If you’re saving for a child’s higher education, there are some proposed changes written into the Tax Cuts and Jobs Act that you should know about.
While we’re uncertain what the final legislation will look like, here’s a look ahead at what could be coming down the pike if the bill is enacted exactly as written.
5 proposed changes that may impact education savers
No more student-loan interest deduction
Under current rules, student loan borrowers who have a modified gross income of $65,000 ($135,000 for couples) can deduct up to $2,500 of interest that’s paid toward qualifying student loans annually.
The tax bill wants to put the kibosh on that deduction.
But don’t expect this one to go down without a fight; official estimates suggest that more than 12 million people take advantage of this deduction, according to The Wall Street Journal, and public opinion could sway legislators here.
Say goodbye to the Coverdell
For years, money expert Clark Howard has talked about a Coverdell account as an ideal tax-free way to save for private school for families with kids in kindergarten through 12th grade.
Coverdells have always stood in contrast to 529 plans, the latter of which is a popular tax-free vehicle used by millions of people to save for college — not primary or secondary school.
Yet under the proposed Tax Cuts and Jobs Act, Coverdells would go the way of the dodo as a standalone savings vehicle. They would effectively merge with 529 plans. That means you would be able to apply the funds in your 529 plan to pay for elementary and secondary education — not just qualifying higher-education expenses.
If the tax bill is enacted as written, no new contributions to Coverdell accounts will be accepted after December 31, 2017, unless you’re doing a rollover contribution.
Farewell to employer-paid tuition assistance and more
The Tax Cuts and Jobs Act also calls for the repeal of employer-paid tuition assistance of up to $5,250.
Employers are likely to push back hard on this provision because they like to offer tuition assistance to attract and retain top talent. Plus, tuition assistance is deductible for the company offering it.
But that’s not the only kind of tuition assistance that’s in the crosshairs of the tax bill.
The Wall Street Journal points out that the bill fails to restore a recently expired provision that would let taxpayers earning less than $65,000 in adjusted gross income deduct up to $4,000 a year in tuition and related expenses.
American Opportunity Tax Credit will get a booster shot
Moving to the plus side of the ledger, the Tax Cuts and Jobs Act would help defray the costs of tuition, fees and course materials in college by increasing the amount of aid available under the American Opportunity Tax Credit (AOTC).
“You can get a maximum annual credit of $2,500 per eligible student,” the IRS writes about where the tax credit currently sits.
“If the credit brings the amount of tax you owe to zero, you can have 40% of any remaining amount of the credit (up to $1,000) refunded to you.”
But the AOTC benefit would be expanded to provide a fifth-year credit of up to $1,250, or a maximum refund of $500, if the tax bill gets enacted as it now stands.
Meanwhile, the passage of the tax bill would like signal the death of two other popular credits. The Wall Street Journal reports the Hope Scholarship Credit and the Lifetime Learning Credit would simultaneously be eliminated if the Tax Cuts and Jobs Act is passed as written.
No tax hit for borrowers who die or become disabled
Finally, there could be a change coming for student loan borrowers who die or become permanently disabled and can’t work.
The new tax bill wants to make it so that they won’t find themselves or their estates taxed on the amount of their loans that have to be written off by lenders.
That would be a change from the current system that punitively taxes borrowers in the event of death or disability when unpaid loans have to be discharged.