Republican leaders have opted out of several contentious proposals that would alter education-related tax benefits.
They have decided to preserve the student loan interest deduction and maintain the tax-exempt status of tuition waivers for graduate students. The finalized tax bill will also broaden the application of 529 savings accounts to cover expenses for private K-12 education, as well as keep tax credits for individuals currently funding their college education.
The legislation was revealed on Friday, with votes scheduled in both the House and Senate for the upcoming week.
Here’s an overview of what the bill entails concerning your educational expenses.
Retention of student loan interest deduction
You will continue to have the ability to claim a deduction of up to $2,500 for the interest paid on your student loans each year.
In 2015, approximately 12 million individuals took advantage of this tax break. It can be claimed without itemizing deductions, although it is restricted to certain borrowers based on income criteria.
The benefit begins to phase out once your modified adjusted gross income reaches $65,000 for single filers or $135,000 for joint filers, and is completely eliminated for singles earning more than $80,000 and couples exceeding $165,000.
This deduction could save taxpayers as much as $625 annually, although most receive a lesser benefit.
Tuition waivers for graduate students spared from taxation
The bill protects graduate students from incurring income tax on tuition waivers—something that was previously proposed in the House draft of the bill.
This measure faced backlash from graduate students nationwide who feared potential increases in their tax liabilities by thousands of dollars.
An estimated 145,000 graduate students involved in teaching or research at their universities benefit from these tuition waivers.
Related: Will Obamacare survive the tax bill?
Employer tuition reimbursement remains tax-exempt
Employers can provide employees with up to $5,250 tax-free to assist with tuition costs, and this provision will stay tax-exempt under the new bill.
Roughly half of employers offer this benefit, as reported by the Society for Human Resource Management.
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Expansion of 529 savings accounts
The bill broadens the use of 529 savings accounts, allowing funds saved to be utilized for both college and K-12 educational expenses.
Currently, funds accumulated in 529 accounts grow tax-free but can solely be used for college-related costs.
With the new bill, a maximum of $10,000 can be withdrawn each year for the purpose of sending a child to a “public, private or religious elementary or secondary school.” The funds could also be allocated for certain expenses associated with homeschooling, as stipulated in the bill.
These updates will apply to distributions made after December 31, 2017.
Cancellation of loan forgiveness due to death and disability exempt from taxes
The bill exempts student debt forgiveness from being counted as taxable income if the borrower becomes permanently disabled. It also eliminates tax implications in the event of death if there is a co-signer on the loan.
This provision will be effective for federal and state student loans discharged post December 31, 2017, but will not apply to loans discharged after December 21, 2025.
American Opportunity and Lifetime Learning credits unchanged
Despite prior proposals for alterations to these credits in an earlier House version, both the American Opportunity Credit and the Lifetime Learning Credit will remain intact.
The AOC can provide up to $2,500 per student for the initial four years of college. Although an earlier proposal aimed to extend this to a fifth year, that amendment was not included in the final bill.
The credit starts to phase out when the modified adjusted gross income reaches $80,000 for singles or $160,000 for couples, and it is completely eliminated for singles earning above $90,000 and couples making over $180,000.
The previous House proposal sought to eliminate the LLC, but it will continue to be available under the final legislation. This credit is a smaller benefit, providing up to $2,000, and is accessible to individuals under a lower income threshold. Importantly, it can be claimed for each year enrolled in college.
