Colorado Lawmakers Move to Formalize Penalties for K-12 529 Withdrawals

Our Colorado partner schools and families will remember hearing about HB 1123 by Rep. Colin Larson earlier this year. The bill would have aligned state law and federal law so that Colorado parents utilizing 529 college-savings accounts for K-12 tuition would not be subject to state penalties. Unfortunately, it died in its first committee hearing at the Colorado Capitol.

See below for a quick recap of the current legal situation surrounding 529 accounts.

Issue Recap

In 2017, Congress expanded the acceptable uses of 529 savings to include K-12 tuition expenses at public and private schools. That new flexibility acknowledged the fact that many families need to access their savings to meet educational needs long before their students go to college. For instance, a student might:

  • Need a more rigorous academic environment
  • Want access to a specialized program or field of study
  • Need a school closer to their parents’ home or work
  • Need a safer environment free from bullying or other issues

The main advantage of 529 accounts has always been that they allow money to grow in a tax-advantaged environment. Colorado has taken those advantages a step further by providing state tax deductions and credits for 529 contributions made individuals and corporations, respectively. Those extra state tax advantages are designed to incentivize increased saving for students’ educational futures.

Here’s where it gets complicated. While federal law now recognizes K-12 tuition as an acceptable withdrawal from 529 accounts, Colorado law has not been brought up to date. As a result, state law considers withdrawals for K-12 tuition to be “unqualified”—a designation that can carry all sorts of consequences for who ignore it.

In practice, this misalignment between state and federal law means that parents who try to utilize 529 funds in accordance with federal law could still be subject to hefty state tax penalties. These penalties will most often take the form of “recaptures,” in which the state forces parents to repay any credits or deductions taken for relevant contributions to the account.

SB 257

While Rep. Larson’s HB 1123 was designed to correct the misalignment of Colorado law and federal law on 529 account usage, SB 257 does exactly the opposite. It actually makes this misalignment permanent by writing into state law that parents cannot take advantage of the new federal flexibility.

In practice, the bill says that any parent who attempts to follow federal law and use 529 savings funds for K-12 tuition will face potentially severe state tax penalties for doing so. What a way to close out the 2019 legislative session, right?

If you’d like to get involved on this important issue, please click the button below.

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Kansas Passes Senate Bill 16

If there’s one thing ACE Scholarships has learned from being involved in tax credit scholarship programs, it’s that enactment is just the beginning. Implementation brings its own set of challenges that will need to be addressed. And sometimes those challenges are tough to predict. That’s exactly the case in Kansas, where a new bill has made a minor technical change with big implications for its scholarship program.

2017 – SB 19

The Kansas scholarship program requires that students meet two eligibility requirements. First, that they qualify for free lunch under the National School Lunch Program by having a family income of 130 percent of federal poverty guidelines or lower. And second, by attending an underperforming public school named on a list created by the state.

Under the old law, the list of eligible public schools was determined using criteria for certain federal funding programs. In 2017, however, the Kansas State Legislature passed SB 19, which included a number of changes to the Kansas program. Among these changes was a change to the list of public schools from which scholarship students must come. Under the bill, this list would now consist of the 100 lowest-performing public schools in the state.

That change didn’t draw much attention until it came into effect in July 2018. At which point, it became clear that the new list excluded a large number of elementary schools. The new, elementary-light list of qualifying public schools posed a significant problem for scholarship organizations. Why? Because students become less likely to transfer as they enter middle and high school. As a result, new scholarship students tend to come primarily from early grades. Thus, excluding elementary schools had the effect of decreasing the number of students who could enter the scholarship program.

2019 – SB 16

Enter SB 16, which changes the list of schools to the 100 lowest-performing elementary schools. This legal change actually began life as part of HB 2395, a K-12 school finance bill. During the process of moving HB 2395, legislators in the House stripped the language related to the scholarship program, along with many other provisions, and added them to a separate bill under consideration: SB 16.

SB 16 went on to pass 63-61 in the House and was subsequently sent to conference committee, where small groups of legislators work to iron out differences between versions of a bill passed by the House and the Senate. The House’s changes were ultimately accepted by both chambers, and the governor signed the bill on April 6, 2019.

What now?

The shift to the new list of low-performing elementary schools takes effect as soon as the bill’s contents are officially published into state law. ACE and other scholarship-granting organizations are waiting for the Kansas Department of Education to publish the list so they can begin recruiting new students.

