The Personal Income Tax Law, in conformity with federal income tax law, generally defines gross income as income from whatever source derived, except as specifically excluded, and provides various exclusions from gross income. Existing law, known as the Golden State Scholarshare Trust Act, establishes the Golden State Scholarshare College Savings Trust (Scholarshare trust), under the administration of the Scholarshare Investment Board, to provide financial aid for postsecondary education costs of participating students. Existing state and federal law generally includes in gross income distributions from a qualified tuition program, as defined to include the Scholarshare trust, except as provided. Existing

Existing federal law, the Consolidated Appropriations Act, 2023, excludes from gross income, for federal income tax purposes, distributions from a qualified tuition program that are made after December 31, 2023, and are paid in a direct trustee-to-trustee transfer to a Roth IRA, as described.

This bill would exempt from gross income distribution made from a Scholarshare trust account after December 31, 2023, long-term qualified tuition program during the taxable years beginning on or after January 1, 2024, and before January 1, 2029, that are paid in a direct trustee-to-trustee transfer to a Roth IRA. IRA, and would conform state tax law to those changes relating to federal law, as described above.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law, in conformity with federal income tax law, generally defines gross income as income from whatever source derived, except as specifically excluded, and provides various exclusions from gross income. Existing law, known as the Golden State Scholarshare Trust Act, establishes the Golden State Scholarshare College Savings Trust (Scholarshare trust), under the administration of the Scholarshare Investment Board, to provide financial aid for postsecondary education costs of participating students. Existing state and federal law generally includes in gross income distributions from a qualified tuition program, as defined to include the Scholarshare trust, except as provided. Existing federal law, the Consolidated Appropriations Act, 2023, excludes from gross income, for federal income tax purposes, distributions from a qualified tuition program that are made after December 31, 2023, and are paid in a direct trustee-to-trustee transfer to a Roth IRA, as described.

This bill would exempt from gross income distribution made from a Scholarshare trust account after December 31, 2023, that are paid in a direct trustee-to-trustee transfer to a Roth IRA.

Existing Personal Income Tax Law conforms to federal law in its treatment of specified retirement accounts, including Roth IRAs. Existing state and federal law generally do not allow rollover contributions, as defined, unless they are qualified rollover contributions. Existing federal law, the Consolidated Appropriations Act, 2023, expands the definition of qualified rollover contribution, for contributions occurring after December 31, 2023, to include rollover contributions from a qualified tuition program, as specified.

This bill would expand the definition of qualified rollover contributions to include rollover contributions made after December 31, 2023, from a qualified tuition program.

This bill would take effect immediately as a tax levy.

Date of Hearing: May 17, 2023

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Chris Holden, Chair

ABPCA Bill Id:AB 629

Author:(Wallis) – As Amended Ver:April 25, 2023

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill exempts, for taxable years beginning on or after January 1, 2024, and before January 1, 2029, from gross income under the Personal Income Tax Law a distribution made from a long-term qualified tuition program (QTP) paid in a direct trustee-to-trustee transfer to a Roth Individual Retirement Account (IRA).

This bill provides conformity to federal law and declares the goal and performance indicators for the income exclusion.

FISCAL EFFECT:

1. General Fund (GF) revenue loss of approximately $4.6 million in fiscal year (FY) 2023-24, $6.8 million in FY 2024-25, and $8.1 million in FY 2025-26.
2. Costs of an unknown, but potentially absorbable, amount to the Franchise Tax Board (FTB) to administer the exclusion.

COMMENTS:

1. Purpose. According to the author:

In December 2022, Congress passed and President Biden signed the omnibus spending package, Secure 2.0, which includes a provision that allows savers to roll money from 529 plans to Roth [IRAs] free of income tax or tax penalties. AB 629 conforms state tax to federal law to allow transfers from 529 plans to Roth IRA accounts without incurring taxes or penalties. This change will encourage people to save for their children’s education expenses, knowing that any unspent funds can be rolled over to their Roth IRA account.

1. Scholarshare 529 and Other QTPs. Schloarshare 529 is the state-sponsored, tax-advantaged QTP, or college savings investment program helping families plan for the costs of higher education. The plan provides families with a diverse set of low-cost investment options, tax-deferred growth on investments and tax-free withdrawals on distributions used for qualified education expenses. Recent changes to federal law expanded distributions from a QTP that may be excluded from gross income to include distributions made after December 31, 2023, to a Roth IRA, with certain limitations on the amount transferred.

