College Savings Plans: Obama Drops Proposal To Tax 529 Accounts

U.S. President Barack Obama dropped a proposal Tuesday that would cut tax breaks for college-savings accounts, after his plan met widespread opposition from parents and lawmakers, according to several news outlets. Obama’s proposed tax reforms are aimed at increasing income for lower and middle-class households, but members from both parties said gutting the so-called 529 plans would actually hurt the middle class.

“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 told the New York Times late Tuesday.

Obama administration officials proposed to end families’ ability to remove investment earnings from a 529 savings account tax-free, because the plans are more advantageous to wealthy households.

House Speaker John Boehner urged the president to drop his proposal Tuesday and keep the existing 529 plans intact, arguing that the new plan could inadvertently hurt millions of Americans trying to pay for college. “529 plans help middle-class families save for college, but now the president wants to tax those plans,” Boehner told the Times.

The reforms would begin taxing withdrawals from 529 accounts, with the money identified as income in financial aid calculations. Obama hoped it would make permanent the American Opportunity Tax Credit, which provides up to $2,500 a year in tax relief for families earning up to $180,000, according to the Internal Revenue Service.

House Minority Leader Nancy Pelosi encouraged Obama and senior White House officials to withdraw the plan while on board Air Force One, as the president flew from India to Saudi Arabia, NPR reported.

Obama’s proposed changes highlighted an ongoing debate over the definition of the middle class. “Many people who fall within the lower echelon of the middle class were among the people the president proposed to tax,” David Lillard, the state treasurer of Tennessee and president of the National Association of State Treasurers, told the Times.

Supporters of Obama’s plan argue that the rich are reaping a hefty majority of the 529 tax breaks. But over 70 percent of the roughly seven million current 529 accounts are owned by households earning less than $150,000 a year, according to the College Savings Foundation, an alliance of financial institutions that support 529 plans.

A White House official told the Wall Street Journal that Obama’s 529 proposal was “a very small component of the president’s overall plan to deliver $50 billion in education tax cuts for middle-class families. We proposed it because we thought it was a sensible approach, part of consolidating six programs to two and expanding and better targeting education tax relief for the middle class.”

The House will vote next month on an alternative, bipartisan approach that would actually expand 529 account benefits, a GOP aide told the Journal Tuesday.