The Qualified Tuition Programs or the “529 College Saving Plans” was one of the biggest remarks that President Obama announce in his State of the Union speech on January 20, 2015. The president proposed to roll back the tax advantages of 529 Plans and then he dropped his proposal.
As it explained by the IRS, 529 Plans are operated by a state or educational institution, with tax advantage and potentially other incentives to make it easier for families to save for college and other post secondary training for a designated beneficiary, such as a child or grandchild. The 529 plan was created by the Congress in 1996 to help Americans save money for valuable goals, similar to health savings account and 401k plans. This program is one of the best college savings programs that are available for a lot of the American families. This plan gained its popularity because of its special tax exemption under the IRS Code Section 529, which holds around $250 billion dollars of savings in 2014 according to the College Savings Plan Network (CSPN).
However, there’s a lot to be said regarding the 529 plan, which may benefit mostly wealthier taxpayers and not lower income families because they generally can’t afford to contribute to these plans.
The President‘s plan was to provide free and affordable education to the majority of the American people, and specifically the middle and low income families. In his State of the Union address, President Obama plan included eliminating some of the tax breaks on 529 Plans.
According to current 529 Plan rules, money invested in a 529 Plan isn’t deductible on federal taxes (however, 34 states and the District of Columbia provide breaks on state taxes.) However, savings grow tax-deferred, and earnings withdrawn to pay for higher education expenses, including tuition, room and board, and books are also not taxed.
Under Obama’s plan, those investment profits would be taxable, even if the money went toward college.
President Obama says he’d use the estimated extra $2 billion in tax revenues to raise the American Opportunity Tax Credit, which is a $2,500 write-off targeted at low- and middle-income families paying tuition bills.
Under massive criticism after his speech, the President was forced to drop his plan to end tax break on 529s. According to the White House, the President will continue to keep an expanded tuition tax credit at the center of his future college access plan.
