New tuition tax break said to be among nation's bestEdit

By Lindsay Minnema Special to The Morning Call, Lindsay Minnema is a summer intern with the Pennsylvania Legislative Correspondents Association.

Saving for college got a little easier this month when Gov. Ed Rendell signed into law a $25 million tax break for residents with qualified 529 savings plans — one of the most generous college savings tax breaks in the country.

Pennsylvania residents who contribute up to $12,000 per year to 529 savings plans for college tuition may now receive a state income-tax deduction for their contribution. The deduction applies not only to contributions made to Pennsylvania Tuition Account Program 529 plans, but also to plans from other states.

Every state offers its own version of the 529 plan, which gets its name from Section 529 of the Internal Revenue Code. Under federal law, earnings from 529 plans are income tax-free.

Currently, 26 states offer tax deductions on contributions, but most limit those deductions to their state's 529 plans.

The unique part, where we've gone ahead of the curve, is on those contributions to other states' plans, said state Rep. Mike Turzai, R-Allegheny, who sponsored the House bill that eventually developed into the bill signed by Rendell on July 6.

The law is retroactive, so the deductions may be applied beginning this tax year.

Kansas and Maine are the only other states that allow tax deductions on contributions to all 529s. But Pennsylvania's new law is the most generous. Kansas caps the tax-deductible contributions at $3,000 for single contributors and $6,000 for couples, while Maine caps it at $250 per year.

By giving Pennsylvanians a tax break regardless of which state's college savings plans they choose, the law forces TAP to compete with other states' 529 plans, Turzai said. That may encourage the state Treasury Department, TAP's sponsor, to expand the number and types of investment options it offers.

Treasury spokeswoman Karen Walsh said some of that expansion is already under way.

I certainly think the idea of a 529 has the potential to be helpful, said Chris Hooker-Haring, dean of admissions and financial aid at Muhlenberg College in Allentown. But how helpful are they compared to other investments a family could be making?

My advice to families if they're thinking of a 529 is to talk with a financial adviser, Hooker-Haring said. Do research on all the options out there and look at the percent return on investment. Think in terms of risk versus reward.

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