Legislative Update: Implications of Tax Reform on Education Financial Planning

By Paul Curley | paul.curley@strategic-i.com | January 12, 2018

How does the Tax Cuts and Jobs Act (H.R. 1) change how we save, pay and repay the cost of education?

The vision of the 529 Insiders website is to provide industry relent news, product training and best practices to those that help families in the college financial planning process. As the value of education, innovation and knowledge continues to rise in helping families to achieve their career goals and to live a better life, so does the importance of college financial planning. While many families focus on getting their children or grandchildren academically into college and especially into the “right” college, few families focus on how they will financially save, pay and repay the cost of education. Therefore, there is an education and awareness gap that the 529 Insiders website and 529 Dash e-newsletter is trying to solve to make the world a better place, and the importance of the goal is growing as the college affordability gap continues to widen. In order to educate and accelerate getting the message out into the marketplace, the 529 Insiders website provides proprietary content to build an audience of institutions, industry stakeholders, advisers, accountants, estate planners and employers as they are the key influencers and intermediaries in helping many families in the college financial planning process. Therefore, the goal of the 529 Insiders website is to address the specific needs and concerns of those that help families and institutions in the college financial planning process by providing industry relevant news, product training and best practices.

One new need has been understanding the implications of tax reform on education financial planning given the pace of legislative changes at the end of 2017. As such, this week’s 529 Insiders provides an overview of the final result of legislative updates relating to H.R. 1, The “Tax Cuts and Jobs Act”:

529 Qualified Expenses Expand to include Tuition for K-12

– At the Federal level, H.R. 1 allows 529 college savings plans to expand its list of qualified expenses to include tuition up to $10,000 per year per beneficiary for elementary or secondary schools (including K-12 public, private or religious) (excluding home schooling) effective for distributions made after December 31, 2017.

– At the State level, roughly 20 states and D.C. automatically update state legislation to align with this federal legislation effective January 1, 2018. Even so, some of those roughly 20 states are announcing that state legislation is still required. As of publication of this article, the remaining states will need to take state legislative action to enable the expansion of 529 qualified distributions and, if applicable, state tax incentives. Otherwise, the 529 withdrawal for K-12 tuition may be considered a non-qualified distribution subject to state tax recapture of any state income tax deduction previously taken. As of publication of this article, certain states representatives have made public announcements that have highlighted this issue. Therefore your client should consult their tax advisor regarding their individual situation before making a withdrawal for K-12 tuition and before making a contribution which they intend to use for K-12 tuition. Also, contact your 529 plan provider, review your 529 plan provider’s website and read your 529 plan’s disclosure statements for announcements related to this update.

529s Can Rollover to ABLE

– ABLE accounts are tax-advantaged savings accounts for certain individuals with disabilities and their families. From December 26, 2017 through the end of 2025, assets in 529s are permitted to roll over to an ABLE account as long as that account is owned by the designated beneficiary or a member of his or her family. Amount rolled over would could towards the annual contribution limit of the ABLE account.

Coverdells Remain Open

– There were no changes to Coverdell Education Savings Accounts, despite text in the initial Senate Bill that the investment vehicle would get closed.

Other Education Financial Planning Related Changes

– Through the end of 2025, the discharge of student loan debt due to death or disability does not have to be reported as income for tax reporting purposes.

– University endowment funds went from typically not being subject to taxation to subject to a 1.4% excise tax on net investment income for certain colleges and universities.

– Restrictions on state and local tax (SALT) deductions up to $10,000 per year due to H.R. 1 may increase demand for 529s plans in those states that also have a state tax deduction or credit on 529 contributions.

– Home Equity Loan Interest is no longer deductible. This change impacts the college financial planning of families as some parents use home equity lines of credit as a means to pay for educational expenses.

List of Discussed Factors Not Changed

– American Opportunity Credit, Hope Scholarship and Lifetime Learning Credit remain unchanged despite discussions to change them.

– Student Loan Debt Interest Deduction remain unchanged. The maximum allowable deduction continues as $2,500 per year.

– Employer College Tuition Reimbursement remain unchanged. Up to $5,250 may still be excluded from the employee’s gross include when used for certain educational expenses.

– Graduate School Scholarships remain unchanged. Though ultimately unchanged, this was also referred to as exclusion of qualified tuition reductions throughout the evaluation process.

– Deduction for qualified tuition and related expenses remain unchanged.

– Repeal of exclusion for interest on U.S. Savings bonds used for higher education remain unchanged. Read the 529 Insiders article here for an overview of the special tax provisions of education savings bonds.

Editor’s Final Note: Thank you for your feedback and suggestion to write this summary, and we will continue to track and write about these types of legislative updates going forward. In the meantime, have the college financial planning discussion with your clients today.