Category: Paying for college

The Republican tax bill – a burden to families, homeowners, and students


Important note: I am not a CPA or tax attorney and I don’t play one on TV. My explanations and descriptions of the proposed changes to the tax code are simplified (which is the goal of this blog). Nothing contained here should be construed as tax advice. I also want to note that I am a Conservative, and I am firmly against this bill.

In early November, 2017, the Republican party released their version of tax reform. You can find the full text of the tax code here: https://waysandmeansforms.house.gov/uploadedfiles/bill_text.pdf. Most people agree that the tax code needs some simplification and that some loopholes need to be closed. While there are a few positive aspects of the bill, the bill, as a whole, is a disaster and should not be passed.  Let’s start with the positive aspects of the proposed bill:

  • Tax brackets are reduced from seven to four, which could lower taxes for some.
  • The standard deduction is doubled, which will make taxes easier for many individuals and families.
  • Repeal of the Alternative Minimum Tax (AMT).
  • Repeal of the estate tax.
  • An increase in the child tax credit from $1,000 to $1,600.
  • Corporate tax rate lowered from 35% to 20%.

Now for the negatives:

  • Removal of the personal exemption (currently $4,050 per person). You can find this removal on page 33 of the tax bill. The doubling of the standard deduction is supposed to make up for the removal of the personal exemption, which you get for each dependent and taxpayer on a return. In my family, with five children, we get seven personal exemptions. In 2016 the personal exemption was $4,050, which equates to $28,350. We would get this on top of the standard deduction, which was $12,600, for a total of $40,950. Our deduction under the new bill will be $24,000. This bill penalizes anyone with children, and certainly penalizes large families. Even with the increased child tax credit we still come out behind. I thought Republicans were in favor of families.
  • Mortgage interest deduction would be capped on homes up to $500,000 (see page 100 of the tax bill). In many areas of the country $500,000 is an average home[i]. This only applies to new mortgages, so if you have a mortgage now and the value of your home is $1,000,000 or less, it won’t affect you. Republicans obviously don’t want you to buy a more expensive home.
  • Under current laws, as long as you are using your home as your primary residency, you can move every two years and not pay capital gains taxes on the increase in value on your home. The new tax plan increases that to five years (see page 137). This will be devastating to the starter home market, and challenging for many others. For most individuals that tax will be 15% of the gain. For some reason, Republicans don’t want you to move very often.
  • Graduate students often pay for their tuition by doing research and teaching undergraduate courses. In exchange, they are paid a wage (which average $20,000 – $30,000 a year) and receive a tuition waiver (which averages $12,000 – $50,000 a year). Under current law, the wages are taxed, while the tuition waiver is not. Under the proposed changes, both the wages and tuition waiver become taxable income (see page 98 in the tax bill). This will dis-incentivize students from going to graduate school, and raising their tax bill by a large amount, especially for those that go to more expensive schools.[ii] An analysis by Forbes shows that an in-state University of Florida grad student pays about $1,424 a year in taxes currently, but under the new plan they will pay $4,052 a year, which is 17.6% of their income. A Princeton grad student pays $2,849 (8.8% of their income) now, while under the GOP plan they will pay $13,499 (41.9% of their income)[iii]. That is a heavy, and unacceptable, tax burden on those trying to get an education. For an excellent analysis of how this would affect students, click here.  Why do Republicans not want individuals to go to grad school?
  • Elimination of state and local tax deduction (see page 105).
  • If your employer offers adoption assistance that is not currently reported as income. This bill repeals that and it will now be reported as income. NOTE: This was included in the original bill (see page 142), but has since been removed.
  • If your employer offers tuition assistance, it is currently not reported as income. That benefit will be repealed and it will now be reported as income (see page 96-98). Again, this will discourage individuals from going to school.
  • If you work at an educational institution you or your children may get reduced or free tuition. Currently this is not reported as income. Under the new bill it will be (see page 96). For example, as an employee benefit my children get free tuition at Utah Valley University. Their tuition would be reported as income.
  • The student loan interest deduction will be repealed (see page 96 – Section 221).
  • The itemized deduction for medical expenses will be repealed (see page 113).
  • The bill adds a “Chained CPI” to the tax code, which essentially means that Social Security income will grow at a slower rate than true inflation[iv].

This tax bill is terrible and should not be passed. However, remember that this bill is not a law yet! I encourage you to contact your elected officials and encourage them to scrap this bill entirely. You can find contact information here:

https://www.usa.gov/elected-officials

Call them, e-mail them, post on their social media pages. Let them know you don’t support this bill.

