Will the New Tax Laws Affect Your Education Plans?

Will the New Tax Laws Affect Your Education Plans?

by | Accounting News, IRS, News, Tax, Tax Planning - Individual

While it can be difficult to live debt-free in today’s world, many American adults attribute a majority of their debt to educational loans. In fact, recent statistics show that Americans owe approximately 1.48 trillion in student loan debt and about 44 million Americans are currently paying on their student loans.

The recent conversations around tax reform had many students and those still paying their loans concerned about what the tax changes would mean for their debt-to-income ratio. Early proposals suggested the repeal of student loan interest and educational assistance deductions, as well as tax-free tuition waivers, which certainly left many feeling uneasy. The proposed changes would have removed around $2,500 in deductions and would have considered tuition waivers and employer-assisted tuition as taxable income, effectively bumping many into higher tax brackets.

Luckily, when the final legislation was passed in December of 2017, none of these changes were included. But, what changes were in the final bill that could affect your education and how you save for it?

One significant amendment is the expanded usage allowed under Section 529 accounts, which are tax-advantaged savings and prepaid tuition plans intended to encourage taxpayers to save for college sponsored by educational institutions, states or state agencies under Section 529 of the IRS code. As of 2018, qualifying distributions from Section 529 accounts include tuition for elementary and secondary schools as well as tuition for private, public or religious college institutions. At the federal level, funds are limited to $10,000 per student during a taxable year, however, states have the option to enact a different approach at a state income tax level.

While Section 529 accounts saw expanded usage, Coverdell Education Savings Accounts, which allowed taxpayers to set aside up to $2000 a year in tax-free money for college education, will be phased out under the new tax laws. Since employer-assisted tuition was left unchanged under the new code, employers can still contribute up to $5,250 a year to an employee’s qualified continuing education. The student loan interest deduction of up to $2,500 was also left intact, however, if you make more than $80,000 as a single filer or $165,000 as joint filers, you no longer qualify for this deduction.

While many deductions and educational credits were kept under the new legislation, taxpayers should still be wary of the implications of long-term loan repayment options and deferring loans. Determining the best strategy for repaying loans quickly and educating yourself on ways to reduce the tax implications on current loans will likely leave your credit and your taxes intact and manageable in the future.

How Student Loan Debt is Affecting First Time Home Buyers

by | Construction, News, Tax

2017 has been a more promising economic year including higher wages, a lower unemployment rate and booming markets. The housing market, however, has proven to be a stumbling block for many, particularly those looking to purchase their first home. This year has brought an increase in home prices and a decrease in available homes.

Although it seemed that new buyers were beginning to take their place in the market again, that ratio has dropped to a low 34 percent of overall home sales. In years past, first time buyers have made up closer to 40 percent of the overall market, but there seems to be a correlation between rising student loan debts and falling first time homeowners.

Of those who did purchase a home for the first time in 2017, 41 percent recorded they had student debt, and half of buyers owed at least $25,000. The average amount of student loan debt increased from $26,000 in 2016 to $29,000 in 2017 as well. Many said this increase in debt has hindered their ability to save for a down payment. Conversely, the average home cost hit a new peak in August at $282,000, which means down payment costs rose as well.

Not only are fewer buyers purchasing for the first time, but it seems that those who did paid more for less house. In 2016, first time buyers averaged a 1650 square foot home for $182,500, but in 2017, first time buyers averaged a 1640 square foot home for $190,000. Across all buyers, 42 percent paid the list price or more for their home, which is the highest in survey history.

Although it is possible to have student loan debt and still be approved for a mortgage, many first time buyers are afraid to even apply, fearing a stressful, long-winded process that will result in them not being approved.

However, the Realtor’s report did mention that more buyers said the mortgage application and approval process was easier than expected, a positive note in the mix of rising debt and home prices. Unfortunately though, mortgage rates are on the rise, so first time buyers may choose to consider waiting for the new year in the hopes that rates and home prices will drop, and hopefully their down payment savings will increase.