COLLEGE SAVINGS 101

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Proposed legislation H.R. 529 - Withdrawals, Reporting and Redepositing
http://www.savingforcollege.com/articles/proposed-legislation-h-r-529-withdrawals-reporting-and-redepositing-718

Posted: 2015-02-02

by Kathryn Flynn

As we know, President Obama's proposal to eliminate the federal tax benefits of 529 college savings plans faced strong opposition from families across the country. Among the plan's biggest critics were Rep. Lynne Jenkins (R-KS) and Rep. Ron Kind (D-WI), who retaliated by introducing H.R. 529, a bipartisan legislation intended to modernize and expand 529 plans. Just one day after this new bill was announced, the President retracted his proposal and parents of future college students breathed a sigh of relief. According to a republican congressional staff member, the new bill could come up for a vote in the House by the end of the month.

If the legislation passes, there will be three key changes that would expand the benefits of 529 plans, and could encourage more families to take advantage of them.

529 plans and their tax benefits are here to stay

1. Computers will become a qualified expense
Why aren't computers a qualified expense? This is one of the most common questions we hear regarding 529 plan withdrawals. Currently, computers are only considered a qualified expense if the school requires them. This leaves many parents and students scratching their heads, since it is virtually impossible to study and complete assignments without one. Interestingly, there was a provision that included computers as non-taxable qualified expenses in 2009 and 2010, but it expired in 2011. H.R. 529 would make computers a permanent qualified expense going forward.

2. No more distribution aggregation requirements
President Obama's unpopular proposal wasn't exactly a new idea. Prior to the Bush tax cuts of 2001, the earnings portion of 529 withdrawals, even when used to pay for college, was taxed to the beneficiary. Because of this, all 529 accounts in a single state with the same account owner and beneficiary were viewed together for purposes of calculating the earnings that had to be reported on Form 1099-Q when withdrawals were made. This requirement is still in place today, even though with the current tax-free treatment of distributions there is really no need for this aggregation. In fact, Jenkins and Kind argue that it creates “an unnecessary paperwork burden for 529 plan administrators”.

Multiple 529 accounts for the same child: does it ever make sense?

3. Redeposit funds tax-free

Under current law, students who take tax-free distributions from a 529 plan to pay for college are subject to taxes and penalties on refunds received if they withdraw from school. If passed, H.R. 529 will allow students who withdraw from school early do to illness or other reason to avoid paying taxes and penalties when the refund is redeposited into their 529 account within 60 days. This provision would only apply to distributions taken after December 31, 2014.

Take Action

Do you think the proposed legislation is a good idea? Let Congress know! Contact your local Senators and Representatives today.

As we know, President Obama's proposal to eliminate the federal tax benefits of 529 college savings plans faced strong opposition from families across the country. Among the plan's biggest critics were Rep. Lynne Jenkins (R-KS) and Rep. Ron Kind (D-WI), who retaliated by introducing H.R. 529, a bipartisan legislation intended to modernize and expand 529 plans. Just one day after this new bill was announced, the President retracted his proposal and parents of future college students breathed a sigh of relief. According to a republican congressional staff member, the new bill could come up for a vote in the House by the end of the month.

If the legislation passes, there will be three key changes that would expand the benefits of 529 plans, and could encourage more families to take advantage of them.

529 plans and their tax benefits are here to stay

1. Computers will become a qualified expense
Why aren't computers a qualified expense? This is one of the most common questions we hear regarding 529 plan withdrawals. Currently, computers are only considered a qualified expense if the school requires them. This leaves many parents and students scratching their heads, since it is virtually impossible to study and complete assignments without one. Interestingly, there was a provision that included computers as non-taxable qualified expenses in 2009 and 2010, but it expired in 2011. H.R. 529 would make computers a permanent qualified expense going forward.

2. No more distribution aggregation requirements
President Obama's unpopular proposal wasn't exactly a new idea. Prior to the Bush tax cuts of 2001, the earnings portion of 529 withdrawals, even when used to pay for college, was taxed to the beneficiary. Because of this, all 529 accounts in a single state with the same account owner and beneficiary were viewed together for purposes of calculating the earnings that had to be reported on Form 1099-Q when withdrawals were made. This requirement is still in place today, even though with the current tax-free treatment of distributions there is really no need for this aggregation. In fact, Jenkins and Kind argue that it creates “an unnecessary paperwork burden for 529 plan administrators”.

Multiple 529 accounts for the same child: does it ever make sense?

3. Redeposit funds tax-free

Under current law, students who take tax-free distributions from a 529 plan to pay for college are subject to taxes and penalties on refunds received if they withdraw from school. If passed, H.R. 529 will allow students who withdraw from school early do to illness or other reason to avoid paying taxes and penalties when the refund is redeposited into their 529 account within 60 days. This provision would only apply to distributions taken after December 31, 2014.

Take Action

Do you think the proposed legislation is a good idea? Let Congress know! Contact your local Senators and Representatives today.

 

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