Republicans want to give rich people a tax cut on private school tuition
- The GOP tax plan would allow families to pull money out of 529 accounts to pay for K-12 schools.
- 529 accounts are education savings accounts that grow tax-free.
- Currently, families can only pull money out of 529 accounts to pay for college.
The GOP tax reform bill passed the House on Thursday and eyes are shifting to the Senate version next.
Both versions include a similar break seemingly aimed at wealthy families: the ability to withdraw from 529 plans to fund K-12 education.
529 plans sound technical, but they're basically just an investment account that allows college savings to grow tax-free, similarly to saving for retirement in an IRA. Current tax law permits families to withdraw their savings only for tuition and expenses related to college or graduate school.
The proposed GOP bills allow families to withdraw expenses up to $10,000 a year to pay for private elementary and high schools. That's a big change, and one that could yield significant benefits to wealthy families. A New York Times analysis estimated the savings could be more than $30,000 per 529 account.
The Times takes the example of a family who opens a 529 plan with $200,000. It assumes that the money in the plan grows at 6% annually, and the family takes out the maximum allotted $10,000 each year. In that case, the family would avoid $2,380 in taxes per year. Multiply that savings over the 13 years of private school a child could attend from kindergarten to 12th grade, and the family would ultimately earn a tax break of $30,940.
The move can be seen as a benefit primarily to the rich, since the tax benefits of 529 plans go almost entirely to affluent families, according to the Brookings Institute. The new plan also benefits families who can maximize their capital gains tax break by withdrawing $10,000 a year to pay for private school starting in kindergarten, instead of waiting for their wealth to build in the account over time. Essentially, the people who would see the largest tax breaks over time are those who have another $10,000 to withdraw every year.
Some school choice advocates, like the conservative Heritage Foundation, praised the proposal, arguing that it would allow families to have more access to schools, according to Education Week.
But other proponents of school choice struck out at the proposal, arguing that school choice should benefit those families who need options most.
"If we are going to use scarce resources to advance school choice, we should do it for poor and working class kids, not for families who can already afford private school tuition," Mike Petrilli, President of the Thomas B. Fordham Institute, told the Washington Post.
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