What is really frustrating to me, is the notion, which goes largely unchallenged, that families earning $250k per year are the "rich." I'm fortunate (perhaps even lucky); my family income is greater than $250k per year...therefore, I'm rich! Further, our president is fond of saying that those of us earning over $250k are the "fortunate" and the "lucky." It's our responsibility to forego tax breaks, pay higher taxes and fees, so that we can transfer our hard earned money to those "less fortunate." What is it that differentiates the fortunate from the less fortunate?
Is it just our current family income? Why is income the only measure of the fortunate? How about someone who comes from a wealthy family, inherits millions, but doesn't choose to work, so has a lower income. Is that person less fortunate? How about the many kids I grew up with, all of whom had the same opportunities as me, but chose different paths, perhaps easier paths, and now earn much less than I do? Are they really less fortunate? How about an athlete receiving a full ride to college, but who didn't bother to study or get a useful degree, and is now making low wages. Is that person less fortunate?
I am a non-union professional, and always have been. I come from a modest background; my father was a middle school counselor, and my mother couldn't work due to chronic illness. I paid for 100% of my college education. My first job after college paid me $28.5k per year. I've worked hard to get to this level of income, and its taken 25 years of long hours and strong job performance. I've never been fired from a job, but I've always been an "at will" employee, with the threat of job loss ever present. Is that "luck?" Perhaps.
I don't have a pension awaiting my retirement, I have to build my own pension with a 401k, rollover IRA (the Chump portfolio), and regular savings. I may or may not have social security when I retire in 15 years or so. The Social Security website places an asterisk next to my benefits, which states that by 2030 (my retirement year), there will only be enough money to fund 77% of projected benefits. Hmmmm
As someone who enjoys more than $250k in annual income, I also DO NOT qualify for many useful tax benefits and programs including:
- Can't deduct IRA contributions
- Don't qualify for a Roth IRA
- Pay a higher federal tax rate on earnings
- Don't qualify for any college financial aid
- Can't deduct 529 contributions from state tax
- and many, many more
Is $250k really indicative of a "rich" person? In my family, after federal and California state taxes, $250k becomes $162k. A mortgage in CA, or a rental for that matter, is around $3k/month, or $36,000. And when you add in property taxes and outrageous prices for gas, electricity and water, mello roos and hoa fees, etc...housing consumes around $50k per year. That leaves $112k.
Food, gas, home insurance, life insurance, car insurance, autos, clothing, healthcare, cell phones, cable, and other expenses for a family of five eat up around $50k per year, taking me down to $62k for non-essentials. Among the non-essentials are things like vacations ($10k), the kids sports and hobbies ($12k). Another frustrating non-essential cost is education. The public schools in California are among the worst in the country, thus, we pay for supplemental tutoring for our 2 younger kids ($5k), and are likely to try and send them to a private high school ($13k/year). My oldest is a freshmen in a California public university...at a cost of $34,000/year. Ignoring private high school for the moment (I have a year before it hits, whew!), I'm left with....drumroll....$1,000. That's right, after all of the above, I would have $1,000 left!
Oh, and let's not forget about retirement. I need to send money to my 401k for retirement, into a 529 account for three kids college, where I'll need to pay 100% of their education, and I have to find some savings for our regular (taxable!) savings & investment account for emergencies and rainy day!
Could I spend less? Of course, and we do. We can take fewer and cheaper vacations, we can drive older cars (we do) that are 100% paid for. We can eat out less, buy new clothing less frequently, and cut back on sports and hobbies. We could even sell our modest 2,600 square foot home and find a smaller one.
But I ask you, is this what "rich" families do?
Thank goodness I've been socking away a few bucks from every paycheck into my 529 account. I now have enough saved to pay for my son's four years of public university, and I'm on track to have enough for my two daughters when they hit college ages.
I definitely consider myself rich, but its because I have an incredible family, some great friends, and we're blessed with good health, not because of my income.
Best,
Chump
Push to Tax ‘529’ Plans Stokes Debate
Obama Touts Proposal as Means to Restructure Student Aid, but Critics See Challenges for Middle Class
President Barack Obama ’s push to start taxing college-saving accounts, including the popular “529” accounts, would affect millions of Americans who are stashing money for their children’s education, stirring debate about how to structure federal student aid and how to define the middle class.
The proposal, which has sparked a public backlash but faces dim prospects in Congress, targets so-called 529 savings accounts that boomed after Congress passed the tax breaks starting in 2001. States have promoted the plans as a way for middle-class parents to combat escalating college costs.
