529 plans and their tax benefits are here to stay

http://www.savingforcollege.com/articles/529-plans-and-their-tax-benefits-are-here-to-stay-717

Senior Analyst, Savingforcollege.com.

According to news reports this afternoon, President Obama will drop his heavily debated proposal that would have taxed withdrawals from 529 college savings plans. Currently, 529 plans allow college savers to enjoy tax-free earnings on their contributions when the money is used for qualified higher education expenses. But the President, amid much opposition, wanted to rollback to pre-2001 rules when the gains were subject to ordinary income tax.

A White House official said late Tuesday, “Given it has become such a distraction, we’re not going to ask Congress to pass the 529 provision.”

The administration framed the proposal as leveling the educational playing field by abolishing a tax break for the wealthy and redirecting the funds to middle class families. But rebuttals were quickly delivered, calling it an attack on ordinary Americans looking to save for their children’s future. Members of Congress on both sides of the aisle joined in, as did angry parents from across the country.

College savers can now breathe a sigh of relief as the President plans to drop this issue to focus on delivering education tax relief that has bipartisan support. According to White House officials, President Obama will continue to push for the expansion of the American Opportunity Tax Credit, which will be funded by a plan to increase the capital gains tax rate and changing the structure of inherited wealth.

In the meantime, bipartisan legislation was introduced recently to expand 529 plans. Reps. Lynn Jenkins (R-KS) and Ron Kind (D-WI) have proposed legislation that would strengthen tax-free 529 college savings plans, making computers a permanent qualified expense and providing new government and employer incentives to contribute to the plans.