A NOTE ON THE PROPOSED HIGHER EDUCATION TAX INCENTIVE

A tax exemption for earnings on savings deposited in special education accounts is proposed as part of the fiscal year 1984 budget. This provides a tax incentive for savings to pay for future higher education expenses of dependent children. The tax exemption method differs from the tax deferral method used for individual retirement accounts (IRAs). In both cases, the tax incentive provides an essentially equivalent incentive of exempting from taxation the earnings on the amount of money that would be available after tax. Possible reasons for a different subsidy mechanism are: 1. that the taxpayer may not remain in the same tax bracket, and 2. the short-term budget impact on revenues. The tax exemption method appears to be more attractive than expanding the IRA to include an incentive for higher education expense savings.