An act to amend Section 17072 of, and to add Section 17206.2 to, the Revenue and Taxation Code, relating to taxation, to take effect immediately, tax levy.
SB 529 would create a new California personal income tax deduction for contributions to a California qualified tuition program, specifically the Scholarshare 529 college savings plan. Beginning with taxable years on or after January 1, 2026, eligible taxpayers could deduct cash contributions made during the year to Scholarshare accounts they own for a beneficiary, up to $10,000 for head-of-household, surviving spouse, and joint filers, or $5,000 for other filers.
The bill limits the deduction to taxpayers with adjusted gross income at or below $150,000 for head-of-household, surviving spouse, and joint filers, or $75,000 for other filers, with those income thresholds indexed for inflation starting in 2027. It also requires taxpayers to keep records supporting the deduction and authorizes the Franchise Tax Board to issue regulations to administer the provision. If funds are later distributed for purposes other than qualified higher education expenses, the bill generally requires the previously deducted amount to be added back to income, except for certain rollovers to another California qualified tuition program within 60 days.
SB 529 would amend Revenue and Taxation Code Section 17072 and add new Section 17206.2 to create a state income tax deduction tied to contributions to California’s Scholarshare 529 plan. The bill would affect taxpayers who are account owners and meet the income limits, while also imposing recapture rules for nonqualified withdrawals and excluding certain transfers from the deduction calculation. It would also require the Scholarshare Investment Board and Franchise Tax Board to collect data, evaluate performance indicators, and report annually on the deduction’s use and effects.
The bill appears to have been viewed favorably by at least some members in committee, as reflected by unanimous votes in the recorded committee actions and a motion to do pass with re-referral to Appropriations. The legislative findings in the bill itself frame the proposal positively, emphasizing college savings, reduced student loan debt, and broader economic benefits such as improved ability to buy homes and cars. At the same time, the failed passage followed by reconsideration suggests the measure was not entirely uncontroversial or may have required additional review.
The main points of contention likely concern the fiscal cost of creating a new tax deduction, its distributional effects, and whether the incentive would meaningfully increase college savings among eligible families. The bill’s income caps and deduction limits suggest an effort to target middle-income households, but those same limits may raise questions about who benefits and whether the policy is broad enough to change behavior. The recapture provision and reporting requirements also indicate legislative concern about preventing abuse and measuring whether the deduction actually increases Scholarshare participation and reduces student debt.