One College Tax Benefit Extended; Action Delayed on Second Benefit Extension

The U.S. Senate has approved an extension of one federal income-tax benefit that promotes access to higher education. Action on a second higher-education tax break has been delayed, however.

The Senate voted to make permanent the federal tax exemption for distributions from so-called Section-529 college savings plans. The tax exemption originally was scheduled to expire in 2010. The House previously passed a similar provision.

Section-529 plans allow investors to save money in a special account in which the earnings grow income-tax deferred and when used to pay for “qualified higher education expenses” will be federal income-tax-free. Many states also provide additional state tax benefits to participants in their state’s plan.

Action to extend another higher-education tax benefit was delayed, however. Senate Republic leaders failed to muster enough votes to end debate on a bill that would extend through 2007 a federal income-tax deduction of up to $4,000 for higher-education expenses. The provision was included in a bill containing more-controversial items, including an increase in the minimum wage and a permanent reduction in the estate tax.

Senate leaders now will have to find another vehicle for the tax-break extension.