Tax Reform Impact on Affording College
Tax reform impacts some of the benefits for people who are saving and paying for college and people who are paying off their student loans. However, many of the most popular tax benefits for education (like the education credits) remain unchanged.
The tax benefits available for education are different depending on whether the taxpayer is currently attending college, liable for student loan payments, or saving for college. Because tax reform made changes to some, but not all, of the existing education benefits, this article explains what will be available in 2018 and what will no longer be available.
Tax benefits for students currently attending college
Deduction for work-related education eliminated for employees
Tax reform eliminates the ability for employees to deduct work-related expenses, including work-related education expenses, as an itemized deduction on Schedule A. Self-employed taxpayers may still be able to deduct qualified work-related education expenses, such as continuing professional education, as a business expense.
American opportunity credit stays the same
Tax reform did not make any changes to the American opportunity credit (AOC).
The AOC is a credit of up to $2,500 per eligible student. Up to $1,000 of the credit is refundable. It is only available for 4 tax years per student and only if the student has not completed the first 4 years of postsecondary education before the end of the tax year. Eligible students must be enrolled at least half-time for at least one academic period and must be pursuing a program leading to a degree or other recognized credential.
Lifetime learning credit stays the same
Tax reform did not make any changes to the lifetime learning credit.
The lifetime learning credit is a credit of up to $2,000 for qualified education expenses paid for all eligible students included on the taxpayer’s tax return. There is no limit on the number of years the lifetime learning credit can be claimed, and the student does not have to enroll in a minimum number of hours to claim the credit.
Nontaxable scholarship and grant rules stay the same
Tax reform did not make changes to the rules for scholarships, fellowships and grants.
Under current law, scholarships required to be used for tuition and fees remain nontaxable when applied to tuition and fees. Scholarships that can be used to pay any expense (such as room and board) are nontaxable when spent on qualified expenses and taxable when spent on nonqualified expenses.
Tuition and fees deduction was retroactively extended for 2017; Congress has not yet renewed it for 2018
Tax reform did not extend the tuition and fees deduction. However, a later law did extend the deduction for 2017.
The tuition and fees deduction is an extender (a law that is typically renewed every year or two by Congress). Although it expires at the end of 2017, Congress may renew it again in the future. The tuition and fees deduction allows taxpayers to reduce their taxable income by up to $4,000 of tuition expenses.
Education exception to early distribution penalty for IRAs, the education savings bond exclusion, and the exclusion for employer-provided education assistance stay the same
Tax reform did not make changes any of these education tax benefits.
Tax benefits for people with student loans
Student loan interest deduction stays the same
Tax reform did not make changes to the student loan interest deduction.
The student loan interest deduction allows taxpayers to reduce their taxable income by up to $2,500. It is based on the amount of qualified student loan interest paid during the year. That’s interest paid on a loan taken out solely to pay for qualified education expenses for a qualified student.
Exclusion for student loan cancellations modified
Tax reform modified the exclusion for cancelled student loans.
Income from the cancellation of debt is generally subject to tax. However, there are a limited number of exceptions taxpayers can use to exclude cancelled debts from income. Tax reform left in place rules that allowed certain qualifying students to exclude cancellation of student loan debt from income.
Tax reform also adds a new provision that student loan debt forgiveness due to death or permanent and total disability is excludable from income.
Student loan repayment assistance remains
Tax reform left in place rules that allowed certain student loan repayment assistance made on behalf of taxpayers to be tax-free in some circumstances.
Tax benefits for saving for education
Coverdell Education Savings Accounts remain the same
Tax reform does not change the rules for Coverdell Education Savings Accounts (Coverdell ESAs).
Contributions to a Coverdell ESA aren’t deductible, but amounts deposited in the account can grow tax free until distributed. There is a $2,000 annual contribution limit, and the ability to contribute is phased out when income exceeds the phaseout limit.
529 plans expanded
Tax reform expanded the types of expenses a 529 plan can be used to pay.
Contributions to a 529 plan (also called qualified tuition programs, or QTPs) aren’t deductible, but amounts deposited in the plan can grow tax free until distributed. When distributions from a 529 plan during the year are less than the beneficiary’s qualified education expenses, distributions are also tax free.
The TCJA expands potential usage of 529 plans to include:
- K-12 elementary and secondary school tuition for public, private, and religious schools. Previously, only Coverdell ESA funds could be used for primary and secondary expenses.
- K-12 educational expenses for homeschool students.
Taxpayers will also be able to rollover amounts from 529 plans into ABLE accounts.
Tax reform impacts taxpayers in all stages of life
Because tax reform makes changes to the tax benefits for education, taxpayers may need to update their short-term and long-term plans for how to pay for college. Deciding how to pay for a college education is one of the most important financial decisions individuals make. Knowing which tax benefits are now available helps taxpayers make an informed decision.
If you have questions about how the tax changes apply or will apply to your college plans, make an appointment with a tax professional.
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