So under the proposal, AOTC would expand from 4 years to 5 and become permanent (currently set to expire in 2017) while the lifetime learning credit would be eliminated.
Grad/professional students would suffer under this proposal if the lifetime learning credit were eliminated.
This proposal is not going to be enacted. So I’m going to keep putting dough into my kids’ 529s. I definitely need all the help I can get trying to pay for 4 years for each of them.
But stepping back from my personal circumstances a bit, I think the 2 years free CC is a very good policy idea. Although I would prefer that it would be implemented on a state-by-state basis rather than by the feds (as has been done in TN and perhaps some other states).
The fact is all of us are WAY WAY overpaying for what we get for our kids at 4 year universities. That model is totally stupid, but until that model is broken we are all basically stuck having to send big dollars to the college military industrial complex.
If 2 years free tuition was rolled out widely, at some point middle class families would adopt the new model of 2 years CC and two years college (often away from home). The expensive 4 year college shake down would end, because middle class families would no longer feel compelled (as they are now) to pay up lest their kids be life disadvantaged.
Private high schools and residential boarding schools can certainly offer some valuable features and experiences. But the fact is that 90% of all kids attend the publicly funded K-12 schools. Because (i) they are free (not really free but publicly funded) and (ii) you’re generally not considered a bad parent if you send your kid to public school.
There’s no particular reason why grades 13 and 14 can’t be provided in a similar way as opposed to how it is done now. I wouldn’t need nearly as much of a 529 stash if I only have to buy half as many years of expensive residential college.
What’s the difference?
True. The Congress will be too busy to repeal the ACA in next two years.
Taxing 529 plans goes against helping the middle class. Hopefully, congress will see that.
The White House has the polling and data to show that the vast majority of 529 money does not come from middle class but from wealthy households. Their calculus, right or wrong, is that AOTC tax credits, which are targeted to the middle class would be a better way of saving for college and its limited to Households of $180,000 or less.
I’m very cynical.
I think any move to make 2 years of CC free for some (remember the promise is for some) will result in jacking up CC tuition rates over all. CC is already affordable for most, and possible with student working plus subsidized student loans .
My observation of any market is that prices will rise to soak up all available money, ergo, the more you subsidize a product, the more the retail price rises.
I dont know why everyone is freaking out over this. 1). It wont be enacted, if for no other reason, the two parties cant seem to agree on anything. 2.) Its not the end of the world if only your earnings our taxed. Most states allow nice tax benefits on 529, so you would still receive your state deduction, whatever that may be. You would just have to pay federal tax on earnings. Also, it not taxing earnings on old contributions, just new. Most of the 529s dont make a ton in earnings, so it really shouldnt drastically alter your tax bill. Honestly, the folks who should be screaming are the custodians of these accounts. Its going to be a nightmare to split out and recordkeep earnings on old and new money. I dont think its fair that I cant put money in a roth IRA, because of our adjusted gross income, but those are the rules. Lets just see how this plays out.
If I understand AOTC correctly, I think the President’s proposal is better for the middle class. Take a simple example, if the basic middle class family saves $40,000 in a 529 account for Junior and the balance of that has grown to $50,000, they’ve gotten a tax benefit from two things (1) the deduction from the state income tax, if your state has such a deduction and (2) the capital gains tax on the gain. For a modest account like this, it would add up to around $3500. I calculated this based on the state tax savings of $2000 ($40k X 5% state tax rate) plus $1500 (15% of long term capital gains tax on $10k in gains). Under the President’s plan, as I understand it, an AOTC tax credit would be available to a middle class family for $2500 per year, up to five years. That’s a simple $12,500 tax credit, so basically up to 3 times the benefit to a middle class family. It also gets rid of the state-to-state variance regarding what rate your state charges for income taxes and whether 529 contributions are deductible. And because it’s targeted to incomes below $180,000, the rich families cannot take advantage of it. And for even lower income families, the tax credit would be refundable up to $1500 per year, i.e., you get it refunded regardless of whether you paid federal income taxes, so that’s $7500 toward college that they would receive. Don’t get me wrong, I love the 529 accounts I opened for my Ds, but I am probably one of those families that is getting an out-size tax benefit from it when I don’t really need it.
I’m doing this based on a limited understanding of AOTC, so I would be happy to receive feedback on whether my calculations are wrong here.
I think this was a trial balloon, and the balloon has failed. I just don’t see support from anyone for taxing the 529s.
Partyof5, the earning would also raise your FAFSA EFC. Could impact the amount of the Pell and the subsidized direct loans.
As others said, this won’t pass Congress.
