Like many new parents, Greg Wilcox and his wife opened college savings accounts for each of their two children when they were born. Ella, now 7, and Ian, 2, get $100 a month into their accounts.
Wilcox said a major factor in their decision to open the North Carolina 529 savings accounts was the state tax deduction on contributions. If it wasnt for the tax deduction, we would probably have found another way to save, he said.
But at the end of the year, the state tax deduction is expiring, meaning thousands of parents like Wilcox are re-evaluating their options.
It is one of roughly 40 tax breaks being eliminated under a sweeping new tax law approved by Gov. Pat McCrory and the Republican-led legislature this year that will lower personal and corporate income taxes.
About 38,000 taxpayers took advantage of the 529 tax break and saved a collective $6.1 million in the 2011 tax year, according to the latest figures available from the state Department of Revenue. The earnings in the account will remain exempt from federal and state income taxes if they are used for qualified college expenses.
Under existing state law, a married couple can deduct up to $5,000 and a single taxpayer up to $2,500 in contributions. A married couple contributing the maximum would save between $350 and $415, said Holly Nicholson, a Raleigh financial planner.
The tax break is one of the main incentives for North Carolina taxpayers to invest in the state-sponsored NC 529 plan and its elimination opens an assortment of investment options to parents who are saving for their childrens college costs.
A majority of states that have income tax provide a deduction, said Joe Hurley, a certified public accountant and 529 plan expert. Its one reason a lot of people do use 529 plans when their states do offer this incentive.
The looming deadline is spurring plan holders to make contributions before the end of the year. College Foundation Inc., which administers the North Carolina plan, reports new accounts in November were up 14 percent compared to a year earlier and contributions rose 18 percent over the same period.
The funds investments now total more than $1.3 billion, the foundation reported.
Wilcox, a 36-year-old salesman from Clayton, said he doesnt have the spare money to make a big end-of-the-year contribution. But the simplicity of sending a chunk of his paycheck automatically to the 529 account will keep him investing in North Carolina.
I dont think well change, he said. As I get older, hopefully, Ill make more, and Ill have less debt, and well be able to put more in there.
Others are likely to look at different options. Every state offers at least one 529 plan, and many perform better than North Carolinas investment options, most of which are managed by Vanguard.
Without the savings (from a deduction), they are much more likely to look around at other states investment options, said Roby Sawyers, a certified public accountant who also teaches accounting at N.C. State University.
In most cases, a North Carolina taxpayer can invest in plans offered by other states, and the plan beneficiary can attend college anywhere. Hurley ranks all the plans at his website savingforcollege.com.
North Carolinas gets 4-1/2 caps out of 5, in part because of its low cost to investors. But other states score higher, and North Carolinas one-year performance in the third quarter of 2013 ranked it 44th. A three-year rank is not yet available because the state changed investment options in 2011.
Morningstar analysts rated the states plan among the best in 2012, giving it a bronze medal.
Broadening the base
Ben Kittner, a CFI spokesman, said the plan is still emphasizing the federal and state exemption on investment earnings used to meet qualified expenses as a reason to join the program. It will also launch a promotion in early 2014, in coordination with the State Employees Credit Union, to get more people enrolled.
It is our expectation that most people will not be dissuaded from saving for college by the loss of a modest tax break, he said. Of course, the deduction was important, and we wish that North Carolina, as in South Carolina and other states, offered a bigger break to its residents using its 529 program.
N.C. Republican lawmakers who crafted the tax bill say the tax benefit helped less than 1 percent of the states taxpayers.
But the law, they argue, will reduce personal income taxes to a flat 5.8 percent and benefit more people. The standard deduction will also more than double to $15,000 for a married couple filing jointly and $7,500 for a single taxpayer.
The tax reform effort was and continues to be focused on broadening the base, which means broadening the areas which can be taxed, said Rep. David Lewis, a Dunn Republican and tax plan architect.
Kept people motivated
Lewis said the tax break was a way to help the plan get support when it wasnt posting strong returns. But now, he argued, the extra incentives arent necessary to get people to save for college. The average student debt for 2012 college graduates in North Carolina was $24,000, according to the Project on Student Debt.
I hope that people will continue to invest and save to help them pay for college, Lewis said. This just simply puts the North Carolina 529 plan on equal footing with all the other savings- and investment-type mechanisms that people use to pay for college.
Danny Bostic, 35, a Wake Forest father of two, said he wont continue to contribute to his childrens 529s because of the tax change, instead opting to put money in a Coverdell Education Savings Account.
He believes the state should have kept the deduction and hopes lawmakers will reconsider the move in the future.
A lot of people that were on the fence (about saving for college) ... that deduction pushed them over, he said. I think its worth it to help keep people motivated, making those contributions to the 529 and preparing for really the states future.