TCJA Changes to Education
Graduation is only a month away. The Tax Cuts and Jobs Act (TCJA) modifies or eliminates some of the benefits for people who are saving for college, people who are paying off their student loans, and students just starting out. However, many of the most popular tax benefits for education remain unchanged. Stay ahead of the curve by being prepared for the tax changes.
Currently Attending College?
American Opportunity Credit
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 is only available 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
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 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.
Qualified expenses include:
- Tuition and fees required to enroll at or attend an eligible educational institution, and
- Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in the course of instruction.
Qualified education expenses do not include the cost of:
- Room and board,
- Clerical help, or
- Equipment and other expenses that aren’t required for enrollment in or attendance at an eligible educational institution
If you receive benefits through a qualified tuition reduction program you can also treat your benefits as nontaxable.
Many students in grad school who are teaching and research assistants also receive tuition reductions. A tuition reduction for grad school can be nontaxable if the waiver is provided by an eligible institution and the grad student performs teaching or research activities for the institution.
In any other cases, scholarships or grants provided in exchange for services are taxable.
Tuition and Fees Deduction Eliminated
The tuition and fees deduction is no longer available.
Education Exception for IRAs
The exception to the 10% additional tax applies if, for the year of the distribution, the you pay qualified education expenses for:
- Your spouse; or
- Your or your spouse’s child, foster child, adopted child, or descendant of any of them
Education Savings Bonds
If you cash in certain savings bonds under an education savings bond program you are allowed to exclude the interest from income.
Exclusion for Employer-Provided Education Assistance
The employer-provided education assistance exclusion allows employers to offer up to $5,250 per year in educational assistance as a tax-free benefit.
Business Deduction for Work-Related Education Eliminated
The TCJA eliminates the ability for employees to deduct work-related expenses as an itemized deduction on Schedule A.
In fact, all types of employee business expenses are not allowed under the TCJA. This applies to work-related education expenses as well as other expenses such as uniforms, membership in professional organizations, and other ordinary and necessary employee business expenses.
Self-employed taxpayers may continue to deduct qualifying education expenses on Schedule C.
Got Student Loans?
Student Loan Interest Deduction
The student loan interest deduction allows you to reduce your 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. One key requirement is that the student must be the taxpayer, spouse or dependent, and enrolled at least half-time in a program leading to a degree, certificate, or other recognized credential at an eligible institution.
Student Loan Cancellations Exclusion Modified
The TCJA modifies the exclusion for canceled 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 canceled debts from income. The TCJA left in place rules that allowed certain qualifying students to exclude cancellation of student loan debt from income.
To qualify, the loan must have a provision that states that part of the debt will be canceled if the student works:
- For a certain period of time,
- In certain professions, and
- For any of a broad class of employers.
The TCJA 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
The TCJA left in place rules that allowed certain student loan repayment assistance made on behalf of taxpayers to be tax-free in some circumstances.
Loan repayment assistance is nontaxable if received for any of the following:
- The National Health Service Corps (NHSC) Loan Repayment Program (NHSC Loan Repayment Program).
- A state education loan repayment program eligible for funds under the Public Health Service Act.
- Any other state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health services in underserved or health professional shortage areas (as determined by such state).
Saving for Education?
Coverdell Education Savings Accounts
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 phase-out limit.
When distributions from a Coverdell ESA during the year are less than the beneficiary’s qualified education expenses, distributions are also tax-free. Distributions can be used for elementary, secondary, and higher education expenses.
529 Plans Expanded
The TCJA 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.
Taxpayers will also be able to rollover amounts from 529 plans into ABLE accounts.
Impact on All Taxpayers
Because the TCJA makes changes to the tax benefits for education, you may need to update your 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 you make an informed decision.
A tax professional can assist you if you have questions about how the tax changes apply or will apply to your college plans, make an appointment today.