Tax reform and 529 plans

http://www.savingforcollege.com/articles/tax-reform-and-529-plans

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The Chairman of the House Ways and Means Committee, Dave Camp, unveiled his comprehensive tax reform package last week, a massive proposal that would shred much of the Internal Revenue Code.

Not that it doesn’t deserve to be shredded. The tax code is so bloated and complicated right now, with so many special provisions, incentives, and penalties that it’s a wonder that any average American can do their own tax returns.

As far as tax incentives for education go, Chairman Camp’s proposal is a study in simplification. He would retain the American Opportunity Tax Credit as well as improve its coordination with Federal Pell Grants. And he would preserve the benefits of 529 plans. But beyond those two college tax incentives, the proposal trashes just about every other education incentive that currently complicates our taxes.

For example, we would say good-bye to continued funding of Coverdell education savings accounts. Also to be jettisoned: the deduction for student loan interest, the penalty-free use of IRAs to pay for college, the above-the-line tuition deduction, the tax-free redemption of U.S. savings bonds for college expenses, employer-provided education assistance, and tax-free tuition benefits for college employees.

If the package were to pass as currently proposed, 529 plans would flourish as Americans would have even more reason to use them in saving for college.

Special interests will undoubtedly cry foul over the tax benefits they currently enjoy that would be eliminated under comprehensive tax reform, and that’s why the chances of the package making it through Congress are rather slim. But as far as the education incentives go, it makes a lot of sense.