The Tax Cuts and Jobs Act is working its way through both chambers in an attempt to make it onto President Trump’s desk before Christmas. One amendment added by Senator Ted Cruz (R-TX) has some advocates of the school choice movement very enthusiastic while critics say it’s a symbolic gesture unlikely to have much of an impact.
The amendment will expand the use of 529 plans that currently allow families to save money using after tax dollars without having to pay taxes on the accumulated amount (principal and interest) when the savings are used to pay for qualified higher education expenses. Specifically, 529s allow savers and investors to save for education purposes because income gained through these accounts are subject to less taxation. Specifically, 529’s help investors better avoid dividend and capital gains taxes which can be as high as 28 percent. The plans also help taxpayers avoid income taxes on interest earned through the accounts.
So far, 529s have only been legal for use in higher education expenses. Cruz’s amendment, however, would expand the accounts to include k-12 expenses such as private and religious schools, homeschooling materials, online education courses, as well as tutoring for students with developmental disabilities for amounts up to $10,000 per year.
In addition to expanding the use of the savings account, the amendment also includes language allowing families to open the 529 plans at the moment of the child’s conception as opposed to their birth, thus expanding the time during which funds can be accumulated.
This post was published at Ludwig von Mises Institute on December 21, 2017.