This bill conforms to federal law in that regard for distributions made during the next five taxable years, thus allowing a QTP beneficiary to transfer certain amounts from their QTP account into a Roth IRA without being taxed on the distribution. Although federal conformity eases tax administration for both the government and taxpayer, providing this income exclusion would also provide a tax benefit to Californians with the means to save money for higher education, at the expense of other Californians without such means.

1. Prior Legislation. AB 340 (Ward), Chapter 557, Statutes of 2021, conformed Scholarshare 529 to changes in federal tax law that expanded allowable distributions from QTPs to include expenses related to registered apprenticeship program participation and student loan repayment.

Analysis Prepared by: Irene Ho / APPR. / (916) 319-2081

Date of Hearing: May 1, 2023

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Jacqui Irwin, Chair

ABPCA Bill Id:AB 629 (

Author:Wallis) – As Amended Ver:April 25, 2023

SUSPENSE

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal Income Tax Law: deferred compensation: exclusions: long-term qualified tuition program

SUMMARY: Conforms, for taxable years beginning on or after January 1, 2024, and before January 1, 2029, to federal law by exempting from gross income distributions made from a long-term qualified tuition plan (QTP) that are transferred to a Roth Individual Retirement Account (IRA). Specifically, this bill:

1. Conforms state law to recent federal changes made by the Consolidated Appropriations Act of 2023 (CAA), which exempt from taxation amounts transferred after December 31, 2023 from a QTP to a Roth IRA, as specified.
2. Replaces references to the "Secretary" with the Franchise Tax Board (FTB).
3. Provides that, for purposes of complying with Revenue and Taxation Code (R&TC) Section 41, the Legislature finds and declares:
   1. The specific goal that the exclusion will achieve is to encourage additional savings for educational expenses and to conform to federal law to bring tax relief and ease return preparation for taxpayers who transfer funds; and,
   2. The detailed performance indicators for the Legislature to use in determining whether the exclusion meets the goal described above are the number of taxpayers that make the transfer permitted and the amount of additional savings added to QTPs.
4. Takes immediate effect as a tax levy.

EXISTING FEDERAL LAW:

1. Authorizes eligible educational institutions or a state, state agency, or any instrumentality of a state, to establish a tax-exempt QTP, which accepts taxed contributions on behalf of a beneficiary to pay for certain education related expenses. Contributions must generally be made in cash and are not subject to a limit. Interest earned on amounts contributed to the QTP, and amounts distributed from the program to pay for eligible expenses, are excluded from gross income. Eligible expenses include tuition, fees, books, and supplies, among others. Ineligible distributions are taxed as normal income, and are subject to an additional 10% penalty. (Internal Revenue Code (IRC) Section 529 et. seq.)
2. Excludes from gross income eligible amounts distributed from a Roth IRA. To benefit from the exclusion, distributions must generally be made to the beneficiary after the age of 59 and ½. Amounts contributed to the Roth IRA are included as taxable income and subject to certain limitations depending on the taxpayer's modified adjusted gross income (MAGI) and filing status. Married taxpayers filing jointly with MAGI over $214,000, and single filers with MAGI over $144,000, may not contribute any amount to a Roth IRA. The maximum amount a taxpayer may contribute for the 2023 taxable year is $6,500, or $7,500 if the taxpayer is age 50 or older. (IRC Section 408A et. seq.)
3. Excludes from gross income amounts distributed after December 31, 2023 from a QTP in a direct trustee-to-trustee transfer to a Roth IRA with the same beneficiary. The QTP must be maintained for 15 years and amounts cannot exceed the aggregate contributions to, and earnings in, the QTP over the prior five years. Excluded amounts may not exceed the annual amount that an individual may contribute to a Roth IRA and the total aggregate amount that may be transferred is limited to $35,000. (IRC Section 529 (c)(3)(E).)

EXISTING STATE LAW:

1. Conforms, under the Personal Income Tax (PIT) Law, to the treatment of Roth IRAs under IRC Section 408A, without regard to the specified date-change conformity to federal law in the R&TC. (R&TC Section 17051(b).)
2. Conforms, with certain modifications under the PIT Law, to the federal gross income exclusion for eligible amounts distributed from a QTP. (R&TC Section 17140.3.)
3. Establishes the Golden State ScholarShare Trust Program as a QTP administered by the State Treasurer's Office. This program offers California taxpayers a college tuition savings plan, the distributions from which are excluded from gross income if spent on eligible higher education expenses. Under this program, specified amounts that are transferred to a Roth IRA are currently included in gross income. (R&TC Section 17140.)

FISCAL EFFECT: The FTB estimates this bill would result in a General Fund revenue loss of $4.6 million in fiscal year (FY) 2023-24, $6.8 million in FY 2024-25, and $8.1 million in FY 2025-26.

