College students and their families are among the taxpayers directly affected by the recent overhaul of the federal income tax code.
The Tax Cuts and Jobs Act is not all bad news for folks trying to save for or pay for higher education, however. It preserved more tax breaks than it nixed, and it left multiple ways to save for college largely untouched.
No more tuition and fees deduction
Up through tax year 2016, qualifying higher-education expenses that you paid for yourself or your spouse or dependent were tax-deductible, according to the Internal Revenue Service. This deduction could reduce your taxable income by as much as $4,000.
This deduction was not extended by the overhaul, however, the H&R Block Tax Institute reports. So, Congress effectively allowed it to expire after 2016.
Preserved tax breaks
The tax deduction for interest on qualifying student loans remains in place, according to H&R Block. This deduction enables you to write off up to $2,500 in interest payments per year.
The tax code overhaul also did not change two tax credits for higher-education expenses:
- The American Opportunity Tax Credit (AOTC), worth up to $2,500 per year, can help pay for expenses from the first four years of a student’s higher education.
- The Lifetime Learning Credit (LLC), worth up to $2,000 per year, “can help pay for undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills,” the IRS says.
Ways to save for college
The overhaul loosened the federal rules for 529 plans, allowing funds in those tax-sheltered investment accounts for college costs to be used for K-12 education expenses. This change takes effect starting with the 2018 tax year — the taxes you’ll file next year.
Funds saved in 529 plan accounts can, however, continue to be used for college expenses. After all, 529 plans were originally intended to encourage folks to save money for college.
Various other ways to save money for higher education remain available as well post-overhaul, H&R Block reports. They include:
- Savings bonds
- Educational assistance programs provided by employers
- Coverdell education savings plans
What’s your take on these changes or the overall maintenance of the status quo? Share your thoughts below or over on our Facebook page.