Subject: Proposed amendments to Ohio Revised Code sections 5747.70 and 5747.78 concerning income tax deductions for contributions to 529 qualified tuition programs and ABLE (Achieving a Better Life Experience) accounts.
Executive Summary:
Ohio House Bill No. 48 proposes significant modifications to the state income tax deductions allowed for contributions to 529 college savings plans and ABLE accounts. The primary changes involve increasing the annual deduction limit to match the federal annual contribution limit for each beneficiary and implementing a mechanism for future adjustments to this limit based on the Gross Domestic Product (GDP) deflator. This bill aims to simplify the deduction process and potentially encourage greater investment in these savings vehicles.
Main Themes and Important Ideas/Facts:
1. Increased Annual Deduction Limit for 529 Plans:
- Current Law: The existing law limits the combined annual deduction for contributions and purchases under a qualified tuition program to four thousand dollars per taxpayer or per taxpayer and spouse filing jointly.
- Proposed Change: The bill proposes to remove the fixed $4,000 limit and instead tie the annual deduction limit to the federal annual contribution limit for each beneficiary.
- Specific Amounts for 2025: For taxable years beginning in 2025, the bill explicitly states the “annual contribution limit” will be eight thousand dollars if the taxpayer and spouse file jointly, and four thousand dollars for all other taxpayers.
- Carry-Forward Provision Retained: The provision allowing taxpayers to carry forward and deduct contributions exceeding the annual limit in future years remains unchanged. The bill states, “If the combined annual contributions and purchases for a beneficiary exceed four thousand dollarsthe annual contribution limit, the excess may be carried forward and deducted in future taxable years until the contributions and purchases have been fully deducted.”
2. Future Adjustment of the Annual Deduction Limit:
- Mechanism for Adjustment: For taxable years beginning in 2026 and thereafter, the bill introduces a mechanism for the Tax Commissioner to adjust the annual contribution limits based on the percentage increase in the GDP deflator.
- Calculation Process: In August of each year, starting in 2026, the Commissioner will:
- Multiply the current annual contribution limit by the percentage increase in the GDP deflator.
- Add the resulting product to the current annual contribution limit.
- Round the sum up to the nearest multiple of fifty dollars.
- Application of Adjusted Amounts: The adjusted amounts will apply to taxable years beginning in the calendar year of the adjustment and subsequent years until a new adjustment is made.
- Floor on Adjustments: The Commissioner will not make a new adjustment if the resulting amount would be less than the amount from the previous year’s adjustment.
3. Alignment of ABLE Account Deduction Limit with 529 Plans:
- Current Law: Similar to 529 plans, the current law limits the total amount of contributions deducted for ABLE accounts in any taxable year to a specified amount.
- Proposed Change: The bill explicitly states that the “annual contribution limit” for ABLE account deductions will have “the same meaning as in section 5747.70 of the Revised Code.” This effectively aligns the annual deduction limit for ABLE account contributions with the increased and annually adjusted limits proposed for 529 plans. The bill states, “As used in this section, ‘annual contribution limit’ … has the same meaning as in section 5747.70 of the Revised Code.”
- Carry-Forward Provision Retained for ABLE Accounts: The provision allowing the carry-forward of excess ABLE account contributions for future deduction is also maintained. The bill notes, “If the total annual contributions for a beneficiary exceed the annual contribution limit, the excess may be carried forward and deducted in future taxable years until the contributions have been fully deducted.”
4. Other Provisions Related to 529 Plans (Largely Unchanged but Reaffirmed):
- The bill reiterates the existing provisions regarding the deduction of income related to tuition units not refunded due to termination and the addition to income of losses related to such terminations.
- The treatment of distributions or refunds from qualified tuition programs for reasons other than qualified higher education expenses, death, disability, or scholarship receipt remains consistent. Any portion not included in federal adjusted gross income may be added back to Ohio adjusted gross income, up to the amount previously deducted.
5. Repeal of Existing Sections:
- Section 2 of the bill explicitly states, “That existing sections 5747.70 and 5747.78 of the Revised Code are hereby repealed.” This indicates that the proposed language will entirely replace the current statutes governing these deductions.
Quotes from the Source:
- On the new 529 plan deduction limit for 2025 (joint filers): “As used in this section, the ‘annual contribution limit’ for taxable years beginning in 2025 equals eight thousand dollars, if the taxpayer and the taxpayer’s spouse file a joint return…”
- On the new 529 plan deduction limit for 2025 (all other taxpayers): “…or four thousand dollars, in the case of all other taxpayers.”
- On the future adjustment of the deduction limit: “For taxable years beginning in 2026 and thereafter, the tax commissioner shall adjust the annual contribution limits in the manner described in this division.”
- On the alignment of ABLE account deduction limits: “As used in this section, ‘annual contribution limit’ … has the same meaning as in section 5747.70 of the Revised Code.”
Potential Implications:
- Increased Tax Savings: Taxpayers contributing more to 529 plans and ABLE accounts may be able to deduct larger amounts from their Ohio adjusted gross income, leading to potential tax savings.
- Greater Incentive for Savings: The higher deduction limits could incentivize more individuals and families to save for future education and disability-related expenses.
- Simplification: Aligning the state deduction limit more closely with federal contribution limits could simplify tax preparation for Ohio taxpayers.
- Impact on State Revenue: The increased deductions could potentially lead to a decrease in state income tax revenue.
- Inflation Adjustment: The mechanism for annual adjustments based on the GDP deflator aims to maintain the real value of the deduction limit over time.
Next Steps:
This briefing document summarizes the proposed changes in House Bill No. 48 as introduced. Further analysis may be required as the bill progresses through the legislative process, including consideration of potential fiscal impacts and stakeholder perspectives.