Colorado is once again in the middle of a debate over 529 college-savings account flexibility. This time around, the biggest topic of debate is HB19-1123. That bill, sponsored by Representative Colin Larson and Senator Jim Smallwood, is set for a hearing before the House Education Committee at 1:30 p.m. on Thursday, February 14.
As the sponsors wrote in a recent column for the Denver Post, HB19-1123 would make a simple change to Colorado’s outdated law that would allow parents to utilize their 529 funds for K-12 tuition at public or private schools without fear of heavy tax penalties. If lawmakers fail to act on the issue, parents could begin seeing those penalties as early as this year.
Issue Recap
For those just tuning in, here’s some quick background on the issue. 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.
Why Should You Care?
The recaptures mentioned above could amount to hundreds or even thousands of dollars. If a parent were to pull the maximum $10,000 for K-12 tuition, that parent could trigger a state deduction recapture amounting to $463. If a parent’s employer has also taken tax credits for contributions to the account, which can amount to up to $500 per year, the recapture of those credits could result in even higher tax bills.
Considering that the Federal Reserve has found that nearly half of American households would be unable to handle an unexpected expense of $400, these recaptures could be crippling for many families. Is that really how we want to treat parents who save for their children’s futures?
What Can I Do?
You may remember that last year’s legislative debate ended in a partisan stalemate. This legislative session, Colorado lawmakers have a chance to get it right and ensure that parents aren’t treated like tax criminals for accessing their own educational savings.
If you’d like to make your voice heard on this important issue, click on the button below to contact members of the Colorado House Education Committee. If you would like to testify in person or in writing at the February 14 hearing, please email Katrina Yoshida at kyoshida@acescholarships.org no later than Tuesday, February 12.