I conclude with two quotes:

“This is a Republican plan that targets people wanting to adopt children, homeowners, small businesses and people with high medical bills.” – Carol Markowitz[v]

“If the goal of the new tax plan is to shift the tax burden from wealthy, older Americans onto young, already-indebted students pursuing their higher education dreams, it’s poised to be a smashing success.” – Ethan Siegel[vi]

 

END NOTE: If you are looking for a comprehensive review of the GOP tax bill you can find that here: https://www.kitces.com/blog/tax-cuts-and-jobs-act-2018-house-gop-tax-reform-proposal/

 

[i] In Los Angeles county, for example, 23% of mortgages are over $500,000. In San Francisco that number jumps to 56.6%. http://www.latimes.com/visuals/graphics/la-na-g-mortgage-interest-deduction-tax-calculator-20171106-htmlstory.html

[ii] https://www.wired.com/story/grad-students-are-freaking-out-about-the-gops-tax-plan-they-should-be/

[iii] https://www.forbes.com/sites/startswithabang/2017/11/07/the-gop-tax-plan-will-destroy-graduate-education/#427787703d2f

[iv] https://newrepublic.com/article/145688/biggest-trojan-horse-republican-tax-plan

[v] http://www.foxnews.com/opinion/2017/11/07/im-conservative-and-hate-republican-tax-plan.html

[vi] https://www.forbes.com/sites/startswithabang/2017/11/07/the-gop-tax-plan-will-destroy-graduate-education/#7c929ce63d2f

Paying for College – 529 plans

College can be paid for in a number of different ways – you can save up in advance, you can work and pay along the way, you can excel in academics, sports or other areas and get scholarships, you can pay with grants or loans or you might just have a rich relative that is willing to pay it for you.

In today’s article I want to cover the first option – saving up in advance.

In 2013 the Center for Social Development did a study called “Small-Dollar Children’s Savings Accounts, Income, and College Outcomes”(1) where they share some interesting findings:

  • 61% of low- and moderate-income (LMI) children have no savings account for college.
  • An LMI with savings for college is three times more likely to enroll in college than a child with no savings, and more than four and a half times more likely to graduate.
  • Only 5% of LMI’s with no savings will graduate, while 25% of those with savings of $1-$499 will graduate, and 33% of those with $500 or more set aside will graduate.

These numbers are significant – compared to their peers from a similar socioeconomic background, setting aside between $1-$499 for your child or grandchild makes them three times more likely to enroll in college and four and a half times more likely to graduate. That’s not a lot of money for those outcomes.

In addition, the government has provided some great tax benefits to saving for college in special accounts called 529 plans. Each state has at least one 529 plan, but they all share these benefits:

  • Tax-free investment growth
  • Tax-free withdrawals for qualified expenses
    • Qualified expenses include tuition, fees, room and board, textbooks, computer, printer and software as well as any other required fee from a university or college
  • You can use the money to pay for education expenses in any state
  • The account holder maintains ownership of the account
  • You can change the beneficiary any time you want
  • If your child gets a scholarship you can withdraw up to the amount of the scholarship and just pay taxes on the earnings
    • Non-qualified withdrawals (i.e. those not for qualified expenses) are subject to taxes and a 10% penalty on the earnings
  • Legally there is no maximum amount, though in reality most people want to keep the annual contribution below $14,000 if you are single, and $28,000 if you are married(2)

Many states offer a tax deduction or credit of some kind if you live in that state and invest in that state’s 529 plan. NerdWallet has created a list of which states offer a deduction or credit here:

https://www.nerdwallet.com/blog/investing/529-plans-list/

Which plan should you invest in? You want to find a plan with low fees, direct-investing (which means you pay no commissions on the investment) and, if possible, a tax deduction or credit.

Consumer expert Clark Howard said, “Utah is by far the single best plan in the country.” He also lists Iowa, New York, Georgia and Michigan as great plans.(3) Morningstar rates Utah’s plan as “…one of the best in the U.S.”(4)

You can explore your state’s plan further from the NerdWallet link above, but if you are looking for a great plan you can’t go wrong with the Utah Educational Savings Plan (https://uesp.org/). It is direct-sold, has low-fees, and has good investment options with Vanguard. There is no fee to open the account, there is no minimum investment and Utah residents can get a Utah State tax credit for contributions.(5)

Remember – saving as little as $1-$499 for your child’s college education dramatically increases the odds of them going to, and graduating from, college, which will increase their lifetime earnings, decrease their chances of living in poverty and decrease their chances of being unemployed.(6)

 


  1. https://csd.wustl.edu/publications/documents/wp13-06.pdf
  2. Note that it could actually be much higher than this if your plan allows it, but that gets into estate planning issues, which we aren’t going to get into here.
  3. http://clark.com/education/clark-updates-his-529-guide-for-2010/
  4. https://uesp.org/morningstar-utah-educational-savings-plan-is-one-of-the-best-in-the-u-s/
  5. This is not tax advice – check with your tax advisor or preparer to ensure you get the maximum benefit.
  6. This is assuming they choose the right major, but that will have to be covered in another article.