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529 plans will still have some tax benefits Plan ends college-savings tax deduction

  • Eagle Topeka bureau
  • Published Friday, Jan. 13, 2012, at 7:21 a.m.
  • Updated Friday, Jan. 13, 2012, at 10:59 p.m.

About 60,000 families saving for their children’s college education could take a hit from Gov. Sam Brownback’s income tax plan.

The governor’s proposal, outlined in Wednesday night’s State of the State address, removes a tax deduction for contributions to so-called 529 college savings plans, which in Kansas is administered through the state treasurer’s office.

The Kansas program, called Learning Quest, offers tax advantages to encourage families to save for their children’s post-high-school education, state Treasurer Ron Estes said Thursday.

Estes said he only learned of the changes to the 529 deduction this week, and he hasn’t had the chance to study the details.

But he said he does think the proposal, if passed, could impact participation in the program.

At present, parents or grandparents who make contributions through 529 programs can claim a tax deduction of as much as $6,000 per child.

“It is an incentive to be able to take that deduction,” he said.

But he added that a reduction in tax rates also included in the Brownback proposal could offset the loss of the deduction.

The governor’s plan brings down the income tax rate from 6.45 percent to 4.9 percent for families with more than $30,000 a year in income.

Whether the general cut is worth more or less than the 529 deduction would vary from family to family, depending on how much they make, how many children they have and how much they set aside for higher education for each, he said.

Sen. Les Donovan, R-Wichita and chairman of the Senate Tax Committee, generally supports the governor’s proposal, but said he does have questions about how it would affect Learning Quest.

“I know it’s been a big program,” Donovan said.

The Senate Tax Policy Study Group, which Donovan also chairs, is scheduled to begin its analysis of the tax plan during a three-hour session scheduled Friday.

All states offer 529 plans, but only about half allow families to deduct their contributions to the program.

The 529 plan draws its name from the section of the federal tax code that authorizes it. Even without the tax deduction, it would still have tax benefits, Estes said.

In a 529 plan, families can set aside money for their children’s higher education – college, technical or trade school – and the money is invested on their behalf. Earnings on the savings can be withdrawn tax-free to pay eligible education expenses.

That tax saving – at the federal and state level – won’t be affected at all by the governor’s plan, Estes said.

Most of the savers in the Learning Quest plan, about 90,000 of the 150,000 total, don’t actually live in Kansas, Estes said. Families in other states are attracted to it because the investment options are better than those in their home states, he said.

He said the state opened the plan to outsiders years ago because the larger investment pool spreads the administrative cost and reduces fees paid by the individual participants.

Reach Dion Lefler at 785-296-3006 or dlefler@wichitaeagle.com.

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