Home / U.S. / Congress modified 529 college savings plans, and now the states are nervous: NPR Ed: NPR

Congress modified 529 college savings plans, and now the states are nervous: NPR Ed: NPR



  College in the USA UU
  College in the USA UU

If it's like most Americans, it does not have a 529 college savings plan.

If it's like most Americans, I do not even know what it is.

Reason more to continue reading.

That's because, with the new tax law, Republicans have made major changes to the 529 plans that will affect millions of taxpayers, not just the ones saving for college. Before that news, however, a quick primer.

A 529 plan allows families to save money for college. Think of it as a boy in love, born in the mid-90s to his federal and state governments. And they called it, in an instant of creativity, after its relevant section in the Internal Revenue Code.

States generally administer the plans, while the federal ones allow the money to grow in the long term, free of taxes. Thirty-three states also try to encourage savers with a small reward in the short term (or not so little, in some cases): when families in those states make a contribution, they also get a deduction or credit in their state taxes on the rent.

"That lets people know," Look, this is a tax advantage that can unfold for you now and be a gateway to additional tax advantages later, "says Troy Montigney, who oversees the Indiana 529 program. Your state offers families a tax credit of $ 1,000 for contributions.

But that credit means less income from taxes. It is a compensation for the states; They believe that it is worth the loss of income if a tax cut causes more people to save for college.

Now, these state-based tax breaks are a matter of great concern among state leaders over Washington's recent fiscal review.

Changes

After Congress rewrote the tax code, now parents can use 529 plans to cover tuition not only in colleges and universities but also in private primary and secondary schools. That is a big and sudden expansion, and it has some worried experts.

"This change allows private school families to spend their money on 529 accounts and avoid state income taxes," says Nat Malkus, who studies educational policy at American Enterprise. Institute, a group of experts with a conservative tendency. "It's a disaster, no matter how you cut it, it's a change from the federal level that puts several states in a very difficult position to move forward."

That's because, says Malkus, if this movement attracts many new families to enroll and many current families to contribute more, then states could end up losing much more money on tax breaks.

"I think it would immediately create an unwanted impact on the state budget," acknowledges Greg Berck of the Board of School Superintendents of the State of New York. "States plan ahead, sometimes several years later, and the state of New York must provide a state tax deduction [to parents of students in K-12 private schools] unless the legislature acts to amend our state law."

NPR spoke with representatives of half a dozen states offering a tax credit or a deduction for 529 contributions. Although some were more concerned than others about the possible budget shock, all expressed their frustration that the expansion came from Washington, without giving them time to plan or budget.

"This will have a big impact on the state-implement 529 plans. And for states that offer a tax deduction, a big impact on state tax receipts," says Michael Frerichs, who is the state treasurer of Illinois. .

Frerichs says that the 529 were built on the idea of ​​patience – parents save slowly for college, and that using them to pay for kindergarten is a significant change.

"If [families are] puts money in one month and takes it out the next, it does not really have the advantage of having a forward investment," says Frerichs. "And in reality he only uses them to evade state taxes."

To avoid state taxes. That raises a natural question …

Who does it help?

Most Americans, obviously, send their children to public schools. And there is little concern that this change will lead many of them to private schools, since using a 529 to save for the initial grades simply does not generate many cents. There simply is not enough time for the money to grow, except for high-income savers who can afford to save a lot of money from the start.

The real benefit, according to state experts and independent economists NPR interviewed for this story, is for wealthy families, many of whom already have children in private K-12 schools. Now you can use your old 529, or open a new one, to help pay that tuition, all while getting a good state tax discount.

Troy Montigney from Indiana says he is listening to many curious parents. [19659004] "We are already presenting, I'm going to be honest, a lot of calls every day," says Montigney. "About, can I, you know, retire right now to pay for a K-12 tuition expense?"

The challenge for 529 state managers, treasurers and legislators is that they have I had only days to find the answers. And it's hard to know how much this expansion of 529s uses will actually increase the number of people who use them.

Nat Malkus, in AEI, believes that states will have a financial blow and will have to make some difficult decisions.

"They will have to accept a loss in their tax base or do something unpopular to repair the hole," says Malkus.

Many states, from Colorado to South Carolina, Michigan to Mississippi, may end up feeling the pressure. However, one of the few states that will not do so is Texas, where the idea began with Republican Sen. Ted Cruz.

Texas does not give families additional rest on their income taxes when they contribute to a 529 … because Texas does not have an income tax.


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