We wrote yesterday about the latest tax legislation Congress is pushing. Yesterday’s post focused on the disastrous effects on student loan borrowers if this shameful legislation passes. Today, we’ll take a look at how families and adult learners will be negatively and substantially impacted by the Tax Reform Act of 2014. The line items we analyze today will make it harder to save for college, harder to pay for college with saved funds and will seek to tax educational assistance programs that are currently tax-free.
#1 Eliminate Tax Benefits of Saving for College with Savings Bonds
United States savings bonds have long been a safe way to save for college education without worrying about the vagaries of the stock market. If this line item of the legislation is approved, savings bonds cashed in to use for college education will be taxable. Proceeds from 529 accounts aren’t taxable, so why should this be? And this is a proposal that, if it made it on the nightly news, would draw an angry response from most Americans with young children trying to find a way to save for school. But buried in 979 pages of legislation, what family would go looking for it? Shame on whoever came up with this.
#2 Make Tuition Reduction Taxable
This proposed tax modification I have less issue with because those it impacts are higher earners. Educational institutions often offer a reduction or complete waiver of tuition for the employee and their family. Currently, this benefit isn’t taxable. However, with tuition at schools ranging from several thousand to tens of thousands of dollars a year, this is a significant benefit that can prove a great boon to these lucky employees. The Association of American Universities found that 40% of those that enjoy this benefit earn more than $60,000 per year and 11% earn more than $100,000 a year. If this passes, those that take advantage would see the reduction function as income which could drastically increase their taxes, but would still be cheaper than paying the tuition out of pocket. This seems reasonable.
#3 Make Educational Assistance Programs Taxable
Again, this modification isn’t necessarily tragic, but it just has me wondering why Congress seems intent on dismantling programs that incent people to seek higher education. This specific benefit is aimed at working adults (typically) and would make taxable tuition assistance or reimbursement that employers provide to their employees. Some employers, such as Chick-fil-A, offer $1,000 stipends toward tuition for stellar young employees. These would now be taxable, as well. With the job market becoming more aggressive and continuing education more important to retention, this seems like Congress is intentionally looking to make life harder.
#4 Reestablish the Penalty on IRA and 401(k) Withdrawals for Educational Expenses
When you take money out of your retirement account prior to age 59 ½, you incur a 10% tax penalty on top of the regular income tax you have to pay. An exception was established to the 10% penalty for withdrawals for higher education expenses. Congress is looking to reestablish the penalty. This may encourage more parents to turn to student loans or to leave their students to their own devices (which means debt) to pay for their education.
It’s very important that you contact your legislators and tell them to strike the items of the Tax Reform Act of 2014 that relate to higher education and student loans. This is not #taxreform we need and is no reform at all. After you contact your lawmaker, sign up for your free Tuition.io student loan account to track and optimize your debt and read our blog daily for updates on this legislation and other important student loan news, as well as tips on dealing with your debt.