The president’s push, unveiled as part of a broader tax overhaul last weekend, would strip the main federal tax benefit from the plans by taxing any money earned from future contributions. Currently, earnings aren’t taxed and the White House says existing funds would be shielded from the new tax.
Administration officials say the changes are part of a move to restructure a slew of education tax benefits that, according to the College Board, amounted to $17.4 billion in 2012. The net effect would be to boost aid for low- and middle-income families while removing benefits currently enjoyed by wealthier families, the White House said.
The president’s proposal, which has critics within his own party, has generated concern among middle-income families who say they prefer the current system.
Elizabeth Philips, a single mother in San Diego, opened a 529 plan last year for her two boys, ages 6 and 9. She said that without more details, she is skeptical.
“I think we should be making it easier for parents to get started with 529s and not add any more roadblocks,” said Ms. Philips, who said she earns six figures but under $150,000 as a marketing professional at a technology company. At time of rising college costs, she said, “the No. 1 thing people should be doing is setting up these accounts as early as possible to maximize the time value of money.”
To buttress its case in the context of a sharpened focus on the middle class, the White House points out that around 70% of funds in 529 accounts and lesser-known Coverdell plans—which would also be affected—belong to households earning more than $200,000 a year. Thus the benefit of the tax break skews heavily toward the highest earners.
While the president’s push to eliminate tax breaks on ‘529’ college-saving plans isn’t likely to clear Congress, it has sparked debate over how to structure student aid and how to define the middle class. Here, the University of Mississippi campus in Oxford. PHOTO: ASSOCIATED PRESS
Chye-Ching Huang, senior tax policy analyst at left-leaning Center on Budget and Policy Priorities, said the president’s plan is sound. “Overall, the plan would scale back benefits that primarily benefit students from high-income families and would attain college anyway without those tax subsidies, and redirect it more towards people who actually need help for college and more likely to react to incentives,” Ms. Huang said.
Slightly over half of all the college-saving accounts are held by Americans making under $150,000 a year, according to a 2012 Government Accountability Office report. About 30% earned under $100,000 a year. There are about 12 million 529 accounts in total, according to the College Savings Plan Network, an industry group, while the average balance in a 529 account is about $21,000—enough to cover almost two years average tuition, room and board—minus aid—at a public four-year university.
Ryan Ellis, tax policy director for the conservative think tank Americans for Tax Reform, said the proposal violates an Obama campaign pledge to not raise taxes on middle-income Americans.
“This idea that this is an account for the preserve of the Huxtables out there that make $250,000 a year is kind of ridiculous,” Mr. Ellis said. Many owners of 529 plans are young parents who take pride in saving money in advance for their children’s college education, he said. “You’ve made them look like chumps for saving whatever they’ve saved so far.”
Other critics, including Capitol Hill Republicans and conservative think tanks, said the president’s plan of “streamlining” education tax benefits was vague and that removing the 529 tax break would ultimately hurt middle-income families. The change, critics say, would dissuade parents from saving and ultimately push more families to borrow for educations at a time when student debt burdening many middle-class Americans.
“What these accounts are designed for is the middle-income families that can’t afford to pay as you go and aren’t going to get need-based aid,” said Betty Lochner, head of the College Savings Plan Network. “It doesn’t make any sense to” take away the incentive to save, she said. Ultimately, many families would have to borrow more to cover expenses without the 529 tax break, she said.
The White House said 529 plans would continue to receive “favorable” tax treatment even with the proposed change. The accounts would still grow tax-free, with funds being taxed only after being withdrawn. Also, the earnings would be taxed as income to the beneficiary—the student. Officials pointed out that in most cases students are in lower income brackets than their parents and thus pay a lower tax rate.
The 529 provision was pitched as part of a broader tax overhaul, which faces steep odds on Capitol Hill. Sen. Lamar Alexander (R., Tenn.), chairman of the committee that oversees education policy, said the 529 provision is “sure to go nowhere in Congress.”
But the larger restructuring, were it to pass Congress, would make the system fairer, the White House said.
“Under the president’s plan, every dollar saved from consolidating and curbing inefficient education tax breaks—and tens of billions more—is ploughed right back into higher-education tax benefits for students and middle-class families,” an Obama administration official said.
The vast majority of middle-income families who would lose the tax break for 529 earnings would benefit from an expansion of the American Opportunity Tax Credit under the president’s plan, the official said.
Write to Josh Mitchell at joshua.mitchell@wsj.com
