Middle-class savings like blood in the water: Column

[WestVirginiaRebel]

USA Today:

Bank robber Willie Sutton is said to have explained his career this way: "That's where the money is." Whether Sutton ever really said that, it's an aphorism that, according to Bloomberg's Megan McArdle, explains President Obama's plans to go after middle class assets like 529 college savings plans and home appreciation.

 

Though millions of Americans have been putting money into "tax free" 529 plans to save for their children's increasingly expensive college educations, President Obama would change the law so that withdrawals from the plans to fund college would be taxed as ordinary income. So while you used to be able to get a nice tax benefit by saving for college, now you'll be shelling out to Uncle Sam every time you withdraw to pay for Junior's dorm fees.

 

This doesn't hurt the very rich — who just pay for college out of pocket — or the poor, who get financial aid, but it's pretty rough on the middle– and upper–middle class. In a double-whammy, those withdrawals will show up as income on parents' income tax forms, which are used to calculate financial aid, making them look richer, and hence reducing grants.

 

Likewise, Obama proposes to tax the appreciation on inherited homes. When you sell property at a profit, you pay capital gains on the difference between the basis (what you paid) and what you sell it for. (Obama also proposes to increase the capital gains rate). That's not a big issue for most middle class people, because right now if your parents leave you their house, you get what's called a "step-up" in basis.

 

That means that the basis isn't what your parents paid for the house decades ago, but rather what it was worth when you inherited it. Thus, the appreciation your property experienced while your parents owned it comes to you tax-free. For many families, that appreciation is their biggest inheritance. Now, subject to some exemptions Obama plans to tax those gains, and other gains via inheritance.

 

Why would the White House even consider such a thing? As McArdle observes: "The very fact that we are discussing taxation of educational savings — redistributing educational subsidies downward — indicates that the administration has started scraping the bottom of the barrel when seeking out money to fund new programs. Why target a tax benefit that goes to a lot of your supporters (and donors), that tickles one of the sweetest spots in American politics (subsidizing higher education), and that will hit a lot of people who make less than the $250,000 a year that has become the administration's de facto definition of 'rich'? Presumably, because you're running out of other places to get the money."

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Sharks waiting to feed.