5 Ways the New Tax Law Affects Paying for College

The final version of the GOP tax bill that passed last month rewrites the tax code in many ways, eliminating deductions and adding new benefits. Some of these new provisions affect those paying for college.

After public outcry on several provisions proposed in the House's tax bill, the Senate version that passed last month left many tax credits related to higher education untouched.

The new tax bill keeps the deduction for student loan interest. Additionally, the tuition waivers that graduate students receive will stay tax free, and other tax credits – such as the Lifetime Learning Credit and the American Opportunity Tax Credit – remain unscathed.

"A lot of things didn’t change that we were worried about changing – the taxation of the tuition waiver, the taxation of employer tuition assistance. We worried about that happening, but it didn’t end up happening," says Shannon Vasconcelos, director of college finance at College Coach, an admissions consulting firm.

But a few key changes will affect families and students who are financing higher education. Here are five new tax codes that may change a family's finances.

1. Deductions for interest on home equity loans and lines of credit are eliminated. Under the new tax legislation, the ability to deduct interest on home equity loans is suspended from 2018 to 2025.

"This one is a real big one that is a bummer for families," says Vasconcelos. "For a lot of families, it's the best interest rate – it's better than a lot of the education loan rates. A lot of families do tap their home equity to pay for college, so losing the deduction is going to cost them fairly significant money."

The new restrictive mortgage rules that cap interest on new loans to $750,000 will also "prevent many middle-income taxpayers from using home-equity loans in the future to fund college tuition, while generating tax-deductible interest," says Blake Christian, a CPA at Holthouse, Carlin, Van Trigt, a Southern California accounting firm.

2. Families can use 529 plans to pay for K-12 education. Families can now use qualified education expenses in a tax-advantaged 529 savings account to pay for elementary or secondary school tuition. The new tax code allows taxpayers to pay up to $10,000 per student per year in K-12 tuition.

But college experts caution some families against using this new flexibility with 529 accounts. Sean Moore, founder of SMART College Funding, worries that parents who redirect these funds to cover private school education may use the money too quickly and come up short for college.

Christian from HCVT says this benefit will largely help families with a high net worth.

3. Colleges and universities will pay a new excise tax on endowments. A new excise tax levies a 1.4 percent on a private educational institution's endowments that amount to more than $500,000 per student.

The new provision affects scores of private universities with large endowments, such as Harvard University in Massachusetts, the University of Notre Dame in Indiana and Stanford University in California, to name a few.

"It's going to cost these colleges money. How much is going to be passed on to students and parents – we don't know yet. The colleges are just now figuring out how to deal with this new tax," says Vasconcelos from College Coach.

4. Student loans discharged for death or disability are now tax-exempt. The new tax code makes death and disability discharges of federal and private education loans tax-free.

Previously, the debt cancellation would be added as income on to the taxpayer's bill. Now the cancellation of the student debt is tax-free. But the new tax code only applies to discharges that occur during 2018 to 2025.

"It's great for those families who suffer from those devastating effects. But the reality is the people that it helps are hopefully very small," says Moore from SMART College Funding.

5. Alimony for recipients is no longer taxable. College consulting experts say this provision should make it easier for custodial parents to qualify for need-based aid when filling out the Free Application for Federal Student Aid, commonly known as the FAFSA. For the most part, the FAFSA for college-bound students relies on parental information, such as tax records.

"Without alimony showing up on their tax returns, divorced custodial parents should be eligible for financial aid," says Joe Orsolini, president of College Aid Planners, a consulting organization in Illinois that helps families navigate paying for college. "This change will make is easier for them to qualify."

Even with this provision, the FAFSA uses tax records from the prior prior year – so there is a time gap to when this new tax code would benefit a custodial parent. But Orsolini says this should benefit these parents "unless the Department of Education catches on to this and changes the FAFSA."

