How will the recent tax proposals impact you as a professor?
The Senate and the House have laid out plans to overhaul the U.S. tax code. Both bills passed within the last two weeks. Now, congressional Republicans will hastily work to get a working combination of the two bills to President Trump by Christmas. Here is what you need to know about the different plans and how they could affect your personal finances…
House Plan Highlights
The current seven tax bracket system would be reduced to four: 12%, 25%, 35%, and 39.6%. These would all apply to the 2018 tax year.
The reduction to four tax brackets is an attempt to simplify the tax code. The tax code’s complexity can make it difficult for many professors, especially those with variable outside income, to project their taxes year over year. This could help make that process easier.
Those in the 12% bracket would still not owe taxes on capital gains.
Currently, those in the 10% and 15% tax brackets do not pay taxes on capital gains realized. This will remain for those in the new 12% bracket. This is good news. This can benefit many, but can really help retirees. If you have non-retirement assets that have appreciated considerably, it’s often prudent to realize gains while you’re in retirement. This is because between social security, a pension, or other investment income, you may have some room to realize gains before you reach the 25% tax bracket. You effectively “reset” your cost-basis and save yourself from paying on those gains in the future.
Current standard deductions and personal exemption will be combined and basically doubled. The new standard deduction will be $12,200 for an individual and $24,400 for a family in 2018.
The personal exemption will be eliminated but the standard deduction would double. Standard deductions are a set amount of income that is not subject to federal income tax. Two-thirds of Americans take the standard deduction so this increase will reduce their taxable income even further. There are also other tax credits that are being discussed that will offset the elimination of the personal exemption.
Many of the itemized deduction items will be eliminated in an attempt to simplify the tax code.
This is another effort to cut down on the complexity and cost of maintaining the tax code. The idea is that most folks will be better off with slightly lower tax brackets and the higher standard deductions.
Dependent care assistance programs are repealed.
This is a fringe benefit that some employers used to offer employees up to $5,000 per year tax-free for child care (children under 13). This benefit would be disallowed.
Qualified Tuition Reductions For Employees Of Educational Institutions is repealed, causing any such tuition reductions in the future to be reportable as taxable income.
This is will hurt professors deeply. Many have skipped saving for their children’s college expenses because this benefit was assumed to take care of the majority of it. Now, if institutions offer it, the amount will be taxable in that year. This would mean substantially higher taxes in the year the benefits are used.
Employer-Provided Educational Assistance (permitting employers to pay up to $5,250/year for undergraduate or graduate courses for employees without being income to the employee) to be eliminated.
Many professors take courses using this benefit at their institutions. From now on, the benefit will either be disallowed or will become taxable in the year utilized.
Student loan interest deduction is repealed.
Currently, borrowers within certain income limits can deduct up to $2,500 of student loan interest paid in that tax year. This deduction would be eliminated.
Beginning in 2018, the estate (and gift) tax exemption amount would be doubled, from the currently-projected $5.6M in 2018 to $11.2M (which would be $22.4M for a married couple). This would be repealed altogether in 2024.
This “death tax” as some call it doesn’t affect many families. However, if you have amassed exorbitant wealth, this repeal is great news.
The number of student loan repayment plans would be reduced to two: one standard 10-year plan and an income-based plan. The income-based plan would no longer allow for forgiveness after 20-25 years but the interest would be capped after 10 years.
This reduction of the available plans is another step toward simplification of the tax code. The thought is also that with less complexity comes less cost for the government to oversee and service the many plans.
The plan would eliminate Public Service Loan Forgiveness, a program that wipes away federal student debt for people in the public sector after they have made 10 years’ worth of payments.
This one is another kick in the gut. This program is a huge benefit to working in the public sector. Many professors are currently on track to receive loan forgiveness under PSLF. If you are on track, you’re still in luck. Changes will only apply to borrowers who enroll after June of 2018. According to the House Committee on Education and the Workforce, no one currently expecting loan forgiveness will be affected.
Senate Plan Highlights
The Senate bill retains the current number of brackets, seven, but changes them to 10, 12, 22, 24, 32, 35 and 38.5 percent.
The Senate bill doesn’t drastically simplify. A few tweaks to the brackets, but the same number of them.
Also doubles the standard deduction and eliminates the personal exemption.
This looks like a done deal. Both bills have it so expect to see your standard deduction doubled when you fill out your taxes for 2018.
Senate doubles the per-child tax credit to $2,000 (House proposed $1,600).
A tax credit reduces what you pay Uncle Sam dollar for dollar. For families with children under 17, and within income limits, you currently get a $1,000 credit per child. The proposals both aim to increase this tax credit, which would be beneficial for most families.
Senate bill repeals the penalty for anyone who doesn’t purchase health insurance, as mandated by the Affordable Care Act (House bill does not).
The ACA mandates that anyone that doesn’t purchase health insurance pay a penalty for not doing so. The Senate bill looks to repeal that penalty.
Senate also doubles the estate tax limit, but does not eliminate in 2024 as the House bill proposed.
Estate tax exemptions would still double, as it does in the house plan. Assets above the limit are subject to a 40% tax.
Conclusion: How Proposed Tax Changes Will Affect Professors
Trump is likely to sign a bill into law before the end of the year. These bills have passed so now it is about finding a compromise of the two and ironing out details. It’s important to know how these changes will affect you so that you can work with your accountants and other professionals to plan for the future.
This article is relates to personal finances. For an article that shows how the changes can affect higher ed in general, read this from The Chronicle.