If you’ve grown accustomed to — or assumed — you’d get a deduction for your college-bound kid, think again.
It’s just one of the many changes in tax law, since the Tax Cuts and Jobs Act of 2017. Of course, this information is not a substitute for professional tax advice tailored to your unique financial situation.
Before TCJA, full-time college children qualified for a $4,050 personal exemption, which a parent could claim as a deduction to determine taxable income. Taxable income is used to calculate financial aid and other awards, says Paula Bishop, a Seattle-based CPA focused on financial aid and higher education. TCJA removed exemptions altogether, so parents of college students (17 and older), accustomed to personal exemptions, may notice a sizable adjustment at tax time — and not necessarily in their favor.
For dependents under 17, the new Child Tax Credit offers a credit of up to $2,000, some of which is refundable. For families claiming full-time college students 17 and up as dependents, there’s a $500 tax credit available, the Credit for Other Dependents, Bishop says. Like most credits and deductions, various income limits apply, and the credit can be reduced, depending upon your income.
Single parents who can file as head of household can take advantage of the standard deduction, which is $18,000 post-TCJA, up from $9,350 in 2017. A parent qualifies if his or her full-time student was under 24 at the end of the tax year, and dependent upon that parent for more than half of his or her support.
Goodbye, HELOC deduction
Some parents rely on home equity loans and lines of credit to help fund educational expenses; HELOC interest payments qualified for a tax deduction. Under TCJA, when HELOC funds aren’t used for a home, the loan interest isn’t deductible. However, “refinance interest rates are in the 4 percent range right now,” Bishop says, “which is a lower rate than the current 8 percent rate for federal loans to parents, known as PLUS loans, Parent Loans for Undergraduate Students.”
Increased gift amounts
If a grandma wants to offer some cash to help defray college costs, let her know that for tax year 2018, you or your child can receive $15,000 (up from $14,000), tax free, from another individual. If two grandparents want to write a $15,000 check each, that’s a tidy, tax-free $30,000.
The TCJA expanded the use of 529 college savings plans — previously restricted to use for higher education — to also include paying up to $10,000 per year for K-12 at private, religious or public schools, Bishop says.
What stayed the same
AOTC: The American Opportunity Tax Credit is the most popular tax credit for college students working on a first bachelor’s degree, attending at least half-time, in a program leading toward a degree or other diploma. Parents can claim up to $2,500 of tax credits, if paying at least $4,000 of qualified education expenses. These expenses include tuition, fees, books, supplies and even a computer. The student must be claimed as a dependent on the parent’s return.
Lifetime Learning Credit: If you or your dependent pay for college tuition and fees, you may qualify for the LLC, Bishop says, a 20 percent tax credit on the first $10,000 of qualified education expenses, up to a maximum of $2,000. There’s no limit on how many years you can claim the LLC. If you’re going to grad school or taking a class to learn something new, this credit is available, within certain income limits.