As we approach the pinnacle of tax season, we’re hearing a lot from taxpayers about the size of their refunds or the size of their bills—for some, much bigger or much smaller than anticipated due to tax reform. The Tax Cuts and Jobs Act, passed at the end of 2017, was one of the most sweeping reforms of our tax code in decades, and repercussions of the bill—both positive and negative—will likely be felt through all sectors of our economy for years to come. We thought readers of The Insider, however, may be particularly interested in taking a look back at the education provisions of the bill—how tax reform is affecting students, parents, and the educational institutions that support them. We’ve broken down the key education provisions of the Tax Cuts and Jobs Act into categories, based upon the stakeholders most affected, though impacts will certainly be felt across stakeholder groups and through society at large.
- PARENTS OF YOUNG CHILDREN:
- 529 Plans: The tax-free use of 529 Investment Plans, formerly reserved for qualified college expenses, has been expanded. Beginning in 2018, up to $10,000 per student can be withdrawn annually for private K-12 expenses.
- Kiddie Tax: Parents who save for college in a Uniform Transfer to Minors Account (UTMA) will likely see a tax increase on investment earnings. Earnings over $2,100 were taxed at the parent’s tax rate, but, moving forward, earnings will be taxed at the rate used for trust funds, representing an increase for all but those in the highest tax bracket (for whom it is a wash).
- Teacher Supplies: Educators purchasing supplies for their classroom will still be able to deduct $250 worth of purchases. The House eliminated this deduction in their proposal, while the Senate sought to double the deduction to $500. The compromise version keeps the status quo with a $250 deduction, providing no additional incentive or disincentive to teachers to continue supplying their classrooms out of their personal funds.
- PARENTS OF UNDERGRADUATES:
- American Opportunity Credit (AOC): This credit was left untouched in the final version of the bill. Parents making up to $90,000 if single and $180,000 if married who are paying tuition for the first four years of their undergraduate child’s education may be eligible for up to a $2,500 tax credit. The extension of the credit to a fifth year proposed by the House was not included in the final bill.
- Dependent Exemptions: The new law eliminates exemptions for dependents, and replaces those exemptions with a higher standard deduction and child tax credit (for children under 17). There’s also a new family tax credit of $500 for other dependents, including children above 17. While parents of younger children may benefit (or at least break even) from this replacement, parents of college-age children will likely end up paying more, as the family tax credit won’t fully offset their lost exemption.
- Home Equity Loans: Interest on home equity loans used to pay for college is no longer deductible.
- GRADUATE STUDENTS:
- Lifetime Learning Credit (LLC): Though eliminated in the House tax reform proposal, the final bill leaves the Lifetime Learning Credit untouched for single filers making up to $67,000 and married filers making up to $134,000. The LLC of up to $2,000 is valuable to graduate students, part-time students, and fifth-year undergraduates who have exhausted their AOC eligibility.
- Tuition Waivers: Lawmakers felt the backlash of graduate students when the House proposed eliminating the tax exemption of tuition waivers. In the final bill, tuition waivers provided to graduate students remain tax exempt. This exemption also applies to tuition remission provided to the dependents of university employees.
- Employer Tuition Assistance: Despite the initial House proposal, the first $5,250 of employer tuition assistance will remain tax-free.
- STUDENT LOAN BORROWERS:
- Student Loan Interest Deduction: Also cut in the House proposal, the Student Loan Interest Deduction, which allows borrowers earning up to $80,000 if single and $165,000 if married to deduct up to $2,500 of interest paid on education loans each tax year, was preserved in the final bill.
- Death/Disability Discharge: Loan forgiveness due to death or permanent disability is no longer included as part of the borrower’s taxable income. This provision applies from 2018 until expiration in 2025.
- Private College Endowments: Previously exempt from taxation, investment income earned by private colleges with assets valued at over $500,000 per student is now subject to a 1.4% excise tax. The new tax will likely apply to a few dozen colleges.
- State and Local Tax Deduction: The bill caps deductions for state and local taxes at $10,000 per federal tax return. Some question whether this ceiling will limit the ability of high-tax states to raise funding for public schools.
- Standard Deduction: The new law doubles the standard deduction, so fewer taxpayers will find itemizing deductions beneficial. With the charitable contribution deduction only available to those who itemize, colleges worry that that fewer alums will respond positively to that annual request for donations.
As for this last group of changes—those that touch colleges—it remains to be seen how families will ultimately be affected. When colleges lose money—through taxation, shortfalls in state funding, or loss of donations—will those losses ultimately be passed along to students, either in the form of cut services or tuition increases? As with the repercussions of much of this tax reform, time will tell.
In the meantime, all of us—students, parents, and educators—should continue to work through political channels to ensure that our tax dollars, whatever they may be, are spent on the services we deem critical to the healthy functioning of our country. Tell your elected representatives—with your voice and your vote—what is important to you.