COMMENTS:

1. The author has provided the following statement in support of this bill:

In December 2022, Congress passed and President Biden signed the omnibus spending package, SECURE 2.0, which includes a provision that allows savers to roll money from 529 plans to Roth individual retirement accounts free of income tax or tax penalties. AB 629 conforms state tax to federal law to allow transfers from 529 plans to Roth IRA accounts without incurring taxes or penalties. This change will encourage people to save for their children's education expenses, knowing that any unspent funds can be rolled over to their Roth IRA account.

1. Committee Staff Comments:
   1. 529 plans: Existing law authorizes individuals to make after-tax contributions to a QTP. These are commonly referred to as "529 plans" as the construction of these QTPs is governed by IRC Section 529. There are two types of QTPs: prepaid tuition plans and education savings plans. Prepaid tuition plans allow a contributor to purchase units or credits at participating institutions of higher education for future tuition and fee costs. Education savings plans have greater flexibility and allow a contributor to open an investment account that accumulates earnings and makes disbursements for qualifying education expenses without being subject to income taxation^[1]. The CAA expanded distributions from a QTP that may be excluded from gross income to include distributions made after December 31, 2023 to a Roth IRA, with certain limitations on the amount transferred.
   2. What does this bill do? This bill would conform California law to federal law regarding QTP rollover amounts to a Roth IRA, subject to certain limitations. In essence, the beneficiary of a QTP would be able to transfer certain amounts from their QTP account into a Roth IRA without being taxed on the distribution.
   3. Tax benefits are a form of financial aid to students: According to a report published by the Legislative Analyst's Office in 2017, tax benefits are one of three main types of financial aid for students in California.^[2] The other two types of financial aid are "loans" and "gift aid." This bill provides financial aid to certain taxpayers that rollover amounts from a QTP into a Roth IRA in the form of a tax benefit.
   4. What is a "tax expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States Treasury officials began arguing that these features of the tax law should be referred to as "expenditures" since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each of them (in the form of forgone revenues). This bill expands an existing gross income exclusion related to QTP rollovers, enacting a tax expenditure.
   5. Committee's tax expenditure policy: SB 1335 (Leno), Chapter 845, Statutes of 2014, added R&TC Section 41, which recognized that the Legislature should apply the same level of review used for government spending programs to tax credits introduced on or after January 1, 2015. AB 263 (Burke), Chapter 743, Statutes of 2019, extended the requirements in R&TC Section 41 to all tax expenditure measures under the PIT Law, the Corporation Tax Law, and the Sales and Use Tax Law introduced on or after January 1, 2020. A tax expenditure proposal must outline specific goals, purposes, and objectives that the tax expenditure will achieve, along with detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets those stated goals, purposes, and objectives. In addition to the R&TC Section 41 requirements, this Committee's policy also requires that all tax expenditure proposals contain an appropriate sunset provision to be eligible for a vote^[3]. Sunsets are required because eliminating a tax expenditure generally requires a two-thirds vote. These requirements must be satisfied before a bill can receive a vote in this Committee. This bill has been amended to comply with R&TC Section 41 and now includes an appropriate five-year sunset.
   6. Related legislation: AB 1026 (Ta) would allow a qualified taxpayer a deduction from gross income for contributions made to a California QTP. AB 1026 is pending hearing by this Committee.
   7. Previous legislation: AB 340 (Ward), Chapter 557, Statutes of 2021, conforms the existing Golden State ScholarShare Trust for college savings to the federal QTP definition of qualified higher education expenses by adding apprenticeship program expenses, and principal and interest of qualified education expenses.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

None on file

Analysis Prepared by: Harrison Bowlby / REV. & TAX. / (916) 319-2098

1. "An Introduction to 529 Plans" U.S. Securities & Exchange Commission (SEC) Office of Investor Education & Advocacy (May 29, 2018), <https://www.sec.gov/about/reports-publications/investor-publications/introduction-529-plans> (accessed March 2023). ↑

2. Overview of Student Loans, Legislative Analyst's Office (2017), <https://lao.ca.gov/handouts/education/2017
   /Student-Loans-Overview-082917.pdf> (accessed March 2023). ↑

3. An "appropriate sunset provision" shall mean five years, except in the case of a tax expenditure measure providing relief to California veterans, in which case "appropriate sunset provision" shall mean 10 years. ↑

Date of Hearing: March 27, 2023

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Jacqui Irwin, Chair

ABPCA Bill Id:AB 629 (

Author:Wallis) – As Introduced Ver:February 9, 2023

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal Income Tax Law: deferred compensation: exclusions: Golden State Scholarshare Trust

SUMMARY: Conforms, in part, to federal changes regarding rollover contribution amounts from a "qualified tuition program" (QTP) to a Roth Individual Retirement Account (IRA), subject to certain limitations. Specifically, this bill:

1. Conforms the Golden State ScholarShare Trust Program to recent federal changes made by the Consolidated Appropriations Act of 2023 (CAA), which exempts from taxation amounts transferred after December 31, 2023 from a "QTP" to a Roth IRA, as specified.
2. Replaces references to the "Secretary" with the "Franchise Tax Board" (FTB).
3. Takes immediate effect as a tax levy.

