New tax legislation for 2011 doesn’t change much for folks using 529 plans to save for college—but there is one minor, odd twist.
Before this year, computers and related technology, along with Internet access, were considered qualified expenses for 529 plans. That’s no longer the case: Unless a college requires students to have a computer in order to attend, the use of 529 plan money to buy one will result in a 10% penalty.
“I think people were surprised about it,” said Larry Montague, a partner with Deloitte Tax, LLP.
While the computer issue may prove an inconvenience, some 529 plan investors and future college students worry that much more serious trouble may lie ahead. The nation’s yawning budget deficit may, within a few years, end up prompting the elimination or curtailing of tax breaks associated with the college savings vehicles, according to Montague.
What if, for instance, Congress in 2013 were to decide that “any growth from this point on is taxable?” says Montague. Another bad outcome for 529 plans might be if distributions were made taxable. And what if Congress did away with the ability to “front-load” plans? Right now, contributors can stuff up to $65,000 into an individual-sponsored 529 plan in a single year, rather than spreading that total over several years.
Nobody in Washington has been openly talking about making such changes, but they are not inconceivable given the pressure the government is under to raise revenue, said Montague.
The uncertainty about what happens the next time the Bush tax cuts are due to expire means that making decisions about 529 plans this year and next is important, he added. It might make sense, for instance, to make that big up-front contribution sooner rather than later.
“If you can afford to do so, you may want to consider front-loading either this year or next,” said Montague. “I think everyone is trying to do all they can over the next two years because of uncertainty as to what will happen after that.”
December’s tax deal wasn’t all status quo in terms of its impact on college savers, noted the Tuition Plan Consortium, a national group of private colleges and universities that sponsors the Private College 529 Plan.
For 2011 and 2012, the group points out, the estate-tax exclusion has increased to $5 million or $10 million for a couple. That gives wealthier parents and grandparents additional motivation to help contribute to college savings accounts because contributions can now reach up to the $65,000 allotted annual gift-tax exclusion amount.