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All Contents © 2019The Kiplinger Washington Editors
By Kevin McCormally, Chief Content Officer
| January 29, 2018
The rush is on to try to figure out what’s in all the nooks and crannies of the most sweeping tax overhaul in three decades. Lawyers, accountants and plain old taxpayers are looking for ways to take advantage of changes that work in their favor and minimize the damage of those that don’t. One group that will be deeply affected is students, ranging from kindergartners to graduate students ... and their parents and teachers. Take a look at the following to see if you’re a winner or a loser.
These tax-advantaged accounts used to be called state college savings plans because they were set up by individual states to give investors a tax break on money saved to pay college costs.
But the new tax law pushes the “delete” button on the word college. Money in the accounts can now also be withdrawn tax-free to pay tuition and other costs for private and parochial elementary and high school. Starting in 2018, up to $10,000 per pupil per year can be withdrawn tax-free for kindergarten through high school costs. (There’s no dollar limit on withdrawals for college costs.)
In the past, when you graduated from high school or college and moved to take your first job, you could write off the cost of the move or, if your employer reimbursed you for the cost, the payments were tax-free. No more.
The new law abolishes the write-off and, if your employer kindly pays the bill, you’ll have to pay tax on the amount as though it were included in your pay. The old rules still apply, though, to active duty military personnel who move pursuant to a military order.
Rhett Maxwell via Flickr
Congress pulled the plug on a controversial tax break colleges and universities have used to convince sports fans to donate big bucks for the right to buy prime seats for football, basketball and other sporting events. Under the old law, fans could deduct 80% of what they paid for the right to buy season tickets, a price that was often far higher than the cost of the tickets themselves. Congress eliminated that break.
The law also demands that tax-exempt organizations, including colleges and universities, pay a 21% tax on compensation above $1 million a year that goes to any of the organization’s five most highly paid employees. This group often includes football coaches and athletic directors.
A sweet perk for some employees of colleges and universities is reduced or free tuition for their spouses and children—without this benefit being considered taxable income . The House of Representatives version of the tax overhaul called for eliminating this break. The Senate said “no,” so such benefits remain tax-free.
In a move that could affect the level of student aid provided by private colleges and universities, Congress imposed a 1.4% excise tax on the investment income of some school endowments. The tax applies to private schools with at least 500 students and at least $500,000 of endowment investments per student.
The National Association of Independent Colleges and Universities estimates that the new tax will apply to about 35 institutions, and Congressional scorekeepers say it will cost those schools about $200 million a year.
The House bill would have eliminated the right for kindergarten through grade 12 teachers to write off up to $250 a year for out-of-pocket expenses they pay for classroom supplies. The Senate wanted to double the amount to $500. In the end, no change was made. Qualifying teachers can continue to deduct up to $250 in expenses. This deduction is available whether or not you itemize deductions.
Because the new law eliminates the deduction of interest on home-equity loans, some parents may need to adjust their plans for covering college bills. In the past, interest on up to $100,000 of such debt could be deducted regardless of the purpose of the loan, including paying tuition. No more.
Big changes in these credits were envisioned by the House version of the tax overhaul. It called for enhancing the American Opportunity credit by making it available for five years instead of four and, at the same time, eliminating the Lifetime Learning credit all together. As with many of the House’s proposals, though, the Senate disagreed ... and neither credit was changed.
The American Opportunity credit is worth up to $2,500 a year per student for each of a student’s first four years of college. The right to claim the credit is phased out at higher income levels. The Lifetime Learning credit is worth up to $2,000 a year per return for higher education expenses incurred by the taxpayer, his or her spouse or dependents. There is no limit to the number of years this credit may be claimed but it, too, phases out at higher income levels.
One of the many ways the House of Representatives hoped to simplify the tax law was to eliminate a rule that lets Series EE and Series I Savings Bond owners cash in their bonds tax free if they use the money to pay for college education. The Senate declined to go along, though, so this break remains on the books.
To qualify, the money must be used to pay qualified education expenses for the bond owner, his or her spouse or a dependent (tuition and fees qualify; room and board do not). The owner also must have been at least 24 years old when the bond was issued. There are income limits, too. For 2017, for example, the exclusion was phased out for taxpayers with modified AGI between $78,150 and $93,150 ($117,250 and $147,250 for married taxpayers filing a joint return).