EXISTING FEDERAL LAW:

1. Authorizes eligible educational institutions or a state, state agency, or any instrumentality of a state, to establish a tax exempt "QTP," which accepts taxed contributions on behalf of a beneficiary to pay for certain education related expenses. Contributions must generally be made in cash and are not subject to a limit. Interest earned on amounts contributed to the QTP, and amounts distributed from the program to pay for eligible expenses are excluded from gross income. Eligible expenses include tuition, fees, books, and supplies, among others. Ineligible distributions are taxed as normal income, and are subject to an additional 10% penalty. (Internal Revenue Code (IRC) Section 529 et. seq.)
2. Excludes from gross income eligible amounts distributed from a Roth IRA. To benefit from the exclusion, distributions must generally be made to the beneficiary after the age of 59 and ½. Amounts contributed to the Roth IRA are included as taxable income and subject to certain limitations depending on the taxpayer's modified adjusted gross income (MAGI) and filing status. Married taxpayers filing jointly with MAGI over $214,000, and single filers with MAGI over $144,000, may not contribute any amount to a Roth IRA. The maximum amount a taxpayer may contribute for the 2023 taxable year is $6,500, or $7,500 if the taxpayer is age 50 or older. (IRC Section 408A et. seq.)
3. Excludes from gross income amounts distributed after December 31, 2023 from a QTP in a direct trustee-to-trustee transfer to a Roth IRA with the same beneficiary. The QTP must be maintained for 15 years and amounts cannot exceed the aggregate contributions to, and earnings in, the QTP over the prior five years. Excluded amounts may not exceed the annual amount that an individual may contribute to a Roth IRA and limits the total aggregate amount that may be transferred to $35,000. (IRC Section 529 (c)(3)(E).)

EXISTING STATE LAW:

1. Conforms, under the Personal Income Tax (PIT) Law, to the treatment of Roth IRAs under IRC Section 408A, without regard to the specified date-change conformity to federal law in the Revenue and Taxation Code (R&TC). (R&TC Section 17051(b).)
2. Conforms, with certain modifications under the PIT Law, to the federal gross income exclusion for eligible amounts distributed from a QTP. (R&TC Section 17140.3.)
3. Establishes the Golden State ScholarShare Trust Program as a qualified tuition program administered by the State Treasurer's Office. This program offers California taxpayers a college tuition savings plan, the distributions from which are excluded from gross income if spent on eligible higher education expenses. Under this program, specified amounts that are transferred to a Roth IRA are included in gross income. (R&TC Section 17140.)

FISCAL EFFECT: The FTB estimates this bill would result in a General Fund revenue loss of $4.6 million in fiscal year (FY) 2023-24, $6.8 million in FY 2024-25, and $8.1 million in FY 2025-26.

COMMENTS:

1. The author has provided the following statement in support of this bill:

In December 2022, Congress passed and President Biden signed the omnibus spending package, SECURE 2.0, which includes a provision that allows savers to roll money from 529 plans to Roth individual retirement accounts free of income tax or tax penalties. AB 629 conforms state tax to federal law to allow transfers from 529 plans to Roth IRA accounts without incurring taxes or penalties. This change will encourage people to save for their children's education expenses, knowing that any unspent funds can be rolled over to their Roth IRA account.

