Republican leaders have retreated from several contentious proposals concerning education-related tax breaks.
They have committed to maintaining the student loan interest deduction and ensuring tuition waivers for graduate students remain tax-free. The final tax bill will also broaden the use of 529 savings accounts to encompass expenses for private K-12 education, along with preserving tax credits for those currently funding their college expenses.
The legislation was presented on Friday, with both House and Senate lawmakers scheduled to cast their votes next week.
Below are the implications of the bill for your educational expenses.
Preservation of the student loan interest deduction
You will continue to be able to claim a deduction of up to $2,500 for the interest paid on student loans each year.
Approximately 12 million individuals utilized this tax break in 2015. It can be claimed without itemizing in your taxes, but it’s limited to certain borrowers based on their income levels.
The deduction begins to phase out at a modified adjusted gross income of $65,000 for individuals and $135,000 for couples, fully disappearing for individuals earning more than $80,000 and couples exceeding $165,000.
Taxpayers can save as much as $625 annually with this deduction; however, most experience a smaller savings.
Tax on graduate student tuition waivers remains untouched
The bill ensures that graduate students will not have to pay income taxes on tuition waivers, a change that was initially proposed in the House’s version of the bill.
This measure faced backlash from graduate students nationwide, concerned it would elevate their tax liabilities by thousands of dollars.
An estimated 145,000 graduate students who teach or conduct research at their universities benefitted from tuition waivers.
Tuition reimbursement from employers remains tax-exempt
Employers are allowed to provide employees with up to $5,250 tax-free to assist with tuition payments, and this provision will stay tax-exempt under the current bill.
According to the Society for Human Resource Management, around half of employers offer this benefit.
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Expansion of 529 savings accounts
The bill widens the application of 529 savings accounts, permitting funds to be utilized for both college and K-12 educational expenses.
While money in a 529 account grows tax-free, current regulations limit its use to college expenses only.
The amended bill allows for up to $10,000 to be annually withdrawn to cover the cost of sending a child to a “public, private or religious elementary or secondary school.” Furthermore, the funds may also be allocated for certain expenses related to homeschooling, as specified by the bill.
These changes will be effective for distributions made after December 31, 2017.
Tax on forgiveness of loans due to death or disability repealed
The bill exempts student loan forgiveness from being taxed for borrowers who become permanently disabled. Additionally, if there is a co-signer on a loan, forgiveness due to death is also excluded.
This applies to both federal and state student loans discharged after December 31, 2017, but does not extend to loans discharged after December 21, 2025.
American Opportunity and Lifetime Learning credits unchanged
Despite previous proposals for modifications to these credits in an earlier House bill, both the American Opportunity Credit and the Lifetime Learning Credit will remain as they are.
The AOC offers a value of up to $2,500 per student for each of the first four years in college. A previous iteration of the House bill had proposed an expansion to five years, but that provision was removed in the final draft.
The credit begins to phase out once modified adjusted gross income hits $80,000 for individuals or $160,000 for couples, and is entirely phased out for individuals earning over $90,000 and couples over $180,000.
The prior House version sought to eliminate the LLC, but it remains under the final legislation. Although it is a smaller benefit, capped at $2,000, it can be claimed for each year of college enrollment and is available to individuals with a lower income cap.
