Obama Scraps Plan to Tax 529s
That was a close one, said John D. McKinnon in The Wall Street Journal. President Obama has abandoned a controversial plan to end a key tax break on state 529 college saving plans after facing bipartisan criticism that branded his proposal an attack on the middle class. The policy change could have made saving for college even harder, depending on your tax bracket, said Kara Brandeisky in Time.com. Under current law, money invested in a 529 isn’t deductible from federal taxes, but the savings grow tax deferred, and students can withdraw money, tax free, “to pay for higher education expenses, including tuition, room and board, and books.” Under Obama’s dropped plan, 529 investment returns would have been taxed as ordinary income, even if they were used to pay for college.
It’s true: Obama wanted to tax some college savers, said Jordan Weissmann in Slate.com. “But, by and large, they’re wealthy college savers.” Government statistics show that nearly half of all families with 529s earn more than $150,000 per year, putting them in the top 10 percent of U.S. households. Do America’s richest families really need a tax break so they can “send their kid to the most expensive possible school?” Obama didn’t think so. That’s why his plan would have funneled the extra $2 billion raised through taxing 529 gains to expand other educational tax breaks, like the American Opportunity Tax Credit, which is available only to families earning a maximum of $180,000 a year. The middle class would have made out “just fine in this deal,” but now the White House will have to return to the drawing board as it pushes for bigger tax credits and better breaks for lower- and middleincome families.
Obama’s plan was dead on arrival, said Megan McArdle in BloombergView.com, but that doesn’t mean we’re out of the woods. The fact that we are discussing taxing educational savings proves that the government is “scraping the bottom of the barrel” to find revenue. What’s next? Taxing our IRAs? Don’t laugh—compared with raising ordinary income taxes, gouging retirement savings is more “politically palpable.” But the last thing this country can afford to do is “discourage saving, given how little of it Americans do.” And until your Roth IRA ends up on the government’s chopping block, “you have to save your money somewhere, so you might as well put it in a tax-advantaged account.” Roth IRAs offer “real benefits,” too. Depositing post-tax dollars means “you have to save more and consume less now,” reinforcing “good fiscal discipline.” Plus, any future attempt to tax the savings is not likely to be retroactive, meaning the money you put in now will still be safe later.
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