Where Tax and Education Intersect
Last week, Republicans in the U.S. House of Representatives unveiled H.R. 1, a tax reform proposal that will generate much discussion in the coming weeks, as it begins to make its way through the legislative process. Proposed changes in a few areas have caught our attention, as they directly impact education. These include:
- Phase-Out Deductions for College Tuition and Student Loan Interest: Current law allows certain higher-education expenses, including college tuition, to be deducted from federal taxes. Additionally, the interest paid on student loans for higher education may be deducted from federal taxable income under current law. This tax proposal phases these deductions out. The phase-out of this deduction will impact a wide range of people and professions, including educators. According to a 2014 study, people with a master’s in education have an average of $50,879 in student loan debt.
- Tax Free Private School Savings: The proposal would expand tax-advantaged 529 savings plans to be used for private school tuition and other K-12 expenses, for up to $10,000 per year. Currently, these savings plans – which do not tax earned interest and allow deposits to be deducted from Michigan taxable income – may only be used for certain higher-education expenses, such as college tuition, without a tax penalty.
- Eliminate Deduction for Classroom Expenses: Current law allows educators to deduct up to $250 annually ($500 for joint filers, if they are both educators) for the cost of eligible classroom supplies – like paper and pencils – that the teacher has purchased out of their own pocket. This tax proposal would eliminate this deduction. According to AdoptAClassroom.org, teachers report spending nearly $600 each year, from their own funds, on classroom supplies.
As H.R. 1 makes its way through the legislative process, the Education Trust-Midwest will continue to monitor and share any changes potentially impacting education in Michigan.