So, your tax clients say their daughter got into Harvard...
Your clients are ecstatic. Their daughter just got accepted to an Ivy League college. But they’re also worried because that top tier school is expensive. Concern doubles when they think about their 15-year-old son who just started at a private high school. He’ll be looking at colleges soon, too.
Many parents feel financial pressure when it comes to their children’s education. That’s not surprising considering that in 2016, the yearly estimated average cost of undergraduate tuition, fees, room and board was $16,757 at public institutions, $43,065 at private nonprofit institutions and $23,776 at private, for-profit institutions.
What can you as a tax practitioner do to prepare your clients for this financial milestone? Below, you’ll find four suggested talking points to put your clients’ minds at ease.
Discuss Coverdell Education Savings Accounts and changes to qualified tuition programs (QTPs)
Clients who have QTPs (529 plans) or Coverdell Education Savings Accounts (ESAs) may find that tax reform has changed how they’ll use these funds. So, you’ll need to discuss the pros and cons of each type of plan to ensure they’re still getting the most bang for their buck.
One benefit resulting from the new tax bill is that 529 plans can now be used to cover tuition at private K-12 schools up to $10,000 each year per beneficiary. That’s great news for parents with kids in private elementary and high schools, but your clients need to be aware of the downside of using these funds early. The longer the funds stay within the plan, the more growth opportunities the money will have.
While both ESAs and 529 plans are good ways to save money for education costs, ESAs can allow for more adaptability, such as very flexible investment choices. The downside of ESAs is that they are subject to higher income restrictions. Benefits phase out completely for joint filers for modified adjusted gross incomes (MAGI) of $220,000 — $110,000 for single filers — or above. Corporations and other such entities can make contributions to ESAs without income restrictions. Also note, the total amount of contributions to these ESAs cannot exceed $2,000 per year, while 529 plans are only limited to the amount necessary to provide qualified education expenses. Make sure your clients understand that there may be gift tax consequence if these contributions exceed $15,000 during the year.
Regardless of which option best fits your clients’ needs, encourage them to shop around to minimize fees.
Update your clients on the status of popular benefits
Good news for your clients! Many popular education incentives remain unchanged after tax reform.
- The American opportunity tax credit (AOTC) can still be used to obtain up to $2,500 of federal tax credits for expenses related to a four-year degree, and $1,000 of this is refundable.
- Scholarships may be excluded from income for tax purposes if they are used for approved expenses.
- Interest from income on savings bonds within an education savings bond program is also excluded from income.
- There is still an exception to the early distribution penalty for retirement account withdrawals if they’re made for education purposes.
Unfortunately, the tuition and fees deduction isn’t around anymore. That can be a blow to those clients who are used to claiming this deduction.
Remember the grownups who want to go back to school
According to the U.S. Department of Education, about eight million adults over the age of 25 are enrolled in college, which means it’s likely that you have clients who need to know about their options.
Recent tax reform did not alter the Lifetime Learning Credit, which offers up to a $2,000 federal tax credit for qualified education expenses paid for all eligible students included on the taxpayer’s return. There’s no limit on the number of years your clients can claim this credit, and there’s no minimum number of enrollment hours or degree requirements to qualify. However, if your clients qualify for the AOTC as well, it may be best for them to take that credit instead.
Adult students with children have even more benefits to choose from. For instance, a tax credit for child care expenses is available for those attending school full time, so long as the child is under the age of 13.
Many adults are still paying off student loans, which can make it difficult to afford more school. If their MAGI is less than $80,000 ($165,000 joint), they can write off up to $2,500 of interest on a loan without itemizing.
Help your clients see the big picture
Of course, paying for school extends beyond smart tax planning. Providing a holistic perspective on a person’s tax and financial situation is where CPAs shine. Just because something is good for tax planning doesn’t mean it’s the most beneficial overall.
Tax reform has likely influenced your clients’ taxes and possibly their overall financial health. Lower tax rates and expanded eligibility for the child care credit mean benefits for your clients, but tax reform also reduced or eliminated other long-standing favorites like the mortgage interest deduction and the alimony write-off.
The AICPA offers a free podcast on tax reform’s effect on many tax and planning issues, including 529 plans, retirement plans, estate, gifts and trust considerations and other concerns. Find more useful tax and planning resources and tips on growing your business on the AICPA’s Planning & Tax Advisory page.
Whether it’s finally getting that Ph.D. or sending a child to Harvard, the more clients understand about how their tax decisions affect their overall financial health, the more likely they are to take the steps necessary to meet their goals. And you’re the person to help guide them.
Michael Ohanesian, CPA, MST, Tax manager - Parr & Associates. Michael lives in San Antonio, Texas, and is a member of the AICPA Tax Practice Management committee.