Modifying the tax treatment of college savings accounts and the employee college savings account contribution credit. (FE)

The bill makes the following changes to the state individual income tax treatment for contributions to and withdrawals from 529 accounts:

1. Increases the maximum amount that may be deducted. Under current law, the maximum amount that a contributor may deduct is annually indexed for inflation and, in 2022 is $3,560, which is reduced to $1,780 for a married individual filing a separate return or, in the case of divorced parents, each former spouse. The maximum amount in 2023 is $3,860, reduced to $1,930. The bill increases these amounts to $5,000 and $2,500, which are indexed annually for inflation, and repeals the limitation for divorced parents.

2. Requires the use of a first in, first out method of accounting for purposes of provisions in current law requiring that account withdrawals be added to income for state tax purposes and restricting carry-overs of contributions in excess of the maximum deduction threshold if the carry-over amount was withdrawn from the account within 365 days of being contributed.

3. Conforms the definition of “qualified higher education expense” to federal law. In recent years, the federal definition of “qualified higher education expense” has been expanded to include tuition expenses for elementary and secondary schools, expenses for apprenticeship programs, and qualified education loan repayments.

The bill conforms state law to the federal definition.

Additionally, the bill modifies the tax credit that may be claimed by an employer for contributions to an employee's 529 account. Under current law, the maximum credit per employee is 25 percent of the amount the employer contributes to the 529 account, up to a maximum contribution that is 25 percent of the maximum amount that an individual contributor may deduct under state law. The maximum credit is $222.50 for 2022 and $241.25 for 2023. Under the bill, the maximum credit per employee is 50 percent of the amount the employer contributes to the 529 account, not exceeding a maximum credit of $800, adjusted annually for inflation. The bill also specifies that sole proprietors may claim the credit and that the credit may only be claimed for a contribution to an employee's 529 account if the employee's compensation is reported, or required to be reported, on a W-2 form issued by the employer.

Because this bill relates to an exemption from state or local taxes, it may be referred to the Joint Survey Committee on Tax Exemptions for a report to be printed as an appendix to the bill.