The Tax Cuts and Jobs Act (TCJA), passed at the end of 2017, was one of the biggest tax reforms our country had seen in decades. While there were changes made across many areas, there were certain educational provisions that affect college planning specifically.
Below we’ll look at four separate tax changes and how each affects college planning for parents with young and college-aged children.
Parents With Young Children
529 Plans have more qualifying expenses. These plans used to be for qualifying college expenses only. Under the new tax law, this plan now covers K-12 private school tuition. Parents can pay up to $10,000 per beneficiary per year, regardless of the number of contributing plans. (1)
Although these funds are tax-free at the federal level, they’re not tax-free at every state level. Some states, such as Colorado, haven’t updated their tax code to reflect these changes. Withdrawing funds for K-12 tuition in a state that hasn’t updated its tax code could result in a surprise bill come tax time. Our advice? Before you use any funds for K-12 tuition, research your state’s law or speak with a tax professional.
The Kiddie Tax rate has increased. Before the tax reform, those with a Uniform Transfer for Minors Account (UTMA) paid taxes at the marginal income tax rate on investment earnings over $2,100. Now, earnings over this threshold are taxed at the same rate as trust funds.
The problem? Under the trust fund rate, unearned income exceeding $12,751 is taxed at the 37% trust fund rate. Under the old marginal tax rate, a single parent’s unearned income would need to exceed $510,300 to be taxed at 37%. (2) In short, the tax reform hurts low-income families who will now be taxed at a much higher rate than before.
Parents With College-Aged Children
Dependent exemptions have been eliminated. Instead of dependent exemptions, parents can now claim a higher standard deduction and Child Tax Credit. The standard deduction limit increased to $12,000 for individuals and $24,000 for couples. (3) The Child Tax Credit pays up to $2,000 per child with $1,400 being a refundable piece. (4)
Families that may see the biggest hit under this tax change are those who have college-aged children between the ages of 17 and 23. (5) These children would’ve been young enough for personal exemptions under the old law, but they’re too old to be eligible for the tax credit under the new law.
Home equity loan interest is no longer deductible. It’s quite common for parents to take out home equity loans as an alternative to student loans when funding college tuition. These loans often have lower interest rates for borrowers with good credit. And parents can deduct the annual interest paid from their federal tax return.
Under the new tax law, interest from a home equity loan is no longer tax deductible if used for anything other than home improvements.
How We Help
A comprehensive college planning strategy looks at how to avoid losses while accumulating wealth. Without the help of a trusted professional, it can be difficult to know if you’re maximizing savings amidst all the tax law changes. At College Planning America, we assess your total financial picture so you can have confidence knowing you’re saving for your child’s future in the most efficient way possible. Want to learn more? Get started by emailing me at dcoen@sageviewadvisory.com or calling 800-814-8742.
About Dave
Dave Coen is a Financial Advisor with SageView Advisory and the CEO of College Planning America. Along with his retirement financial industry experience, he is a College Planning Specialist. He works closely with individuals and families to provide comprehensive financial planning that addresses all elements of their financial picture. Learn more by connecting with Dave on LinkedIn.
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This material is designed to provide accurate and authoritative information on the subjects covered. It is not however intended to provide specific legal, tax, or other professional advice. For specific personal assistance, the services of an appropriate professional should be sought.
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(1) https://www.irs.gov/newsroom/irs-offers-guidance-on-recent-529-education-savings-plan-changes
(2) https://taxfoundation.org/kiddie-tax/
(3) https://www.irs.gov/pub/irs-utl/oc-changes-to-standard-deduction-0419.pdf
(5) https://www.fool.com/taxes/2019/01/31/wait-a-minute-whered-my-personal-exemptions-go.aspx
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