Students and their parents dodged a bullet with the final Tax Cuts and Jobs Act of 2017. Initial drafts of the bill had included the elimination of the Lifetime Learning Credit, the student loan interest deduction, along with the taxation of tuition waivers (used mainly graduate students and college employees). In the end, none of these provisions made it into the final legislation. But a few other college-related items did. These changes took effect in 2018.
529 Plans
The new law expands the definition of 529 plan “qualified education expenses” to include K-12 tuition. Starting in 2018, annual withdrawals of up to $10,000 per student can be made from a 529 college savings plan for tuition expenses related to enrollment at a K-12 public, private, or religious school (excluding home schooling). Such withdrawals are now tax-free at the federal level. However, part of the beauty of 529s is their tax-deferred growth over time, so we do not generally recommend using them for pre-college schooling.
In addition, the new tax law allows 529 account owners to transfer funds from a 529 account to an ABLE account without federal tax consequences, if certain requirements are met. An ABLE account is a tax-advantaged account that can be used to save for disability-related expenses for individuals who become blind or disabled before age 26. Like 529 plans, ABLE plans allow funds to accumulate tax deferred, and withdrawals are tax-free when used for a qualified expense.
New calculation for kiddie tax
The tax reform law changes the way the “kiddie tax” is calculated. Previously, a child’s unearned income over a certain amount was taxed at the parents’ rate. Under the new law, a child’s unearned income over a certain amount ($2,100 in 2018) will be taxed using the compressed trust and estate income tax brackets. This change may make the use of UTMA/UGMA custodial accounts less attractive as a college savings vehicle due to the reduced opportunity for tax savings.
New tax on large college endowments
The tax law created a new 1.4% tax on the net investment income of large college endowments. Specifically, the tax applies to institutions with at least 500 tuition-paying students and endowment assets of $500,000 or more per student. Some 30 colleges are expected to be swept up in this net in 2018, including top-ranked larger universities and smaller elite liberal arts colleges. Some colleges have publicly stated that the tax will limit their ability to fund certain programs, including financial aid programs.
Loss of personal exemptions
Starting in 2018, the tax law eliminates personal exemptions, which were $4,050 in 2017 for each individual claimed on a tax return. So on their 2018 tax returns, parents of college students will lose an exemption for each college student they claim.
However, this loss may be at least partially offset by:
(1) a larger standard deduction in 2018 of $24,000 for joint filers (up from $12,700 in 2017); $12,000 for single filers (up from $6,350 in 2017); and $18,000 for heads of household (up from $9,350 in 2017); and
(2) a new family tax credit of $500 in 2018 for each dependent who is not a qualifying child (i.e., under age 17), which would include a dependent college student. The income thresholds to qualify for this credit (and the child tax credit) are significantly higher: up to $400,000 adjusted gross income for joint filers and up to $200,000 for all other filers.
College Board reports tuition increases
In other college news, the College Board has released college cost data for the 2018-19 school year in its annual Trends in College Pricing report. Here are the highlights:
4-Year Public Colleges (in-state students):
- Tuition and fees increased an average of 2.5% to $10,230
• Room and board increased an average of 3.1% to $11,140
• *Total average cost for 2018-2019: $25,890 ($25,290 in 2017-2018)
4-Year Public Colleges (out-of-state students):
• Tuition and fees increased an average of 2.4% to $26,290
• Room and board increased an average of 3.1% to $11,140
• *Total average cost for 2018-2019: $41,950 ($40,940 in 2017-2018)
4-Year Private colleges:
• Tuition and fees increased an average of 3.3% to $35,830
• Room and board increased an average of 3.2% to $12,680
• *Total average cost for 2018-2019: $52,500 ($50,900 in 2017-2018)
* Total average cost includes direct billed costs for tuition, fees, room and board, plus a given sum for books, transportation, and personal expenses, which vary by student.
