President Obama has changed his mind about effectively ending the tax break tied to a very popular college savings program, known as 529s, after widespread public and political blowback.
Obama had proposed raising $1 billion over 10 years by taxing capital gains taken from 529 account withdrawals. White House officials cited surveys showing that 70 percent of the funds in 529 accounts are held by families earning more than $200,000 per year. The conclusion was that mostly higher-income families benefit most from the current 529 tax exemption.
The White House intention was to take the money derived from taxes on 529 capital gains to make permanent the American Opportunity Tax Credit, which provides up to $2,500 per year for families with incomes up to $180,000.
But the president faced mounting and vigorous opposition to taxing 529 capital gains from parents and from lawmakers of both parties
House Speaker John Boehner, R-Ohio, had demanded that the proposal be withdrawn from the president’s budget, due out Monday.
“Given it has become such a distraction, we’re not going to ask Congress to pass the 529 provision so that they can instead focus on delivering a larger package of education tax relief that has bipartisan support, as well as the president’s broader package of tax relief for child care and working families,” a White House official said.
Of the estimated seven million existing 529 plans, about 80 percent of the tax benefits go to households with income above $150,000, supporters of the Obama proposal contend. About 70 percent go to households with incomes over $200,000. These are the household that can contribute $14,000 a year or more without worrying about reaching federal gift tax limits. Investment gains can then be used for education expenses without a capital-gains tax.
However, there is disagreement on the make-up of 529 account holders. According to the College Savings Foundation, a consortium of financial institutions that support 529s, nearly 10 percent of 529 households have incomes below $50,000, and more than 70 percent of the total number of accounts are owned by households with incomes below $150,000.
Translation: It’s not just the rich reaping the benefits of the current 529 tax status.
A report from the Government Accountability Office in 2012 said that that a family with income of $100,000 could expect about $561 in benefits from investment gains that would go untaxed in a 529 account. For a family with income above $150,000, the tax benefit was $3,132.