DENVER — The Colorado House of Representatives is about to experience its own version of “Dueling Banjos” Monday when House Bills 18-1221 and 18-1209 square off in the House Education Committee.
The two bills are about the same thing, but have very different outcomes. In fact, only one word in the two titles differs. However, that word — NO — could have far reaching implications for Colorado residents with 529 education plans (Collegeinvest).
If something isn’t changed, recent federal regulation concerning the plans could also cause a collections nightmare for the Colorado Department of Revenue.
Until recently, 529 investment plans were intended only for college expenses. They accumulate tax free, and withdrawals are penalty and tax free at both the federal and state levels if used for such expenses as: tuition, fees, books, supplies, room and board, etc.
As part of the recently passed tax reform package, the federal government expanded that definition to include K-12 education expenses.
The two bills, which will be heard at 1:30 p.m., Monday in room 112 of the State Capitol, will debate whether the state should follow suit.
HB 1221, which is sponsored by Rep. Tim Leonard, R-Jefferson County, would align the state with the new federal tax law and allow qualified K-12 expenses to be tax free and penalty free in Colorado. HB 1209, which is co-sponsored by Brittany Pettersen, D-Jefferson County, and Alec Garnett, D-Denver, specifically says Colorado will not align itself with the federal tax change..
An opinion put out by the Office of Legislative Legal Services for the Colorado General Assembly says contributions to Colorado’s qualified tuition program for use on K-12 expenses under the Tax Cuts and Jobs Act of 2017 (TCJA) still qualify for the state income tax deduction.
“From a practical perspective, there also appears to be no way for the DOR to know what a taxpayer’s contribution to a 529 will be used for in the future (higher education or K-12),” the opinion reads. “And this fact supports the conclusion that a taxpayer who contributes to a Colorado qualified tuition program for K-12 expenses may claim a state income tax deduction for such contribution.”
However, the opinion argues that not all sections of the IRS code were modified and those not modified allow the state deduction to be subject to recapture if distributions are later made for K-12 expenses.
“In other words, “qualified higher education expenses” in Colorado do not include K-12 expenses,” the opinion reads.
Recapture is the ability of the state to collect back taxes on income that is protected from initial taxation for qualified reasons but is eventually used outside the scope of those qualifications.
The TCJA modified the federal rules so that up to $10,000 per student could be used for enrollment at a public, private or religious elementary or secondary school or for certain expenses for home school.
The Legislative Legal Services Opinion says its conclusion is based on how TCJA was written, making the language ambiguous.
“In the event of such an ambiguity, we look to section 2-4-205, C.R.S., which specifies that if a general provision conflicts with a special provision and the conflict is irreconcilable between both, the special provision prevails.”
In this case, that means K-12 expenses are not qualified.
The ambiguity is what led to the competing bills and continuing debate on school choice, which is what some believe this is about.
“Parents should be able to use this for K-12 education,” said Barb Bulthuis, Executive Director of Crossroads Schools in Longmont, which is in its eighth year. “Tax credits and tax incentives have always been available at the preschool level and at the college level. It doesn’t make any logical sense that it wouldn’t also apply to K-12.”
Crossroads is a private alternative school in the Saint Vrain School District for middle and high school students who are at risk for dropping out. All of the students have struggled in the public school setting before enrolling at Crossroads.
All students are charged $100 per month for tuition. Students from low income families pay $50 per month.
“That is about one-tenth of our expenses,” Bulthuis said. “But we don’t want money to be a factor.”
The school also works closely with the St. Vrain district in what Bulthuis calls a unique partnership because all of the high school students at Crossroads attend public schools half time to take elective credits.
“Our superintendent gets it,” Bulthuis said about Don Haddad, who has been the superintendent in St. Vrain for about the same period as Crossroads has been open. “We are all in this for the kids and we work together to figure out a way that we can make that happen.”
Bulthuis said she believes the charge against school choice — private schools specifically — has been driven by lobbyists.
“I think that’s the only reason (tax credits) have not been allowed for K-12,” she said. “I don’t understand the K-12 distinction, and it’s a change that has long been needed. The people who are so opposed are typically so opposed because they have a perception that private school is all about rich kids and about isolating rich kids and giving them things that poorer kids don’t have. And that is false.”