The tax exclusion for Section 529 college savings plan withdrawals is scheduled to expire at the end of the year 2010, along with many other features of the 2001 tax act. Should you worry if you have children who’ll attend college after that year?
Probably not. Congress is not likely to deny a continuing tax break to millions of families who are trying to save for future college expenses because it would be political suicide. This exclusion likely will be made permanent, or at least extended beyond 2010.
Even in a “worst case,” Section 529 plans will revert to prior law and college students will report some taxable income when they tap their 529 accounts. College students tend to be in very low tax brackets so the tax bill needn’t be enormous. Moreover, any tax owed on withdrawals will probably be offset by tuition tax credits these students can claim.