Obama Abandons Plan To Tax College Savings Accounts

The Obama administration has dropped a proposal to tax college savings accounts known as 529 plans.

President Obama floated the new tax levy in his State of the Union address, but the idea flunked out with both Republicans and Democrats, including House Speaker John Boehner and Minority Leader Nancy Pelosi.

The administration, among other initiatives, still seeks to increase the capital gains tax rate as well as hiking the inheritance tax.

A 529 plan, which gets its name from section 529 in the IRS tax code, is similar to an IRA in which parents can sock away after-tax dollars in the account and then withdraw them later on a tax-free basis — under current law — to pay college tuition for their kids.

According to the College Savings Foundation, 529 plans primarily benefit the middle class, depending on your definition of same. About 10 percent of households with 529 accounts have an income below $50,000; about 70 percent have incomes less than $150,000.

Obama’s plan would have taxed 529 plan earnings as ordinary income, which some experts insist would amount to a repeal.

A White House official offered this explanation for backing off from trying to tax the currently tax exempt 529 plans, the New York Times reported.

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.”

Another White House official referred to the scrapped 529 tax as “a very small component” of the president’s agenda.

Prior to the administration’s decision to give up on removing the tax breaks of 529 plans, Speaker Boehner took a dim view of the whole idea.

529 plans help middle class families save for college, but now the president wants to tax those plans. It’s another example of this outdated, top-down approach when our focus ought to be on providing opportunity for all Americans. So for the sake of middle class families, the president ought to withdraw this tax increase from his budget when he submits it soon.”

Going in the entirely opposite direction, the House is scheduled to vote in February on a bipartisan bill “that would expand 529 account benefits while preserving their current tax treatment,” The Wall Street Journal explained.

In 2007, Barack and Michelle Obama contributed $240,000 to 529 college savings accounts on behalf of their two daughters’ future education.

The College Savings Foundation notes that the average balance in a 529 college savings account is about $20,000.