.5 percent state tax, even when the same withdrawal owes nothing to the IRS.
What It Costs You in California Taxes
Two state-level costs land on the earnings portion of a K-12 withdrawal. The earnings are added to your taxable income and taxed at your regular California marginal rate, which runs up to 12.3 percent, or 13.3 percent on taxable income above $1 million.1Franchise Tax Board. 2025 California Tax Rate Schedules On top of that, California imposes an additional 2.5 percent tax on the same earnings.2ScholarShare 529. How Our 529 Plan Works That 2.5 percent is California’s version of the 10 percent federal penalty on non-qualified distributions, set at a lower rate.
Your original contributions come back untaxed no matter how you spend the money, because California does not offer a state deduction for 529 contributions in the first place. Only the investment growth is taxed. For a family in a higher bracket with a well-grown account, that combined tax can take a real bite out of the earnings used to cover private school tuition.
Why California Taxes a Federally Qualified Withdrawal
The Tax Cuts and Jobs Act of 2017 expanded federal 529 rules to cover K-12 tuition, but California never followed. Revenue and Taxation Code Section 17140.3 says the TCJA amendments to Section 529 covering K-12 expenses “shall not apply” for California tax purposes.3California Legislative Information. California Revenue and Taxation Code RTC 17140.3 The Franchise Tax Board’s instructions for Form 3805P confirm the gap: state law conforms to the Internal Revenue Code as of January 1, 2015, with selective updates, and the K-12 provision is not one of them.4Franchise Tax Board. 2024 Instructions for Form FTB 3805P – Additional Taxes on Qualified Plans California still recognizes only higher education costs, plus a few later federal additions like apprenticeship programs and student loan payments, as qualified distributions.
A legislative fix has been proposed. Assembly Bill 2444, introduced in February 2026, would amend Sections 17140 and 17140.3 to move California closer to the federal treatment of 529 distributions.5LegiScan. California 2025 AB2444 Introduced As of early 2026, the bill is in the early stages of the legislative process and has not been enacted.
How Much of the Withdrawal Is Actually Taxed
Every 529 withdrawal is a mix of two components: the contributions you put in (your basis) and the investment earnings that accumulated. The split is calculated pro-rata based on the account’s total value at the time of the distribution, and only the earnings portion is subject to California income tax and the 2.5 percent additional tax.
If your contributions make up 70 percent of the account’s current value, then 70 percent of the withdrawal is a tax-free return of basis, and 30 percent is taxable earnings. You don’t get to choose which dollars come out first. The longer the account has grown, the larger the earnings share of each withdrawal, and the larger the California tax bill on any K-12 use.
Your plan administrator reports the breakdown on IRS Form 1099-Q, which should arrive by early February of the year after the distribution.6Internal Revenue Service. About Form 1099-Q – Payments from Qualified Education Programs The form lists the total distribution, the earnings portion, and your basis. Those are the numbers you use on your California return.
What the Federal Side Looks Like
Federally, a K-12 withdrawal is clean as long as you stay within the cap. You can withdraw up to $10,000 per beneficiary per year for K-12 education without owing federal income tax or the 10 percent federal additional tax on earnings.7Internal Revenue Service. 529 Plans: Questions and Answers The $10,000 limit is an aggregate per beneficiary, so if a child has more than one 529 account, the combined K-12 withdrawals from all of them cannot exceed $10,000 in a single tax year.8Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs Go above $10,000 in a year and the excess becomes a non-qualified distribution federally too, with regular federal income tax and the 10 percent additional tax on the earnings portion of that excess.
The practical point for California families: the state tax cost is the whole tax cost. There is no federal bill to add on top as long as you keep the K-12 withdrawals within the federal cap.
How to Take the Withdrawal and Report It
California’s official plan, ScholarShare 529, processes distribution requests through its online portal or by mail, with electronic requests typically transferring funds within a few business days.2ScholarShare 529. How Our 529 Plan Works You specify the dollar amount and the payee, which can be the school, the beneficiary, or you as the account owner. Paying the school directly keeps the paper trail simple.
At tax time, you report the taxable earnings as an income adjustment on your California Form 540 and calculate the 2.5 percent additional tax on Form FTB 3805P.4Franchise Tax Board. 2024 Instructions for Form FTB 3805P – Additional Taxes on Qualified Plans Keep the 1099-Q and your tuition receipts with your tax records. Skipping the adjustment on your California return can trigger follow-up notices from the Franchise Tax Board, since the state sees the 1099-Q but not the K-12 context that makes it federally qualified.
One More California Mismatch to Know About
If you are thinking about repurposing leftover 529 funds down the road, California applies the same nonconformity to the newer federal 529-to-Roth-IRA rollover. Under the SECURE 2.0 Act, you can transfer money from a 529 account to the beneficiary’s Roth IRA if the account has been open more than 15 years, with an annual cap tied to the Roth contribution limit ($7,500 for 2026) and a $35,000 lifetime cap.9Internal Revenue Service. Publication 590-A (2025) – Contributions to Individual Retirement Arrangements10Internal Revenue Service. Retirement Topics – IRA Contribution Limits Federally the qualifying rollover is tax-free and penalty-free. California treats it as a taxable distribution. The Franchise Tax Board’s instructions state that a 529-to-Roth-IRA rollover is “includible in California taxable income and subject to an additional tax of 2½%.”4Franchise Tax Board. 2024 Instructions for Form FTB 3805P – Additional Taxes on Qualified Plans The same state tax picture that applies to K-12 withdrawals applies here.