In the third part of our three-part series on the sweeping changes in the tax bill passed by Republican lawmakers in the recent week, we will take a look at children’s tax, 529 plans, and discharged student loan. These will impact taxpayers with children and with retirement plans – and we can assume that millions of them are present.
As with changes in the tax rules and regulations, taxpayers are well-advised to seek the expert opinion of their tax advisors and preparers at Liberty Tax Service just to be on the safe side.
Tax on Children’s Income
In the current law, a child who collects unearned income above $2,100 will be taxed according to his parents’ tax rate under the condition that said tax rate is higher. Emphasis must be made that the term “children” includes those under 19 years old and those who are full-time students under the age of 24.
But under the new tax plan, the net unearned income collected by a child shall be taxed using trust and estates brackets. Here, the top bracket is 37% applicable to income exceeding $12,500.
Middle class families are more likely to feel the brunt of the burden from the change, especially if their children have portfolios earning substantial income. High-income families, in contrast, will not feel the change since they have already been using the trust and estate brackets anyway.
By 2025, however, the rules will revert to the current tax laws.
Tax on 529 Plans
In the current laws, you can grow your money without worrying about capital gains taxes. You may also withdraw your money – tax-free, too – so that you can use it to pay for your higher education costs.
The new plan makes 529 plan use more attractive in several ways:
- You can withdraw up to $10,000 annually for every child, which you can pay for the child’s education in a religious or private school. You will still get the same tax benefits.
- You can also roll over your 529 funds to your ABLE accounts. If you have a disability, you will find that it offers tax benefits in contrast with the current law.
In all other aspects, nothing changes in the 529 funds treatment where higher education is concerned.
Tax on Discharged Student Debt
Under the new tax plan, the student loan discharged in the event of death of the debtor or in the event of his permanent and total disability will not be taxable. But the tax benefit will expire after 2025.
Indeed, the new tax plan has its pros and cons but the new rules and regulations are what they are – taxpayers have to comply with them, whether they want to or not.