How new tax laws can affect your education plans

When the talk of tax reform first began last year, there was a lot of theory about the implications for educational loans and debt. Because students seeking loans, and those already paying on student loans worried that the changes would mean money out of their pockets.

Here is what is left intact:

  • American Opportunities Credit (AOC), a credit of up to $2,500 per eligible student.
  • Lifelong Learner credit, a credit of up to $2,000 for qualified education expenses.
  • Student loan interest deduction.  The student loan interest deduction of up to $2,500 stays intact. This benefit still gets phased out the more you earn. E.g. single tax filers earning more than $80,000 and couples earning over $165,000 no longer qualify for this deduction.
  • Employer tuition assisted remains nontaxable. Employers can contribute up to $5,250 a year to your qualifying continuing education.

Changes related to the Section 529 accounts:

Use of Section 529 accounts is expanded. Per US Security and Exchange Commission, A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.

Contributions to a 529 plan aren’t deductible, but amounts deposited in the plan can grow tax free until distributed

Starting in 2018

  • “Qualifying distributions” will include tuition at public, private or religious schools.
  • In addition to college tuition, section 529 also applies to elementary or secondary schools.
  • Section 529 will be limited to $10,000 per student during any taxable year

The new legislation only affects the federal tax treatment.  Each state is to review the impact to determine if they will adopt a similar approach at a state income tax level.

There is a $2,000 annual contribution limit to Coverdell Education Savings Accounts (Contributions to a Coverdell ESA aren’t deductible, but amounts deposited in the account can grow tax free until distributed).  The ability to contribute is phased out when income exceeds the phaseout limit.

Note: For people who are just starting to get educational funding in 2018, it will be important to understand the different types of student loans available and what the tax consequences will be when 2018 taxes get filed.  Obtaining all of the information you can and planning accordingly will give you the best tool to minimize the tax impacts and alleviate any unintentional impact to your credit score. To leave yourself in the best shape in terms of both taxes and credit, plan for your tax liability and use different strategies to repay your student loans.

Are you eligible for a $1000 child tax credit?

You might be eligible for a child tax credit. This credit is up $1000 per each eligible child. There are seven qualifying tests that have to be met according to IRS. 

  1. Age test – The child must be under 17 by the end of 2011 
  2. Relationship test – The child must be your child or adopted child, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of the above child such your grandchild, niece or nephew.
  3. Support test – You must have provided at least 50% of support of the child.
  4. Dependent test – The child must be your dependent on your tax return
  5. Joint Return test – The child can not file a joint return for that year
  6. Citizenship test – The child must be a US citizen or a legal permanent resident
  7. Income Limitation test – The credit is limited if your modified adjusted gross income is above a certain amount.

Married Taxpayers return  $110,000

Married filing separate      $55,000

Other taxpayers                 $75,000

This credit is generally limited by the amount of tax you owe.