While the Obama Administration hatched a plan to make community college free, the White House plotted a change in the tax treatment of savings accounts parents use to pay for their children’s college education.
“During his State of the Union address, President Obama proposed taxing 529 college savings plans,” Alexander Hendrie of Americans for Tax Reform (ATR) writes. “529 tax plans work by allowing families to deposit after tax funds into an account that then accumulates interest.”
“When funds are withdrawn from the account to pay for college they are tax free.” These Education Savings Accounts (ESAs) allow parents to save that what they earned and withdraw what they need in order to make tuition payments, tax free. They are frequently called 529s after the section of the IRS code that regulates them.
The Obama Administration initially praised 529s, then, more recently, began dismissing them. Within the past month, the White House floated a plan to change the tax status of 529s, and then anonymously backed off of the scheme.
ATR has a timeline of the Administration’s contortions on 529s here.
Ryan Ellis of ATR notes that the Government Accountability Office (GAO), a research arm of the U. S. Congress, found that “30 percent of households that own a 529 plan earn less than $100,000 per year. Cross-posting with the other 529 data, that means that about 3.5 million 529 accounts will see tax increases even though those account owners make five figure incomes.”