1. Committee Staff Comments:
   1. 529 plans: Existing law authorizes individuals to make after-tax contributions in a QTP. These are commonly referred to as "529 plans" as the construction of these QTPs is governed by IRC Section 529. There are two types of QTPs: prepaid tuition plans and education savings plans. Prepaid tuition plans allow a contributor to purchase units or credits at participating institutions of higher education for future tuition and fee costs. Education savings plans have greater flexibility and allow a contributor to open an investment account that accumulates earnings and makes disbursements for qualifying education expenses without being subject to income taxation^[1]. The CAA expanded distributions from a QTP that may be excluded from gross income to include distributions made after December 31, 2023 to a Roth IRA, with certain limitations on the amount transferred.
   2. State administered 529 plan: The Golden State ScholarShare Trust Program is the state administered 529 plan, under the jurisdiction of the State Treasurer's Office. This program benefits from the same general treatment of 529 plans under both state and federal law, except that this program does not exclude from gross income rollover contributions to a Roth IRA.
   3. What does this bill do? This bill would conform the Golden State ScholarShare Trust Program to federal law regarding contribution amounts to a Roth IRA, subject to certain limitations. In essence, the beneficiary of the state's QTP may transfer certain amounts from their Golden State ScholarShare Trust Program account into a Roth IRA without being taxed on the distribution.
   4. Selective conformity: While this bill authorizes the federal exclusion of amounts rolled over into a Roth IRA under the Golden State ScholarShare Trust Program specifically, it does not authorize the exclusion under state law for other types of QTPs more generally. Thus, this bill would only partially conform to the changes in the CAA related to 529 plans. If this is not the intent, the author may wish to amend this bill.
   5. Tax benefits are a form of financial aid to students: According to a report published by the Legislative Analyst's Office (LAO) in 2017, tax benefits are one of three main types of financial aid for students in California.^[2] The other two types of financial aid are "loans" and "gift aid." This bill provides financial aid to certain taxpayers that rollover amounts from a QTP into a Roth IRA in the form of a tax benefit.
   6. FTB analysis: The FTB has noted the following considerations in its analysis of this bill:
      1. This bill's provisions would be operative for taxable years after December 31, 2023. The author may wish to amend this bill to provide January 1, 2024 as the operative date, which would provide clarity to taxpayers and consistency with terminology in the R&TC.
      2. For consistency with terminology in the R&TC, it is recommended that, on Page 5, Line 16, the phrase "relating to special rollovers to Roth IRAs" be replaced with "relating to special rollover to Roth IRAs from long-term qualified tuition programs," and on Page 5, Line 20, insert the phrase "of the Internal Revenue Code" after the term "529(d)."
      3. Delete Section 2 of this bill, as California automatically conforms to IRC Section 408A under RT&C Section 17051 (b).
   7. What is a "tax expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States Treasury officials began arguing that these features of the tax law should be referred to as "expenditures" since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each of them (in the form of forgone revenues). This bill expands an existing gross income exclusion related to the Golden State ScholarShare Trust Program, enacting a tax expenditure.
   8. Committee's tax expenditure policy: SB 1335 (Leno), Chapter 845, Statutes of 2014, added R&TC Section 41, which recognized that the Legislature should apply the same level of review used for government spending programs to tax credits introduced on or after January 1, 2015. AB 263 (Burke), Chapter 743, Statutes of 2019, extended the requirements in R&TC Section 41 to all tax expenditure measures under the PIT Law, the Corporation Tax Law, and the Sales and Use Tax Law introduced on or after January 1, 2020. A tax expenditure proposal must outline specific goals, purposes, and objectives that the tax expenditure will achieve, along with detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets those stated goals, purposes, and objectives. In addition to the R&TC Section 41 requirements, this Committee's policy also requires that all tax expenditure proposals contain an appropriate sunset provision to be eligible for a vote^[3]. Sunsets are required because eliminating a tax expenditure generally requires a two-thirds vote. These requirements must be satisfied before a bill can receive a vote in this Committee. This bill does not comply with R&TC Section 41 nor does it include an appropriate five-year sunset.
   9. Related legislation: AB 1026 (Ta) would allow a qualified taxpayer a deduction from gross income for contributions made to a California QTP. AB 1026 is pending hearing by this Committee.
   10. Previous legislation: AB 340 (Ward), Chapter 557, Statutes of 2021, conforms the existing Golden State ScholarShare Trust for college savings to the federal QTP definition of qualified higher education expenses by adding apprenticeship program expenses, and principal and interest of qualified education expenses.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

None on file

Analysis Prepared by: Harrison Bowlby / REV. & TAX. / (916) 319-2098

1. "An Introduction to 529 Plans" U.S. Securities & Exchange Commission (SEC) Office of Investor Education & Advocacy (May 29, 2018), <https://www.sec.gov/about/reports-publications/investor-publications/introduction-529-plans> (accessed March 2023). ↑

2. Overview of Student Loans, LAO (2017), <https://lao.ca.gov/handouts/education/2017
   /Student-Loans-Overview-082917.pdf> (accessed March 2023). ↑

3. An "appropriate sunset provision" shall mean five years, except in the case of a tax expenditure measure providing relief to California veterans, in which case "appropriate sunset provision" shall mean 10 years. ↑