Last week, Congress passed a bill called the Protecting Americans from Tax Hikes or PATH Act. The PATH Act has a positive impact on college cost. President Obama signed the bill on December 18, 2015. These enhancements will expand the 529 plans qualified expenses and will permanently extend the American Opportunity Credit. These changes will help families who are trying to save and pay for college. The rule changes are retroactive to January 1, 2015.
529 Plan Changes
A 529 plan is an education, tax-advantaged savings plan that helps families save for the future college costs. The plans are great options to save for college since the investment gains are tax-free and some states offer contribution incentives, which may reduce your state income tax amount. The downside to a 529 plan is the limited number of changes allowed per year. You can currently make two investment changes per year. The money in a 529 Plan can only be used for qualified expenses. This includes tuition, room, board and books. The PATH Act will now allow families to include the computer cost as a qualified expense. The qualified higher expense will also include computer printers, hard drives, cables, electronic readers, internet access, and computer software. The software must be for education purposes and not games for sports or hobbies.
The next change included in the PATH Act may help existing college students and families. The PATH ACT states that families can now return credited qualified money back into the 529 plan. This occurs if a student decides to drop a class, change housing, or possibly even leave school. If an institution has refunded money to a student, it can return the credit amount back into the 529 plan without penalty. The student needs to be the beneficiary of the plan. It is important to note, that once the credit money is available, the family will need to reinvests the credit within 60 day after the date of the refund. The recontributed amount cannot exceed the amount of the refund.
As the PATH Act is retroactive to January 1, 2015 there is a special transition rule. The transition rule states that any refunds received after 12/31/14 and before 12/18/15 can be reinvested no later than 60 days after the date of enactment. The deadline for families is February 10, 2016.
American Opportunity Credit
Prior to the PATH Act, the American Opportunity Credit was to expire in tax year 2017. It has been extended various times since its inception in 2009. The PATH Act now makes this educational tax credit permanent.
This credit helps many middle-income families since the Adjusted Gross Income limits are $180,000 for a married couple filing joint and $90,000 for Single and Head of Household tax filers. It is also a tax credit, which means it is a dollar for dollar reduction of your tax bill. Tax deductions only reduce the amount of taxable income within the tax calculation. Tax credits are normally more beneficial.
To maximize this credit, you should try to find ways to manage your Adjusted Gross Income in the years your children will be in college.
These changes will enhance both college saving plans and educational tax credits. As college cost and student debt continue to rise, families need to take advantage of these opportunities. Most people have a tendency to focus only on the EFC number and the financial aid position. Other financial options are often overlooked when paying for college. Other options include proper use of educational tax credits and structuring your debt the best way. Before investing in a 529 plan, families should review their own state plan since many states offer some additional tax savings for their residents.
The PATH Act had other provisions that helped small business, other individual items, ABLE account owners, and chartable gifting. You need to consult with your tax advisor to see if any of these changes will impact your taxes for 2015 and going forward.