And to see why the wealthy might fight to keep the 529 accounts, let’s take the example of Daddy Warbucks, who is saving for Annie. Warbucks put away $250,000 for Annie’s education and because he started early, that $250,000 nearly doubled to $450,000 and he’s got $200,000 in capital gains. Warbucks also lives in a high state income tax state (say, 9%) that lets him deduct 529 contributions on an unlimited basis. His tax savings from the 529 account would be as follows: (1) the state tax deduction is worth $22,500 ($250,000 X 9%) and (2) the capital gains tax savings is worth $47,800 (the long term capital gains rate for the wealthy is 20% plus there’s another 3.8% kicker for the superwealthy investor, so Warbucks would pay 23.9% X $200,000). Warbucks would have a tax savings of $70,300. In sum, even though Warbucks saved only roughly 6 times the amount of money as our middle class family above, he would have a tax savings that is a 20X multiple of the middle class family. (I’m probably even underestimating Warbucks’ tax savings because there’s probably also a state capital gains tax.)
Your point is well-taken that the custodians are going to be the ones to lobby to retain 529 accounts’ tax benefits, but not for the reason you say. The acounting and bookkeeping is actually every easy and it’s done today with IRAs that contain both Roth and non-Roth funds. The custodian just segregates those funds and gives an annual statement of how much was contributed in that particular year. It should be up to the account holder to report how much of the income is taxable. I do think the fund companies and custodians will fight for Congress to retain 529 for the simple reason that the more money they have going into them the more revenue they generate.
Please explain how to put away $250,000 into a 529 Plan early, when the limit that can be put in is $14,000 a year?
and could you please redo your calculation taking into account the phase-out of personal exemptions and tax deductions, Alternative Minimum Tax ramifications, and the fact that the 9% state tax rate should be re-stated to take into account the Federal tax implications on that 9% rate, just to name a few?
14,000 x 18 = 252,000
For a single parent AOC is phased out after 80K MAGI. This new initiative is really unfair unless you consider 80K/y family rich.
Ok, maybe you’re right that that’s an incorrect assumption. But as I understand it, the $14,000 is simply the annual gift limit not an actual 529 limit. You can bypass the individual gift limit in many ways, by having both a spouse and yourself giving to the account, so it’s really double or $28,000 for married couples. Also, it’s an individual gift limit, so you can have two 529 accounts for, in Warbucks’ case, Annie and Betty as beneficiaries. He can multiply the number of 529 accounts as many times as he wants. Finally, you can use your liftime gift tax exemption for the gifts in order to give more than $14,000, and it won’t limit your gifts today but may count against your estate.
So yes, you might be right that’s it’s unrealistic to hypothesize a $250,000 529 in the situation I described, but not unrealistic to consider other situations where total assets in 529 accounts might exceed that. But what do I know?
I would be shocked if there are families that have 529s and are Pell Eligible, so I wouldnt worry about that. I also dont think it would affect loans significantly. Yes, it might be the difference between a subsidized and unsubsidized loan, but really if your family has signifant 529 assets, I doubt you are eligible for subsidized loans anyway.
As I said, Congress hasnt agreed on much on anything over the last 8 years, I dont expect this to be any different.
I believe the numbers reported are skewed when it is mentioned that 529s support the wealthy. What was the person’s income when they started the 529. I would think the majority of people who use a 529 start when their children are young and they are at the low end of their income potential. By the time 20 years comes around and they use the 529, they are closer to the maximum earning potential and are now considered wealthy. Most people income is not static throughout their lifetime.
Example when my kids were born, I made 35K and wife stayed home. When kids were older, wife went back to work and we easily doubled income. Now 15 years later, depending on which jobs we decide to do for the year, we could easily hit the 200K income level and be considered wealthy for income tax purposes.
Is the government counting me wealthy for reporting purposes when I withdraw the money even though I was wasn’t wealthy for the majority of time I contributed to the 529. I need to see more analysis of the government’s numbers and their methodology.
It is sad to see how quickly people squabble when a tax policy to help the middle class is also used by the wealthy. I guess that whole “equality” thing, really doesn’t apply anymore.
Yes, singles get screwed on the AOTC. A single making $90,001 gets no AOTC, no matter if there is 1 or 6 college kids, and yet college costs the same as if that child were in a two parent household.
Basically, there is no AOTC for singles. You’d have to hit the sweat spot of about $65-70k in earnings to even owe tax to take full advantage of the credit. If you make under $50k, it’s unlikely you’d have $2500 in tax owed (if you are contributing to an IRA or 401k, taking the very few other credits allowed). If you have more than one child in college, you aren’t going to get the full $5000/7500 AOTC because you won’t owe that in taxes. You’d probably get the $1000 in refundable amounts, but you’ve paid $4000 in college expenses to get that.
A single who makes $100k can benefit a lot more from the 529/prepaid tuition accounts.