Tax deductions

Colorado’s 529 plan contribution limits would limit tax deductions

Update: The bill was approved during the legislative session by the House and the Senate.

A major tax reform bill proposes to cap the amount Colorado parents can deduct on college savings account contributions.

Supporters of the bill say a planned annual limit of $ 15,000 on tax-exempt contributions so-called 529 college savings plans would limit tax breaks for wealthier families and put Colorado college savings accounts in line with other states and their goal – to help low-income families and of the middle class to save and invest for their children’s higher education. education.

Unlike most other states, Colorado does not have 529 plans. Supporters of the tax change say it would not affect the vast majority of Colorado families who contribute to the accounts.

Supporters say the cap would close a loophole and make the system fairer.

Bill 1311 adopted by the House and must be heard Wednesday evening before the Senate finance committee.

The bill’s change to 529 plans is just one of the provisions of the complex tax legislation, which would also limit itemized deductions for those earning more than $ 400,000 a year and reduce some business expenses. The changes would generate $ 57.2 million per year for the state by 2023-24. The bill is a top priority for Democrats.

Colorado Tax Institute Communications director Elliot Goldbaum said 32 of the 36 states that manage 529 accounts have contribution limits. The move to 529 accounts would raise $ 11 million per year, according to a legislative analysis.

Goldbaum said the system will start working as expected if the change is approved.

“We think making sure that the part of our tax code that is really designed to help working and middle class families pay for college could be a bit fairer,” Goldbaum said.

The 529 plans act like savings accounts. Taxpayers can deduct 529 contributions to the plan, which then increase tax-free. They can then withdraw money from the account, without paying state taxes, to pay for their children’s school fees.

A 2015 analysis by the Bell Policy Center of Colorado’s 529 Plans showed that Coloradians earning more than $ 500,000 represent 6% of account users, but contribute about 24% of funds saved.

The Colorado Fiscal Institute says that on average, these wealthy people contribute about $ 28,000 per year to the accounts.

Goldbaum said the current tax code allows the rich not to pay taxes.

“A lot of these people don’t need to put their money in a 529,” Goldbaum said.

CollegeInvest, which manages the state’s 529 plans, has not taken a position on the legislation. At a recent House committee meeting, the organization’s chief executive, Angela Baier, said the majority of account users earn between $ 75,000 and $ 150,000. The average account size is only a few thousand dollars per family, which doesn’t even cover a college semester in Colorado.

The State Education Commission, which examines education policies across the country, says annual limits on deductible contributions range from a few hundred dollars to $ 100,000, depending on whether a person files individually or jointly. The majority of states have limits ranging from $ 5,000 to $ 10,000.

University of Denver Professor Christine Nelson, who has studied 529 plans across the country, said the accounts alone don’t help make college more affordable for families, especially low-income ones. Over the course of several decades, the cost of a college education at a four-year Colorado public university has skyrocketed as the state slashed support for public colleges.

“Viewing 529 plans as a viable entry point for middle to low income families to access college seems to be out of place,” Nelson said. “The investments are so low that families would not really benefit in the long run to be able to cover school fees. “

Instead, the state should focus on policies that attack the affordability of universities, such as services that connect families to scholarships and that teach college and finance, she said.

“With these, there seems to be more community buy-in,” Nelson said. “Whereas with just the 529 plans, families would make small investments and, again, that was not enough to cover even a semester of tuition.”

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