The Tax Cuts and Jobs Act

Nov. 14, 2017

A tax bill called the Tax Cuts and Jobs Act seeks to reform the nation’s tax code by reducing income tax rates for individuals and corporations and eliminating many traditional tax benefits, including those offered to the higher education and healthcare communities.

The current tax code contains a number of provisions, enacted independently over time, that together create a framework that functions as a kind of “three-legged stool” intended to advance three important goals: 1) encourage saving for higher education; 2) help students and families pay for college; and 3) assist with the repayment of student loans. This framework serves the needs of low- and middle-income students and families as they invest in themselves and in higher education.

In addition, students and families benefit from the non-profit tax-exempt status of public and private colleges and universities through charitable giving, endowments and tax-exempt bond financing benefits, all of which help institutions to provide financial aid and advance their teaching, research and public service missions.

The legislation was introduced Nov. 2 in the House of Representatives followed by a Senate version of the legislation introduced Nov. 9. Congressional leadership has indicated it hopes to have legislation approved and signed into law before year’s end. As introduced in the House, the changes would take effect Jan. 1, 2018. The Senate version diverges from the House version, but both share the main priorities of cutting corporate and individual taxes.

All of this remains subject to change as the House and the Senate proceed through the legislative process in the coming weeks.

Both the House and Senate bills reduce the income tax rate for corporations (35 percent to 20 percent) and modifies the tax rates for individuals.

At the same time, the bills would increase the allowed standard deduction to $12,000 for individuals (up from $6,350) and $24,000 for married couples (up from $12,700).

Below are highlights of the major priorities for higher education in tax reform, and how they could be impacted if the current proposals are approved by Congress, as provided by the American Council on Education.

Student and family benefits

  • The House bill would repeal the Lifetime Learning Credit, the Hope Scholarship Credit, while slightly expanding the American Opportunity Tax Credit to a fifth year (and at half the value). Graduate students and lifetime learners would no longer qualify for these education deductions.
  • As written, the House bill also would repeal the Student Loan Interest Deduction. In 2014, 12 million taxpayers benefitted from this deduction (7 million more than in 2011).
  • The House bill would repeal Sec. 117(d)(5), which provides for the tax exemption of tuition waivers for graduate students serving as teaching and research assistants. Close to 145,000 graduate students received a tuition reduction in 2011-12.
  • The Senate bill preserves AOTC, LLC, Hope Scholarship, SLID, Sec. 117(d), and Sec. 117(d)(5).

Human resources and employee benefits

  • The House bill would repeal Sec. 117 (d) – tuition remission for employees, Sec. 117 (d)(5) – tuition remission for GRSAs, GSIs and GSAs, and Sec. 127 – employer provided education assistance for employees which would make tuition waivers and exemptions included under estimated gross income and increase the taxable income for many campus employees, as well as graduate students. The Senate bill preserves these provisions.

Charitable giving and endowments

  • Both the House and Senate bills would double the standard deduction for individuals and couples and reduce the number of taxpayers who itemize, significantly reducing the value of the charitable deduction, which could lead to a decline in donations to all nonprofits, including colleges and universities.
  • Both bills would create a new excise tax of 1.4 percent on endowments investment earnings at private colleges and universities, reducing the value of these endowments and redirecting dollars away from students and those institutions to the federal government.

Higher education finance

  • Both the House and Senate bills would eliminate advance refunding of bonds that allows the ‘refinancing’ of bonds to lower rates that is used by both public and private institutions.
  • The House bill would also terminate private activity bonds, utilized by private universities and colleges, to build dorms, classrooms, and research infrastructure. This provision would essentially prevent private colleges and universities from using lower-cost tax exempt bond financing.
  • The Senate bill contains several proposals that would increase Unrelated Business Income owed by many colleges and universities, including treating name and logo royalties as unrelated business taxable income, and computing unrelated business taxable income separately for each trade or business in a so-called “basketing” fashion.

For additional answers to common questions about the tax bill and how it could affect higher education, visit the American Council on Education’s Q&A webpage or contact Cindy Bank in U-M’s Washington Office at bankc@umich.edu.

If you wish to express your views about the proposal and the impact, please reach out to your elected representative. ACE provides a helpful tool that is available here under “Contact Congress.”