TAX PLAN GOES EASY ON EDUCATION
When we left off in December, we were all on the edges of our seats waiting to see if the House and Senate could come to an agreement on a final bill to present to President Donald Trump for passage into law.
Well, they were able to come to an agreement and send a bill on through to 45’s desk for approval and signature on Dec. 22, just before the clock struck holiday break. Known as the “Tax Cuts and Jobs Act” (TCJA), it is the biggest tax reform in over 30 years.
We bring you an update on the items that affect you as students, Seattle-area dwellers and general taxpayers. Luckily for you students out there, a majority of the Senate proposals won out, keeping a lot of the student tax benefits in place.
The TCJA will go into effect for the 2018 tax year.
What used to be a system implementing six different tax rates (ranging from 10-39.6 percent) is now a seven tax-rate system (ranging from 10-37 percent). While people in most brackets will see a little bit of taxing savings, those with higher income amounts will see the largest cuts. Originally touted as a tax system that would bring higher savings to the lower income earners, we are seeing that this likely won’t end up being the case.
The biggest change was the tax rate applied to corporations — the new law has dropped the corporate rate down to a 21 percent flat rate, down from the highest rate of 35 percent. The thought behind this is that large corporations will save money with reduced taxes, and this savings will trickle down to employees via salary raises or bonuses, thus spurring the economy.
Some companies have already given bonuses to employees as a result, others have mentioned they will be using the money to restructure. The jury is out as to whether this will actually spur growth long-term at lower income levels.
One area that could be greatly affected by the tax reform is charitable giving. This is due to an increase in the standard deduction.
Taxpayers are allowed to take either a standard deduction or an itemized deduction, whichever is larger of the two. The standard deduction is a fixed amount, while itemized deductions are a total of specific deductions for expenses such as home mortgage interest and charitable donations.
An increase in the standard deduction will result in fewer taxpayers utilizing itemized deductions. The ultimate victims of this change could be charitable organizations, as there will be fewer people receiving a tax benefit for their charitable giving. Charities are concerned that without this benefit, they will receive fewer donations.
The new standard deduction is $12,000 for single filers, $18,000 for head-of-household filers and $24,000 for those married filing jointly.
Let’s hope that the taxpayers who give to charity rely on that warm fuzzy feeling of giving rather than the tax deduction as their motivation to give and that charities will continue to stay afloat.
Student Loan Interest Deduction
What was once on the chopping block with the House version of the bill has remained intact under the final legislation. That’s right, the student loan interest deduction has been spared.
Students are allowed to deduct up to $2,500 in interest paid on student loan debt during a calendar year, depending on income levels. The deduction is reduced if income levels are above $65,000 for single filers and $135,000 for couples.
You future PhDs can thank those protesting graduate students for making their voices heard. Another item has been spared of which could have been devastating to graduate studies.
In the House version of the bill, it was proposed that education waivers provided by colleges (basically, colleges that waive tuition for graduate and PhD students helping out with research or student teaching) be taxable income to the students. But this was highly controversial as the students would have been expected to pay tax on income in which they never received cash. However, this portion of the Senate bill won out and these waivers are not taxable.
The American Opportunity and Lifetime Learning credits will remain the same as they were prior to the new tax reform. For the American Opportunity credit, this means that anyone pursuing their first four-year degree is allowed a dollar-for-dollar tax break up to $2,500 for qualified expenses. If this drops your tax to zero, you are entitled to 40% of the remainder, up to $1,000, as a refund.
The Lifetime Learning credit extends beyond the four-year degree and allows students up to $2,000 of qualified education expenses as a credit. Parents who claim their student children as dependents are also entitled to the credit.
This credit cannot be used if you are taking the American Opportunity Credit mentioned above. Additionally, there is a phaseout for individuals making over $65,000 a year or joint filers making over $130,000 a year.
A large chunk of businesses out there help pay for their employees’ tuition, up to $5,250 a year. Again, thanks to the Senate portion of the bill that passed, this also stays intact so employees can enjoy this benefit tax-free.
Prior to the law change, homeowners were able to deduct mortgage interest for loans up to $1 million. The new law changes this for new home purchases – the interest deduction is allowed for loans up to $750,000.
A bigger change that affects those with big homes on expensive pieces of land is the itemized deduction for property taxes. Prior law allowed itemized deductions for state taxes to include a combination of income taxes, sales tax and property tax for amounts paid during the year. The new law now caps a combo of all of these deductible taxes at $10,000.
This mostly affects people in states with an income tax and high property values (like California), but given that we are seeing a hike in property values in our beloved metropolitan area, this could affect quite a few people here as well.
Health Insurance Mandate
One of the biggest changes of the tax reform is that the insurance mandate is no longer, well, a mandate. Striving to require health coverage for all, under the Affordable Care Act (also known as Obamacare), a penalty was imposed on taxpayers who didn’t have some form of insurance coverage.
The coverage could be obtained either through employers or the open market that was set up when Obamacare went into place. This penalty is reflected on the tax return, and began in 2014, but due to the passing of TCJA, 2017 was the last year the penalty was imposed.
“But what does this mean?” you might ask. There is concern that because health insurance is no longer required in 2018, many people who were once insured will no longer be insured as, A) they don’t want to pay for premiums as there is no penalty requiring them to do so, or B) insurance companies will stop offering coverage to folks as they are no longer required to do so.
The Congressional Budget Office (the group of smart people that provides budget and economic information to Congress) estimates that over 13 million people will be uninsured in the next decade, due to these changes in the tax reform.
This could result in insurance companies hiking up their premiums. It is anticipated that those who will drop their insurance would be the healthier demographic of 26-35 year olds, who help contribute to the insurance system to help keep premiums lower for all (they pay in, but don’t have as many claims, as they are healthy, so insurers make money off of this age range). Without this demographic, rates could skyrocket for those who need it most — the ill and elderly.
Another concern is that fewer people will sign up for Medicaid, the low-income form of insurance. While there may be a small reduction in tax rates for low income earners, not having insurance could end up costing more in the end for folks who get sick or injured. Additionally, more costs could fall on taxpayers as, under the current system, they would be the ones footing the bill when the uninsured need emergency or life-saving care.
On paper, this new tax reform appears to help out large corporations and the wealthy, as these groups are seeing the largest tax cuts under this system. Many of the savings provisions for individuals are set to expire after 2025 (as opposed to the business provisions — those were made permanent) so it’s possible that the overall savings may not be that significant to folks at middle class and lower-class levels.
And it remains to be seen exactly how, or even if, these changes will spark economic growth, and if large companies really will pass down their tax savings to employees, or further pad their shareholders’ pockets.
But hey, at least the education items benefiting students have stayed fairly intact! So rest assured and keep it up with that intense studying, knowing that Congress has your educational back, for now.
By Kristen Clark,
Design Director (and CPA)