Thank you Beth for taking on the arduous task of explaining the new tax reform and how it will impact your teen students which has been an under-reported story: 

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For months we have been hearing about the Tax Reform bills, usually with either angst or praise depending on the source of your updates.  Now that the law has actually passed, tax professionals are working hard to figure out exactly what has changed and how those changes will impact taxpayers.  Bottom line, there are too many moving parts to the equation to make generalizations for a “typical” taxpayer. What we know for sure is that most breaks on deductions and credits expire by 2025. [Editor’s note: At which point, Congress will kick the can down the road by passing one year extensions...oh, the cynicism]

Let’s focus for now on the group of taxpayers we deal with everyday--our students--and help them understand how this may change things for them for 2018.  We will talk about three things that could impact students either directly or indirectly: taxes on their earned income, taxes on their unearned income, and higher education financing.

Unearned Income

What is “unearned” income?  It is the interest, dividends, capital gains from any investments (not 529 plans) in the child’s name, or things like taxable scholarship income (amounts beyond tuition and fees….don’t get caught out on this!)  For 2017, if a child only had unearned income, she would be allowed to deduct the first $1050.  

For 2018, the taxable unearned income for a child will be taxed at the rates that apply to Trusts and Estates (see table below) instead of using the child’s and parents’ rates.

Earned Income

“Children” include those under 19 and college students up to 24 who can be claimed as dependents by their parents. Children file tax returns for their earned income (all wages) for two reasons: to get back any withholding if they haven’t earned enough to owe income taxes, or because they earned more than the amount of standard deduction for single filers ($6350 for 2017).  

Page 144 of IRS Publication 17 gives a worksheet for calculating a child’s standard deduction for income in total  (earned and unearned).  For 2017, the deduction allowed is the total earned income plus $350 (minimum $1050) up to the standard deduction ($6350).    

The big change for parents in 2018 is that personal exemptions disappear for now.  Parents who can reduce their 2017 income by $4050 for that dependent child but not in 2018.  (This could be good if the higher child tax credit is worth more to them, worse if it is not.) But as it appears to be written, the big change for children will be that the standard deduction increases to $12,000 for single filers.  Unless they earn over $12,000 in 2018 they won’t owe any Federal Income Tax on those earnings. [Editor’s note: for those industrious teens out there, this means you can now earn up to $12,000 free of federal income tax!]

Changes for Higher Ed?

There was lots of speculation for months about the potential for a total disruption to graduate student education with the proposal to tax tuition waivers as income, among other things.  But fear not-- tuition waivers will NOT be subject to income tax, there were no changes in the end to the deductibility of student loan interest (up to $2500/year), and the Lifetime Learning Credit was not changed.  

Institutions with large endowments, however, will now be paying tax on them.

As explained by Inside Higher Ed, “The tax reform package places an annual 1.4 percent excise tax on net investment income at an estimated several dozen colleges and universities. Specifically, the tax will apply to institutions with at least 500 students and net assets of $500,000 per student.”

A reward for you teachers who have read this far:

Teachers can still take a $250 deduction for money they spend on certain job-related and classroom expenses. Neither the House’s attempt to remove this deduction nor the Senate’s attempt to double it made it into the final bill.

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You can take your students through the IRS’ tax simulator for dependents for 2017 and talk about how this might look different for 2018.

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