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The PATH Act & Education Planning

Written by
January 6, 2016

The Protecting Americans from Tax Hikes (PATH) Act of 2015: Issues Regarding Education Planning

Signed into law on December 18th, the PATH Act of 2015 will impact a wide variety of existing tax provisions and establish some new legislation that will have an effect on education planning going forward. The following provides the details of education related provisions of the PATH Act:

  1. Desktop computers, laptops, related hardware (e.g. printers), internet access, and computer software are now considered qualified higher education expenses for 529 College Savings Plan distributions, even if the student is not required to purchase these items. The items purchased must be used by the beneficiary during school years. This new rule is retroactive to purchases made in 2015.
  2. If a student receives a refund of 529 account funds used for qualified higher education expenses, it may be recontributed to the original 529 account within 60 days of the date of refund. This rule is retroactive for 2015. Anyone who received a refund prior to December 18, 2015 (but after December 31, 2014) has until February 16, 2016 (60 days from the enactment of the PATH Act) to re-contribute to the 529 account. The re-contribution cannot exceed the amount of the refund received.
  3. Multiple 529 accounts with the same owner and beneficiary may now be considered separately when determining the earnings portion of a distribution. This is relevant when non-qualified distributions need to be made, allowing the owner to choose the account with the lowest capital gain, thereby reducing the amount subject to tax and penalty. In previous years, all accounts would have to be aggregated for this purpose.
  4. Previously set to expire in 2017, the American Opportunity Tax Credit has been made permanent. This provision provides a $2,500 per year credit for up to four years of post-secondary education. Adjusted Gross Income (AGI) phaseouts for this credit begin at $160,000 for married couples and $80,000 for individuals.
  5. Although rarely utilized, an alternative to the educational tax credits is a tax deduction of up to $4,000 of tuition and related fees for an eligible student. This deduction begins to phase out for married couples with AGI of $130,000 and individuals with AGI of $65,000. Under the PATH Act of 2015, this tax provision has been extended through the end of 2016.

These changes represent a portion of the overall provisions addressed in the PATH Act of 2015. For more information or guidance regarding changes in legislation or education planning, please contact a Hefren-Tillotson Financial Advisor.