Congress found a soft spot in its heart this holiday season for millions of parents looking for all the help they can get to cover rising college costs.
Tucked inside the mammoth tax and spending package passed a week ago by the House and Senate were two family-friendly tax benefits that have long had bipartisan support.
And with President Barack Obama’s signature on the Protecting Americans From Tax Hikes Act of 2015, families socking away money in state-sponsored 529 college savings plans can take immediate advantage of the changes.
Many will also continue to benefit from the American Opportunity tax credit, which was set to expire after 2017. Lawmakers made that temporary tax benefit a long-term benefit.
The 529 provision contains two significant changes:
▪ Withdrawals from the education savings plans will now be allowed for computers and related technology. Under the old law, tax benefits applied only to “qualified” higher education expenses, including tuition, room and board, and books.
▪ Students who receive certain tuition refunds, such as when they withdraw from school because of an illness, can redeposit the money in their 529 account without negative tax implications. One caveat: The transfer must be completed in 60 days.
Another revision removes some technical details that 529 supporters say should eliminate unnecessary paperwork and other outdated administrative burdens.
The changes are retroactive to the beginning of 2015, college savings organizations say.
Savers have opened more than 12 million 529 accounts, with about $250 billion in funds earmarked for college, according to the nonprofit College Savings Plans Network.
Contributions to the accounts, such as Learning Quest in Kansas and the MOST plan in Missouri, are not tax deductible. But once the money is invested, it can grow and eventually be withdrawn with no tax on the earnings as long as the funds are spent on those qualified educational expenses. Many states offer income tax breaks as well.
While the changes in the 529s are significant, supporters say Congress still needs to address other issues about the accounts. Mary Morris, chairwoman of the nonprofit College Savings Foundation, is lobbying for more incentives to encourage employers to offer employees access to 529 plans in their workplaces, more frequent rebalancing of investments in the accounts and flexibility to roll over unused 529 funds into Roth IRAs or similar savings accounts for people with disabilities.
Also notably, Congress removed the “temporary status” from the American Opportunity tax credit, which will eliminate confusion about the provision during tax season.
Considered by many to be the best educational tax break, American Opportunity provides up to $2,500 in tax credits on the first $4,000 of qualifying educational expenses, which includes course materials, supplies and equipment, and tuition. The credit applies to all four years of undergraduate college. The eligibility threshold is as high as $80,000 for single filers and $160,000 for joint filers before the credit is reduced.
Steve Rosen: 816-234-4879