Congressional Republicans have released their proposal for tax reform, and it includes a number of key provisions that will affect every taxpayer. Yet amid corporate tax reductions, the eventual elimination of the estate and alternative minimum taxes, and a simplified structure of tax brackets, some more specialized provisions of the tax bill haven't gotten the attention they deserve. In particular, the Republican tax plan would make substantial changes to the tax breaks people get for costs related to education, taking away some valuable provisions and making significant changes to others. Those who face educational expenses in the near future or who are still paying down student debt need to understand the implications of this tax plan on their finances.
Say goodbye to student loan interest and tuition and fees deductions
The Republican tax plan would eliminate the current provisions allowing many taxpayers to deduct the interest they pay on student loans as well as a certain amount of the tuition and required fees that they pay. Under current law, single filers making $65,000 or less or joint filers making $130,000 or less can deduct up to $2,500 of their student loan interest payments. Partial deductions are available for incomes up to $80,000 for singles and $160,000 for joint filers. The same income limits also apply to the tuition and fees deduction, which allows deductions of up to $4,000 for money spent toward these educational costs.
One of the biggest benefits of both of these deductions is that taxpayers can claim them even if they don't itemize. Eligible taxpayers have been able to adjust their gross income downward to reflect these above-the-line deductions. With 13.4 million taxpayers claiming student loan interest deductions and another 3.9 million claiming the tuition and fees deduction according to the most recently available IRS data, the elimination of these two provisions will have a substantial impact on taxes for a substantial fraction of the American public.
The Lifetime Learning Credit won't last a lifetime under the plan
Also on the chopping block is the Lifetime Learning Credit. This provision allows taxpayers to deduct expenses for a wide array of educational expenses that include not only traditional college degree programs but also certain types of work and vocational training as well as isolated courses that weren't part of the pursuit of a degree. Taxpayers can get a 20% tax credit on up to $10,000 in tuition expenses.
About 2.5 million taxpayers claimed the Lifetime Learning Credit. Given that the American Opportunity Tax Credit is generally more favorable for those who are in traditional college programs, most of these Americans are likely nontraditional students seeking to improve their career skills or gain other valuable knowledge.
Making up for lost breaks
The Republican tax bill does make one favorable move for education. It extends the popular American Opportunity Tax Credit, which more than 9 million taxpayers claimed according to the most recent year's IRS data, to cover a fifth year. Current law allows this credit for the first four years, with 100% of the first $2,000 and 25% of the next $2,000 in expenses eligible for the credit. That works out to $2,500 per year for up to four years.
To qualify for the American Opportunity Tax Credit, students must be at least half-time. The full credit is only available for those with incomes of up to $80,000 for singles or $160,000 for joint filers. The bill would cut the maximum value of the credit in the fifth year by half, maxing out at $1,250.
A potential tax increase
In addition to eliminating existing breaks, the tax bill would also potentially add taxes to a currently tax-free benefit. Currently, employers can offer tuition assistance of up to $5,250 without their workers having to include that money as taxable income.
Under the plan, this benefit would go away. Such awards would get taxed in the same way as your wages or salary, increasing your tax bill in a way that would require you to take cash out of pocket to pay the additional tax.
A learning experience
Education is expensive, and students and parents need all the help they can get. The Republican tax proposal makes changes that on the whole have some negative implications for families paying educational expenses. Although the extension of the American Opportunity Tax Credit will cushion the blow somewhat, lost tax breaks in the Republican tax bill will still hurt millions of taxpayers, especially those who've finished their traditional college education and are trying to dig out from student debt.