As with all policy changes, SB 16’s modification to the scholarship program aren’t perfect. Yes, scholarship-granting organizations will now have an easier time recruiting new scholarship students. But the comparatively lower numbers of disadvantaged students in bad middle school or high school environments will now have few places to turn for help—they have effectively missed their chance to receive a scholarship.

ACE hopes to revisit the Kansas program in greater depth at some point in the future so more students can receive the benefits of a high-quality education. For now, though, SB 16 is the law of the land.

 

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Louisiana Lawmakers Consider Technical Changes to its Tuition Donation Credit Program

As we’ve said before (see Kansas SB 19), passing a tax credit scholarship program is often just the beginning. To build a successful, sustainable program that serves students as efficiently as possible, charities like ACE have to think carefully about implementation. Sometimes, that process reveals areas that could use a little tweaking to help things run smoothly. That’s exactly the case in Louisiana, where legislators are considering a number of technical changes to the state’s tax credit scholarship program.

Implementation Challenges

In 2017, the Louisiana State Legislature converted the state’s unique tuition donation rebate (TDR) program to a tax credit program like those in 18 other states with Act 377.

Under the TDR program, the state would directly reimburse donors for at least 95 percent of their donation to scholarship-granting organizations like ACE (called school tuition organizations, or STOs, in Louisiana). Act 377 modified this funding mechanism to instead provide donors with a tax credit equal to at least 95 percent of their donation, thereby converting the TDR program into the Tuition Donation Credit (TDC) program. Under both programs, charities can reserve up to 5 percent of donations for the costs of administering scholarships.

While the shift to the more familiar tax credit model was welcome, it became clear during the TDC program’s first year of implementation that certain parts of the old TDR statute did not mesh well with the new TDC program. Additionally, the conversion of the law from rebate to tax credit left a few areas of inconsistency that complicated the program’s rollout.

SB 224 – Technical Changes to the TDC

Throughout implementation, ACE carefully tracked areas of the statute where things could be corrected, streamlined, or simplified. Those purely technical changes eventually found their way into SB 224, sponsored by Senator Gerald Boudreaux. With seven ACE partner schools and dozens of ACE scholars in his senate district, Senator Boudreaux has a strong reason to want the program to work as efficiently as possible.

Here is a list of changes included in SB 224, all of which are technical in nature:

  • Cleans up contradictory language about when credits are earned and aligns statute with current receipt processes at LDE
  • Addresses wording and language inconsistencies throughout the statute
  • Streamlines scholarship payment processes by allowing two up-front semesterly payments instead of quarterly payments
  • Eliminates the requirement to make payments via hard checks mailed to schools and allows other forms of payment, including electronic payment
  • Ensures schools are receiving funds by adding language that allows charities to take action if parents do not approve scholarship payments to schools
  • Modifies filing timelines and related requirements to streamline processes and ease burdens on administering charities and LDE

SB 224 will be heard by the Senate Revenue and Fiscal Affairs Committee on Monday, April 22. If it is successful there, it will move to the Senate floor.

 

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Texas Looks to Expand Education Opportunity

 

Overview

Earlier in March, Senator Donna Campbell filed Senate Bill 1906 to expand educational opportunity for Texas students. This bill would incentivize certain companies giving to charities that provide K-12 private school scholarships to disadvantaged students.

The scholarships provided by SB 1906 could be used to help pay K-12 private school tuition; purchase support services like tutoring, therapy or after-school programming; or even to defray the costs of educational materials. That kind of scholarship flexibility would be a first among the country’s dozens of existing tax credit scholarship programs. It would also make Texas the 19th state with a tax credit scholarship program.

SB 1906

Here’s an overview of the bill’s key components:

  • Eligible students would have to qualify for the federal guidelines for free and reduced lunch
  • Texas corporations subject to insurance premium taxes would receive a dollar-for-dollar tax credit for contributions to charities providing K-12 scholarships to economically disadvantaged students
  • The charities would have to use at least 90 percent of the contributions for student scholarships
  • Up to $500 per scholarship can be used for educational expenses besides tuition

How to Get Involved

ACE Scholarships supports SB 1906 and the opportunity it would provide to disadvantaged students in the great state of Texas. If you feel the same and want to get involved, click the button below. Your voice could make the difference when it comes to getting this critical piece of legislation passed.

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