N.H. bill would remove statute saying education freedom account payments are not taxable; lawmakers hear tax experts

Rep. David Luno opened the public hearing on House Bill 402, saying the bill would remove a sentence in state law that currently reads, "Funds deposited in an EFA shall not constitute taxable income to the parent or the EFA student." He said the change would avoid providing misleading guidance to families about possible federal tax liabilities.

Nut graf: Supporters and opponents told the House Ways and Means Committee that federal tax treatment of scholarship-style payments depends on how funds are used. Tax preparers argued the common practice and Internal Revenue Service guidance generally exclude qualified tuition payments from taxable income; a tax attorney said many other EFA expenditures could be taxable and that putting an absolute statement about taxability into state law is potentially misleading.

David Luno, who identified himself as the sponsor, said the state should not assert federal tax consequences for EFA payments. "It's simple. It repeals the one line in RSA 194‑F:2 that reads 'Funds deposited in an EFA shall not constitute taxable income to the parent or the EFA student,'" Luno said. He told the committee the IRS has guidance (Publication 970) and tools that families and advisers should consult, and said the bill is intended to prevent the statute from being read as giving federal tax advice.

Packy Campbell, a retired state representative from Farmington, told the committee he opposed changing the language and called the bill "a solution looking for a problem." He argued the EFA program should continue to be treated like other education funding and warned that changing the statute could create state-level tax implications for small-business owners who pay business profits or enterprise taxes.

Steven Matthew, owner of Legacy Financial Solutions and LFS Tax Group, testified that IRS Publication 970 defines scholarship exclusions and that tax preparers generally do not treat typical tuition scholarship payments as taxable income. Matthew also noted federal gift-tax and tuition‑payment rules that can make payments tax-exempt in particular situations, and warned that requiring routine 1099 reporting could add administrative cost for disbursing agents.

Bill Ardinger, a tax attorney with Rath, Young and Pignatelli, told the committee that federal law (Internal Revenue Code §117 and related IRS guidance) governs whether scholarship-like payments are excluded from income. Ardinger said only certain payments used for tuition and required fees paid to an educational organization clearly qualify for the federal exclusion; many items allowed under New Hampshire's EFA rules — for example, tutoring, certain instructional software, or incidental expenses — could be taxable under federal law. "EFA payments may be taxable income," Ardinger said, adding that the state should avoid statutory language that could be mistaken for federal tax advice.

Committee members asked whether there had been litigation on this language; witnesses said they were not aware of cases directly deciding the statute's effect. Several members and witnesses suggested narrowly tailoring reporting—such as clarifying what the state is saying applies only to New Hampshire tax law or removing the sentence entirely—so families are encouraged to consult tax advisers.

Ending: The public hearing closed after additional public questions. No committee action or vote was recorded at the hearing. The committee heard technical and policy evidence that federal tax treatment of EFA disbursements depends on the nature of the expenditures; the primary policy choice before lawmakers is whether to leave a broadly worded statutory assurance in place or remove it to avoid possible confusion about federal tax consequences.