If you’re saving for a child’s higher education, there are some provisions in the Tax Cuts and Jobs Act that you should know about.
5 changes that impact education savers
The student-loan interest deduction
Though earlier versions of the bill eliminated this deduction, the final version keeps it essentially the same.
According to CNN Money, “You’re allowed to claim a deduction of up to $2,500 per year on the interest paid for student loans. This benefit phases out as your income goes up, so that by the time you’re a single earner making more than $80,000 or a couple earning $165,000, you don’t get the deduction.”
Official estimates suggest that more than 12 million people take advantage of this deduction, according to The Wall Street Journal.
Say goodbye to the Coverdell, hello to 529s covering private K-12 tuition
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 Tax Cuts and Jobs Act, Coverdells go the way of the dodo as a standalone savings vehicle, according to CNBC. They convert to 529 plans, which are now eligible to pay for private elementary and secondary education — not just qualifying higher-education expenses.
Employer-paid tuition assistance
Earlier versions of the Tax Cuts and Jobs Act also called for the taxation of employer-paid tuition assistance of up to $5,250, which was previously exempt from tax. This also died in committee, according to Elite Daily.
Employers are likely to pushed 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.
American Opportunity Tax Credit remains
Moving to the plus side of the ledger, the Tax Cuts and Jobs Act helps help defray the costs of tuition, fees and course materials in college by retaining 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.”
No tax hit for borrowers who die or become disabled
Finally, there are changes for student loan borrowers who die or become permanently disabled and can’t work.
The new tax bill makes 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, according to NerdWallet.
That is a change from the current system that punitively taxes borrowers in the event of death or disability when unpaid loans have to be discharged.