Say Goodbye to the College Savings Tax Break That North Carolinians Used to Get

taxes_zInvesting in the future got more expensive for North Carolina families this month when a state tax deduction for college savings ended.

The state college investment program, called the North Carolina 529 Savings Account, previously allowed each parent to put aside up to $2,500 a year tax-free to pay for future educational expenses. The state legislature cut the tax savings last session in favor of an across-the-board income tax-rate decrease.

According to the College Foundation of North Carolina, which oversees the NC 529 program, more than 38,000 North Carolinians invested in the plan last year. Parents and other family members are able to open the account in the name of a future college student. The CFNC manages the funds, which earn a variable interest rate. Money can be withdrawn at any time, without penalty, to pay for tuition and other educational expenses.

Yes, you can put money in another state’s 529

Until Jan. 1, 2014 taxpayers who invested in the plan received a deduction in their state taxes. An individual paying in the maximum amount of $2,500 would typically receive a $200 decrease on their state income tax bill. According to the North Carolina Department of Revenue, this was a $6.1 million savings statewide.

With this change, North Carolina becomes the 10th state with a state income tax to offer a 529 plan without a tax credit or deduction. Without the tax incentive, families may find it more profitable to invest in plans from others states. All state 529 plans are open to enrollment from anyone in the U.S., and many offer much higher returns than the one offered in North Carolina, which currently is ranked 44th in the country for overall return on investment. An unintended consequence of the new tax plan could be that investment in the plan decreases to the point the state loses more revenue than the tax plan generated.

Even a small tax hike can hurt a lot

Lawmakers who favored ending the deduction said it helped less than 1 percent of taxpayers and claimed the money would be better spent decreasing the overall tax burden of all North Carolinians. But the reality of this plan is that it increases costs for lower income families while giving the state’s highest earners a huge discount.

North Carolina is home to at least 90,000 single moms, the vast majority of whom are middle-to-low income. An income tax increase of even $200 a year may be the difference between a mother’s ability to invest in her child’s future. The decrease of nearly $4,000 in tax breaks over the life of a family is an unfair burden to place on those who are doing their best to plan for their children’s success.

Ending the 529 tax deduction is just one of many changes to the state’s tax code that begin in 2014. WomenAvaNCe is taking a close look at the new tax code throughout the month.




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