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Senate Finance Passes 529 Reform Bill

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The Senate Finance Committee late Wednesday passed a bipartisan bill that modernizes the treatment of 529 plans in three ways, including designating computers as a qualified educational expense.

Several technical amendments were added to the bill, which is companion legislation to H.R. 529, legislation that passed the House in late February.

Senate Finance Committee Chairman Orrin Hatch, R-Utah, said after the unanimous passage of the bill out of his committee, that “the challenges of paying for a college education can be extremely daunting. Thankfully, 529 college savings plans have served as a critical tool for hardworking families, helping to ease the burden of paying for higher education. Today, the Finance Committee built upon this success and took action to expand these plans and keep them tax free.”

Hatch stated that his committee was able to report out the “common-sense measure with a unanimous bipartisan vote,” and that he looked “forward to working with my colleagues in Congress to ensure this bill is enacted into law.”

The bill has been referred to the full Senate.

While the bill contains some technical amendments, Sen. Ron Wyden, D-Ore., ranking member on the committee, noted during the markup his displeasure with the lack of consideration of larger amendments that were suggested. While S. 335 “is a perfectly fine bill, […] the proposition that the Senate shouldn’t change the House passed bill defies common sense,” as “the members of this committee have thoughtful ways to improve Section 529.”

Wyden stated that quick passage of S. 335 “isn’t an urgent national security measure that needs to pass immediately” unlike tax extenders and the highway funding bill. “Senate Finance should not be a rubber stamp to the House bill.”

The bill makes three changes to Section 529 of the tax code:

  1. Restores the 2009 and 2010 rule permitting qualified higher education expenses to include the purchase of any computer technology or equipment, or Internet access or related services;
  2. Provides that, in the case of a designated beneficiary who has received multiple distributions from a qualified tuition program in the taxable year, the portion of a distribution that represents earnings is now to be computed on a distribution-by-distribution basis, rather than an aggregate basis, such that the computation applies to each distribution from an account; and
  3. Creates a new rule that provides, in the case of a designated beneficiary who received a refund of any higher education expenses in connection with a withdrawal from enrollment, any distribution that was used to pay such refunded expenses shall not be subject to tax if the designated beneficiary recontributes the refunded amount to the qualified tuition program within 60 days of receiving the refund, to the extent that such recontribution is not in excess of the refund.

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