This article is from the source 'washpo' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.washingtonpost.com/business/economy/obama-drops-proposal-to-cut-tax-benefits-of-529-college-savings-plans/2015/01/27/5f3f429a-a675-11e4-a2b2-776095f393b2_story.html?wprss=rss_homepage

The article has changed 4 times. There is an RSS feed of changes available.

Version 0 Version 1
Obama drops proposal to cut tax benefits of 529 college savings plans Obama drops proposal to cut tax benefits of 529 college savings plans
(about 1 hour later)
Facing criticism from lawmakers and parents, President Obama on Tuesday abandoned a proposal to end a major tax advantage of 529 plans, a popular college savings account used by millions of American families. President Obama on Tuesday abandoned a proposal to end a major tax benefit of popular college savings accounts used by millions of American families after the White House faced mounting criticism from lawmakers and parents.
White House officials said the backlash against the president’s plan became “such a distraction” that it was best to drop the proposal to focus on the expanded tuition tax credit at the heart of Obama’s college access plan. White House officials said the backlash against the president’s plan became “such a distraction” that it was best to drop the proposal, which would have removed the ability of families to withdraw money tax-free from the savings plans, known as 529s.
The administration had tried to frame the elimination of the tax break as a way to redirect more money to middle class families, arguing that the savings plans were being used disproportionately by wealthy families.
But the proposal proved to be a serious political miscalculation. At a time when there is more than $1 trillion of outstanding student debt in this country, the 529 plan has become one of the best tools for families to save for college. About 12 million American families rely on them.
The administration’s proposal to roll back the benefits of 529 plans was like “kicking a ball in your own goal,” said Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and former economic adviser to Vice President Biden.
“The President’s plan has the puzzle pieces necessary to bring the middle class back, but this particular piece didn’t fit,” said Sen. Charles Schumer (D-N.Y.), who lobbied the White House to drop the plan.
Indeed, the 529 proposal had an extremely short lifespan of only a week after critics quickly pounced on it, saying it was tone deaf to the needs and aspirations of ordinary Americans who are looking for any help they can get saving money for college. House Speaker John A. Boehner (R-Ohio) jumped on the issue and insisted the proposal be stricken from the president’s budget.
Even liberal house minority leader Nancy Pelosi (D-Calif.) warned Obama that targeting college savings was a political misstep. The congresswoman pressed the case to drop the 529 proposal with senior administration officials on board Air Force One as she flew with the president from India to Saudi Arabia, according to people familiar with the meeting who were not authorized to speak publicly.
Another lawmaker who raised objections to Obama’s proposal was Rep. Chris Van Hollen (D-Md.), ranking Democrat on the House Budget Committee.
“This particular proposal undercut the message that they were focused on helping the middle class,” Van Hollen said in an interview.
“I understand the policy nuances,” Van Hollen added. But the way it was designed—with no regard, for instance, to income level or the size of the balance in a 529 account—”hit everybody indiscriminately,” Van Hollen said.
The White House originally defended its plan, saying that 70 percent of account balances are held by households making more than $200,000 a year.
But the administration quickly realized that the public backlash was jeopardizing the rest of the plan laid out by the president in his State of the Union speech last week.
“We’re not going to ask Congress to pass the 529 provision so that they can instead focus on delivering a larger package of education tax relief that has bipartisan support,” a White House official said Tuesday.“We’re not going to ask Congress to pass the 529 provision so that they can instead focus on delivering a larger package of education tax relief that has bipartisan support,” a White House official said Tuesday.
The administration had tried to frame the elimination of the tax break as a way to redirect more money to middle class families, saying that 70 percent of account balances are held by households making more than $200,000 a year. Critics of the proposal accused the administration of ignoring the fact that a growing number of Americans earning less than six figures are investing in 529 plans.
But critics quickly pounced on Obama’s plan, saying that it was tone deaf to the needs and aspirations of ordinary Americans who are looking for any help they can get saving money for college. House Speaker John A. Boehner (R-Ohio) jumped on the issue and insisted the proposal be stricken from the president’s budget.
Even liberal house minority leader Nancy Pelosi (D-Calif.) warned Obama that targeting college savings was a political misstep. The congresswoman pressed the case to drop the 529 proposal with senior administration officials on board Air Force One as she flew with the president from India to Saudi Arabia, according to sources familiar with the meeting who were not authorized to speak publicly.
