Dueling 529 Bills: Discussion Delayed

You’re all familiar with 529 plans right? Traditionally, these plans were created as college savings accounts with some tax benefits. The new federal Tax Cuts and Jobs Act of 2017 expands the qualified distributions to include K-12 education. Colorado provides a state tax deduction for contributions to the accounts, but only for college expenses. This becomes very complicated and is already showing to be confusing to families. Federal law and state law are not aligned.

Under federal law, families interested in such options as K-12 private schools and home schooling can create a tax-free sanctuary with their hard-earned money to plan for their child’s best educational future. But under current state law, a distribution taken for K-12 expenses would mean the state would have to recapture the state income tax deduction received for a contribution to the college savings account. A penalty may also be imposed on the tax payer.

Two Colorado bills have been introduced with opposite objectives. The goals of each bill is stated simply by an editorial in The Gazette titled One bill liberates as another controls. House Bill 1221 would align Colorado with the federal reform and allow for the use of 529’s for K-12 purposes, while House Bill 1209 would deny the taxpayer the ability to claim a state tax deduction for contributing to a 529 for K-12 purposes.

Both bills were on the calendar in the House Education Committee this past Monday. Another 529 related bill was also scheduled. By Sunday, they had all three been removed from the calendar. Rumor has it that the Department of Revenue has some serious concerns about how the legislation plays out.

In her article Competing education tax bills to square off in the House The Independence Institute’s Sherrie Peif refers to this conflict as the House’s “own version of ‘Dueling Banjos’.” The showdown between these bills is surely a duel between freedom and unjustified restriction.

Preventing Colorado state law from aligning with the federal reform is a clear attempt by those who don’t support K-12 private school choice to block any assistance to families by the state.  For what reason would we penalize a family’s effort to responsibly establish the financial groundwork for their child’s education, college or K-12?