Source: https://www.usnews.com/education

House Ways and Means approves amended Tax Cuts and Jobs bill

The House Ways and Means Committee voted 24–16 on Thursday to send the Tax Cuts and Jobs Act, H.R. 1, to the full House for a vote. However, the bill, as marked up by the committee, contains many changes from the original version of H.R. 1 released last week. Reportedly, some of these changes were made to reduce the 10-year cost of the bill, and according to a preliminary estimate by the Joint Committee on Taxation, the net effect of the bill as marked up would be to reduce federal revenues by $1.437 trillion over 10 years.

Here is a list of changes in the version of the bill that the House will consider:

1. The amended bill would provide for a new 9% rate on the first $75,000 in net business taxable income passed through to an active owner or shareholder earning less than $150,000 in taxable income. The 9% rate would be phased out as taxable income approaches $225,000. The lower rate would be phased in over five years: It would be 11% in 2018 and 2019, 10% in 2020 and 2021, and 9% starting in 2022.
2. The current law rules on self-employment income received from a passthrough entity would be preserved.
3. The adoption tax credit would be preserved in its current form.
4. Taxpayers would be required to provide Social Security numbers for children before claiming the enhanced child tax credit.
5. Rollovers between Sec. 529 education savings accounts and Achieving a Better Life Experience (ABLE) Sec. 529A accounts would be permitted.
6. The exclusion for qualified moving expense reimbursements would be reinstated but only for members of the Armed Forces on active duty who move because of a military order.
7. The amendment would lower the dividend-received deduction from 80% to 65% and the 70% rate to 50%.
8. The amendment would change the limitation on deducting interest by businesses, but only for floor plan financing indebtedness (short-term debt used by retailers to finance high-cost items such as cars). Full expensing would not be available to these types of businesses.
9. The amendment would modify the treatment of S corporations that convert to C corporations after the bill is passed by allowing any Sec. 481 adjustment to be taken into account over a six-year period (Sec. 481 adjustments usually must be taken into account over four years).
10. For tax years after 2023, taxpayers would be required to amortize Sec. 174 research and experimentation expenses over five years (15 years for research outside the United States).
11. The amendment would disallow a current deduction for litigation costs advanced by attorneys representing clients on a contingent basis until the contingency is resolved.
12. The amendment would preserve current law treatment of nonqualified deferred compensation.
13. The amendment would clarify that holders of restricted stock units cannot make Sec. 83(b) elections.
14. The amendment would change the 12% and 5% rates on repatriated foreign income to 14% and 7%.
15.  The amendment would eliminate the markup on deemed expenses for foreign purposes, permit a foreign tax credit of 80% of the foreign taxes paid, and make other changes to the foreign tax credit calculation provisions in H.R. 1.
16. The amendment would subject to the 1.4% excise tax on investment income endowment funds held by organizations related to the universities and provide an exclusion from the excise tax for any educational institution unless the fair market value of the institution's assets (other than those assets used directly in carrying out its exempt purpose) is at least $250,000 per student.
17. The amendment would change the repeal of the Johnson amendment to clarify that all Sec. 501(c)(3) organizations (not just religious organizations) are permitted to engage in political speech if the speech is in the ordinary course of the organization's business and the organization incurs de minimis expenses related to the political speech. 
18. The amendment would require earned income tax credit claims to properly reflect any net earnings from self-employment, require employers to provide additional information on payroll tax returns, and provide the IRS with additional authority to substantiate earned income amounts.
19. The amendment would reinstate the $5,000 exclusion from income for employer-provided dependent care assistance through 2022 for children under 13 or spouses or other dependents who are unable to care for themselves.
20. The amendment would reinstate capital gain treatment for self-created musical works.
21. The amendment would require partners to hold their partnership interest received for performing services for three years to qualify for capital gain treatment.
22.  Employees who receive stock options or restricted stock units as compensation for services and later exercise them would be allowed to elect to defer recognition of income for up to five years, if the corporation's stock is not publicly traded.
23. The amendment would change the foreign base erosion rules.

Source:  https://www.journalofaccountancy.com/news/