First, the basics of the president’s new tax proposal:
Obama presented his 529 tax plan during his last State of the Union address. The plan consists of raising $1 billion over 10 years by taxing capital gains realized in withdrawals from 529 savings accounts. According to surveys cited by the White House, 70 percent of 529 account assets are held by families earning over $200,000 per year.
But what exactly are 529 savings accounts -- and who usually invests in them? Glenn Reynolds explains:
Though millions of Americans have been putting money into "tax free" 529 plans to save for their children's increasingly expensive college educations, President Obama would change the law so that withdrawals from the plans to fund college would be taxed as ordinary income. So while you used to be able to get a nice tax benefit by saving for college, now you'll be shelling out to Uncle Sam every time you withdraw to pay for Junior's dorm fees.This doesn't hurt the very rich — who just pay for college out of pocket — or the poor, who get financial aid, but it's pretty rough on the middle– and upper–middle class. In a double-whammy, those withdrawals will show up as income on parents' income tax forms, which are used to calculate financial aid, making them look richer, and hence reducing grants.
The administration argues, however, that since the vast majority of families who invest in these types of plans are upper middle class, the trade-off is worth it. After all, more revenues in the government’s coffers (collected disproportionally from “rich” people) can be allocated more fairly and appropriately to those in need.
U.S. News and World Report summarizes the White House’s thinking on this issue:
The result, Obama hopes, is a shift of benefits from wealthier families to more low and middle-income families trying to pay for higher education. Through additional revenue earned from new taxes on 529 plans and from closing other tax loopholes, the president hopes to make the American Opportunity Tax Credit permanent. That credit is aimed at students from two-income families earning up to $180,000, making them eligible for up to $2,500 per year in tax relief for help in affording college.
The problem? The Daily Caller reports that the new proposal is totally hypocritical.
[I]n 2006, Obama actually voted in the U.S. Senate to make the 529 savings permanent, and has written favorably of the plans in the past. ...In “The Audacity of Hope,” while talking about the struggles of Americans to attend college, Obama praised tax-free savings accounts as a way to help control rising college costs.
Not anymore, apparently; he's flipped 180-degrees on raising taxes on the middle class.
What a difference six years makes:
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