COLLEGE SAVINGS 101

Savingforcollege.com

New tax bill brings improvements to education benefits
http://www.savingforcollege.com/articles/new-tax-bill-brings-improvements-to-education-benefits-882

Posted: 2015-12-21

by Kathryn Flynn

Families saving for college with a 529 plan may want to review their 2015 qualified expenses. Thanks to the Protecting Americans from Tax Hikes (PATH) Act, computers, Internet access and computer software are now considered qualified expenses, retroactive to January 1, 2015. That means if you bought a laptop for college this year you have until January 1, 2016 to take a tax-free and penalty-free withdrawal from your 529 plan to cover the costs.

The PATH Act also includes other important updates to education-related tax benefits. Here’s a quick summary:

ABLE Act updates:

529 ABLE accounts allow beneficiaries with special needs to save tax-free for future expenses without having to forgo government assistance. The new law removes the residency requirement for these accounts, giving individuals more choices when it comes to investment options and expenses since they are now able to use any state’s ABLE plan.

However, another expected update to ABLE accounts was not included in the Act. The Joint Committee on Taxation’s description of the PATH Act refers to a provision that would permit limited rollovers from a 529 plan to a 529 A account without penalty, but this change was not included in the final PATH Act.

Extensions to tax benefits:

The American Opportunity Tax Credit (AOTC) allows eligible parents to claim a tax credit for 100% of the first $2,000 and 25% of the next $2,000 of a child’s mandatory tuition and fees, for total maximum credit of $2,500 per student. The AOTC was scheduled to revert back to the old Hope Scholarship credit at the end of 2017 but was instead made permanent by the PATH Act.

PATH also extended the above-the-line education deduction through 2016, which allows eligible parents to deduct up to $4,000 in tuition and fees per student.

Enhancements to 529 plans (all retroactive to the beginning of 2015):

1. Computers and other related equipment are a permanent qualified expense. Prior to the Act, computer purchases were only considered qualified if the school required them for course attendance or enrollment.

2. School refunds can be redeposited. Students who withdraw from school will avoid paying taxes and penalty when the refund is deposited back into the account within 60 days. A special transition rule provides that refunds received after December 31, 2014, and before December 18, 2015, may be recontributed not later than 60 days after the date of enactment.

3. No more distribution aggregation. Multiple accounts in a 529 program with the same owner and beneficiary no longer must be aggregated for purposes of computing the earnings portion of a distribution. Instead, the earnings portion of a distribution will be computed by each 529 program on an account-by-account basis.

Families saving for college with a 529 plan may want to review their 2015 qualified expenses. Thanks to the Protecting Americans from Tax Hikes (PATH) Act, computers, Internet access and computer software are now considered qualified expenses, retroactive to January 1, 2015. That means if you bought a laptop for college this year you have until January 1, 2016 to take a tax-free and penalty-free withdrawal from your 529 plan to cover the costs.

The PATH Act also includes other important updates to education-related tax benefits. Here’s a quick summary:

ABLE Act updates:

529 ABLE accounts allow beneficiaries with special needs to save tax-free for future expenses without having to forgo government assistance. The new law removes the residency requirement for these accounts, giving individuals more choices when it comes to investment options and expenses since they are now able to use any state’s ABLE plan.

However, another expected update to ABLE accounts was not included in the Act. The Joint Committee on Taxation’s description of the PATH Act refers to a provision that would permit limited rollovers from a 529 plan to a 529 A account without penalty, but this change was not included in the final PATH Act.

Extensions to tax benefits:

The American Opportunity Tax Credit (AOTC) allows eligible parents to claim a tax credit for 100% of the first $2,000 and 25% of the next $2,000 of a child’s mandatory tuition and fees, for total maximum credit of $2,500 per student. The AOTC was scheduled to revert back to the old Hope Scholarship credit at the end of 2017 but was instead made permanent by the PATH Act.

PATH also extended the above-the-line education deduction through 2016, which allows eligible parents to deduct up to $4,000 in tuition and fees per student.

Enhancements to 529 plans (all retroactive to the beginning of 2015):

1. Computers and other related equipment are a permanent qualified expense. Prior to the Act, computer purchases were only considered qualified if the school required them for course attendance or enrollment.

2. School refunds can be redeposited. Students who withdraw from school will avoid paying taxes and penalty when the refund is deposited back into the account within 60 days. A special transition rule provides that refunds received after December 31, 2014, and before December 18, 2015, may be recontributed not later than 60 days after the date of enactment.

3. No more distribution aggregation. Multiple accounts in a 529 program with the same owner and beneficiary no longer must be aggregated for purposes of computing the earnings portion of a distribution. Instead, the earnings portion of a distribution will be computed by each 529 program on an account-by-account basis.

 

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