As the cost of tuition continues to rise and outstanding student debt stands at more than $1 trillion, 529 plans have become a critical tool for Americans. Families can invest through these accounts without the earnings and withdrawals being taxed as long as the funds are used to pay for college expenses.
If Obama had gotten his way, families would no longer have been able to withdraw earnings from 529 plans without paying taxes on them.
Critics of the proposal warned that ending such a key benefit would discourage families from saving and drive them to take on more debt to pay for college. They accused the administration of distorting the fact that a growing number of Americans earning less than six figures are investing in 529 plans.
The College Savings Foundation, a nonprofit that advocates for 529s, estimates that 70 percent of account holders earn less than $150,000 based on a 2014 survey conducted by Strategic Insight, a mutual fund research firm. Another 10 percent of account owners have income below $50,000. Families on average contribute $175 a month and amass about $19,774 in their accounts.The College Savings Foundation, a nonprofit that advocates for 529s, estimates that 70 percent of account holders earn less than $150,000 based on a 2014 survey conducted by Strategic Insight, a mutual fund research firm. Another 10 percent of account owners have income below $50,000. Families on average contribute $175 a month and amass about $19,774 in their accounts.
The Government Accountability Office, however, paints a different picture. Researchers found that nearly half of families with 529 plans made more than $150,000 a year and had median assets of $413,000 — 25 times higher than the assets for families without the plans.The Government Accountability Office, however, paints a different picture. Researchers found that nearly half of families with 529 plans made more than $150,000 a year and had median assets of $413,000 — 25 times higher than the assets for families without the plans.
The use of 529 plans surged after George W. Bush rolled out a series of tax cuts in 2001. Before then, any money withdrawn from a 529 plan was treated as ordinary income subject to taxes — a rule that Obama wanted to revisit. Very few people used the plans in those days, but that started to change once the tax cuts took effect. Assets in 529 plans have risen from $19.4 billion at the end of 2001 to $245 billion in 2014, according to the Investment Company Institute.The use of 529 plans surged after George W. Bush rolled out a series of tax cuts in 2001. Before then, any money withdrawn from a 529 plan was treated as ordinary income subject to taxes — a rule that Obama wanted to revisit. Very few people used the plans in those days, but that started to change once the tax cuts took effect. Assets in 529 plans have risen from $19.4 billion at the end of 2001 to $245 billion in 2014, according to the Investment Company Institute.
Obama was not calling for the abolishment of 529 plans. Families could still defer paying taxes on the plans as the earnings grow, but that ends once they start drawing down the account, according to the White House. Obama was not calling for the abolishment of 529 plans. Families could still defer paying taxes on the plans as the earnings grow, but that would end once they started drawing down their accounts, according to the White House.
The administration said the larger goal is to simplify the jumble of education tax credits to make college affordable for more Americans. The president wants to expand and make permanent the American Opportunity Tax Credit (AOTC), which provides families up to $2,500 a year for the tuition, books and supplies. The administration said its larger goal on college finance is to simplify the jumble of education tax credits currently in the law. The president wants to expand and make permanent the American Opportunity Tax Credit (AOTC), which provides families up to $2,500 a year for the tuition, books and supplies.
“The 529 provision is a very small component of the president’s overall plan,” said a White House official. “We proposed it because we thought it was a sensible approach, part of consolidating six programs to two and expanding and better targeting education tax relief for the middle class.” “The 529 provision is a very small component of the president’s overall plan,” said a White House official on Tuesday. “We proposed it because we thought it was a sensible approach, part of consolidating six programs to two and expanding and better targeting education tax relief for the middle class.”
The administration has previously touted the benefits of 529 plans. In 2009, then Treasury Secretary Timothy F. Geithner said the plans “can be an immensely effective way for Americans to save for college.”
Geithner said that while the accounts weren’t being used broadly enough by middle-income families, the Treasury Department had a series of recommendations to “expand their use, lower investment fees and make them safer for Americans across a wide range of incomes.”
The Obama family itself has relied on the plans to save for their daughters Sasha and Malia’s college education, based on financial disclosures. The couple made contributions of $240,000 in 2007, according to their 2008 tax returns.
Steven Mufson and Karen Tumulty contributed to this report.
Related link:
Here’s what you need to know about Obama’s new plan to help families afford college