Reversing course, Tennessee officials say voucher money won’t be counted as federally taxable income for families who enroll their children in the state’s new education program.
The Department of Education released a statement Wednesday aimed at settling questions about the tax implications of receiving an education savings account under a new law championed by Gov. Bill Lee.
“The intent of [the law] is that any funds distributed through education savings accounts would be considered a scholarship and therefore not subject to taxation,” said the statement, adding that the department “intends to structure the program accordingly.”
The position is an about-face from Education Commissioner Penny Schwinn’s answer to lawmakers earlier in the week when asked about the issue during a House budget hearing.
Schwinn said she believed that the money would be taxable, prompting Sen. Raumesh Akbari to call for a delay in the program’s launch to help eligible families understand the tax ramifications. For instance, $7,000 more in annual taxable income could increase some families’ taxes, bump them into a higher tax bracket, or even kick some off of entitlements such as TennCare, the state’s health insurance program for Medicaid recipients.
The new stance aligns with comments this week from Tennessee Federation for Children, a pro-voucher group that is close to Lee’s administration. Federation spokesman Gillum Ferguson said the federal government has never deemed money as taxable if it’s set aside for education vouchers, education savings accounts, or tax scholarship programs.
Tennessee already sends reporting forms for federal tax purposes to recipients of its other education savings account program for students with disabilities. That program, which started in 2017, offers Individualized Education Accounts —known as IEAs — to students statewide who have autism, deaf-blindness, developmental delay, hearing impairments, intellectual disability, traumatic brain injury, and orthopedic or visual impairments.
“We are not planning any changes to the IEA program or its reporting,” a department spokeswoman said on Thursday when asked if the state plans to stop reporting that income.
The new education savings account program is scheduled to launch in the fall of 2020, and approved families will receive taxpayer funds to pay for private school tuition or other education services. To be eligible, their income cannot exceed twice the federal income eligibility for free school lunch. Their child must be zoned to attend schools in Shelby or Davidson counties and must either be currently attending a public school or about to start kindergarten.
Editor’s note: This story has been updated with additional comments from the education department.