When members of Congress return to Washington next week, they’ll continue working on a tax reform plan that supporters say will aid the middle class in a number of ways, including expanding school choice options.
Both the House and Senate versions of the bill include a provision to change the 529 college savings plan.
529 accounts allow parents, grandparents, even aunts, uncles or family friends, to open an investment account in the child’s name. The accounts grow on a tax-free basis, and in Ohio up to $2,000 in contributions per year can be deducted from income taxes. In 2018, those deductions will increase to $4,000.
Under current federal law, the money in 529 savings accounts is restricted to use for college expenses—tuition at a two or four-year institution, room and board, books, and other qualifying costs, but Republican lawmakers are working to change that, allowing up to $10,000 per year to be used for K-12 expenses at private schools.
Republicans argue expanding the use of the accounts will increase access to school choice for middle income families, but Democrats point to research from nonprofit groups like the Brookings Institute that have found that three-quarters of the tax benefits drawn down through the program belong to families making six-figures or more.
In Ohio, there are more than 633,000 529 accounts currently open. On average, those accounts contain less than $17,000, and more than 60 percent of the annual contributions to the direct accounts overseen by the state are less than $100.
Tim Gorrell, executive director of the Ohio Tuition Trust Authority, which oversees the Ohio plans, said while the state doesn’t track the income levels of account holders, those numbers lead him to believe that Ohioans from all income levels are taking advantage of the program.
“We have a spectrum of people that are very high income, moderate income to even lower income,” he said. “The important point here is that people save because every dollar that’s saved doesn’t have to come from some other source.”
Like student loans, Gorrell said, that account for more than $1 trillion in U.S. debt.
Gorrell said allowing the accounts to be used for K-12 expenses won’t pose an implementation challenge for state oversight officials like himself because they don’t audit the expenditures.
When a beneficiary begins to withdraw from their 529 account, they have to justify the spending to the Internal Revenue Service, Gorrell said, and he imagines the same would be done if K-12 expenses were qualified under the new law.
“The account holder would need to show the IRS that, yes, here was our tuition bill for this period, or here was what room and board costs were, or here’s how much we paid for books or computers,” he said. “If 529 is expanded to encompass other programs, we would think there would be a similar test.”
Lawmakers will return to Washington Tuesday to begin debating the tax reform plan once again.
Pres. Donald Trump has said he wants the bill on his desk by Christmas.
