Higher Education Tax Reform: What’s In It For You?
Originally published on December 21, 2017
Updated on October 30th, 2023
Now that the Tax Cuts and Jobs Act has been signed into law, we are in the midst of higher education tax reform that could impact you and your loved ones.
To help you better understand the higher education tax reform, we’ve summarized the key changes that will directly or indirectly affect colleges, universities and their related organizations nationwide. We have also cited some of the items that didn’t make it to the bill’s final version (and in some cases, generated some heated debate among legislators and the public).
Endowment Excise Tax
Private colleges and universities are subject to a 1.4% excise tax on net investment income. This replaces the previous two-tiered tax. (Note: While the initial Conference bill exempted colleges with fewer than 500 tuition-paying students, this provision was stripped in Tuesday’s Senate vote because it violated the chamber’s rules.)
Originally designed to help consumers set money aside for higher education purposes, the use of a 529 has been expanded. With the new law, up to $10,000 per year from these accounts can now be used for public, private and religious-based elementary and secondary schools. (Note: Due to Senate rules, a provision previously included that allowed these funds for homeschooling use has been removed from the final bill.)
Impact on Charitable Giving
Because the standard deductions have been nearly doubled (up to $24,000 for joint returns and $12,000 for individual returns), it’s estimated that 32 million people who previously did individual deductions will no longer follow this practice. This could drastically affect charitable giving, as these types of deductions usually comprise a large portion of such deductions.
Student Loan Debt Forgiveness
When a person with student loan debt dies or becomes permanently disabled, his or her debt is forgiven. Under the new law, this amount will not be subject to taxable income.
Doubling the Estate Tax Threshold
The maximum amount of an estate exempt from the estate tax has been increased from $5.49 million to $11.2 million.
Increased Amounts Allowed for Cash Gifts
The limit for gifts to charitable organizations will increase to 60% (from its previous 50% level).
Repeal of the Deduction for College Athletic Event Seating Rights
College sports fans often pay a premium for the right to purchase tickets (or priority seating) for athletic events. Previously, this amount was deductible as a charitable contribution; the new law, however, removes this deduction.
“Basketing” of Unrelated Business Taxable Income (UBTI) Organizations with more than one unrelated business or trade must now compute UBTI separately for each income channel, or “basket.” As a result, a loss from one activity can no longer offset income from another.
UBTI on Fringe Expenses
The value of employee benefits such as transportation and on-campus athletic facilities are now required to be treated as UBTI, which means they will be subject to a tax equal to the corporate tax rate.
Net Operating Loss (NOL) Carrybacks
NOLs from a prior year will be allowed to offset up to 80% of the organization’s income in the current year. This applies only to such losses from UBIT activities, and not losses from general operations.
Excise Tax on Executive Compensation
Nonprofits including those in higher education, will now be levied a 21% excise tax on compensation over $1 million paid to any of its five highest-paid employees during that tax year. This also includes “parachute payments” made to departing employees. Certain salary types are excluded from this tax (for example, a medical or veterinary professional performing services directly related to these areas of expertise).
State and local pension plan entities were previously not subject to rules governing UBIT. The new law now mandates that all entities exempt from tax under section 501(a) are still subject to UBIT.
Repeal of Advance Refunding Bonds
Advance refunding bonds are used to pay off other bonds, often at a lower rate than the previous bond. The new law makes taxable the interest on these advance refunding bonds. It also effectively eliminates this capability for bonds issued after Dec. 31, 2017.
State and Local Tax (SALT) Deduction
Individuals and households that deduct state and local property taxes from their federal returns now have a limit on that deduction of $10,000 per year. This can impact the likelihood that taxpayers will support increases in these taxes—which in turn can affect whether tax increases are passed and, ultimately, the amount of money going to education (which is often supported by property taxes).
There are also several changes that were proposed in the initial drafts from the House and/or Senate that did NOT make it into the final Conference bill:
The Johnson Amendment
One of the most controversial proposed changes was the repeal of The Johnson Amendment, which would allow 501(c)(3) organizations, including colleges and universities, to endorse or oppose political candidates. This proposed change, however, was not included in the final bill and The Johnson Amendment remains in law.
American Opportunity Tax Credit (section 1201)
The original House Bill proposed to consolidate the American Opportunity Tax Credit and the Lifetime Learning Credit and repeal the existing Lifetime Learning Credit. With these changes, part-time students would not be able to claim and education tax credit. The proposed senate bill did not offer revisions to the current law and the final bill did not include changes to the American Opportunity Tax Credit and did not repeal the Lifetime Learning Credit.
Student Loan Interest Deduction
The proposed House bill offered to repeal the student loan interest deduction. The proposed Senate bill did not offer changes to the current law, and the final bill does not repeal the deduction—student loan interest can still be deducted.
Above-the-Line Deduction for Qualified Tuition and Related Expenses
Under the proposed House bill, individuals would no longer be able to claim an above-the-line deduction for qualified tuition and related expenses incurred. The Senate bill did not offer changes to the current law and the final bill does not eliminate this deduction.
Section 117d: Qualified Tuition Reductions
The House Bill proposed to repeal Section 117d, which would have eliminated the option to exclude tuition reductions or remissions from. The Senate bill did not offer changes to the existing law and the final bill did not include changes to the current Section 117(d). Tuition reductions and remissions can still be excluded from income.
Section 127: Employer-Provided Education Assistance
The House bill proposed to eliminate the option to exclude employer-provided education assistance from income. Both the Senate and final bill did not include changes to Section 127. Employees who receive tuition assistance from their employers can still exclude up to $5,250 per year on their income for graduate and undergraduate courses.
Additional Reporting requirements for donor-advised fund sponsoring organizations
Under the proposed House Bill, donor-advised funds would be required to disclose annually their policies on inactive donor-advised funds and disclose the average amount of grants made from their donor-advised funds. The Senate bill did not include changes to the current law and the final bill did not include changes to the current law.
Exclusion of research income limited to publicly available research
Under the proposed House Bill, only income from fundamental research where the results are freely available to the public could be excluded from UBTI. The proposed Senate Bill did not offer changes the current law and the final bill also didn’t include changes to the current law.
UBIT Treatment of Licensing an Organization’s Name or Logo
The Senate originally proposed to subject royalty income derived from the licensing of an organization’s name or logo to UBIT. However, this provision was not included in the draft Senate bill and is not included in the final bill.
The House bill proposed to limit the housing exclusion for the employer and employees of educational institutions. However, the Senate bill did not offer changes to the current law and the final bill also didn’t include changes to the current law.
Termination of private activity bonds (PABs)
Tax bond financing for private colleges and universities would have been eliminated in the bill initially proposed by the House. However, both the Senate and the final bill did not include changes to the current law.
The details of the Tax Cuts and Jobs Act can seem daunting given the many ways in which this new legislation can affect higher education. While we have pulled out the changes that are most likely to affect your industry, we strongly recommend that you contact your higher education CPA firm to discuss your particular situation and how it affects your tax picture.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
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