How the Obama Tax Cut Compromise Could Help College Students
A good compromise leaves nobody happy, and this was certainly true for the Obama compromise on the Bush tax cuts. Liberal leaders are dissatisfied that the compromise involves extending tax cuts to the richest percentage of people in the country—essentially depriving the government of money that could be used for the public good. And many Republicans are displeased that the tax cuts for the wealthy were not made permanent.
But one group of people clearly benefits from the tax cut compromise: college students and their families. The controversial compromise includes several non-controversial boosts for college students. Here’s an overview of how the Obama tax cut deal could help college students for the next two years.
Credits and deductions
The Obama tax deal includes a tax credit for college tuition worth up to $2,500 and a student-loan interest deduction of up to $2,500. The college tuition tax credit is partially refundable—meaning that if you don’t already pay $2,500 or more in total taxes, you may still be eligible for some or all benefits. It’s given as part of the American Opportunity Tax Credit, which can be spent on tuition, fees and course materials during four years of college. The government also agreed to reinstate an additional tuition deduction of up to $4,000 that had expired at the end of 2009.
Bear in mind that tax credits and deductions work differently. A tax credit lowers your tax bill dollar for dollar—so if you have a $2,500 tax credit for college tuition, your tax bill at the end of the year will be reduced by $2,500. A deduction simply reduces the amount of taxable income you have. So if you make, say, $50,000 per year and you have a tuition deduction worth $4,000, the government can only tax you on $46,000 of income—reducing the percentage of your income that gets taxed. This will reduce your tax bill overall, but probably not by precisely $4,000.
Both sides have reason to dislike the Obama tax cuts. But there are several reasons why college students should be happy.
President Obama has included a tax credit for companies that donate research money to support college research efforts. It also offers a benefit that allows companies to give up to $5,250 in tuition assistance, tax-free, to their employees.
Increased incentives for individual giving
Individuals also often want to give money to support college students in their families—as well as their alma maters or the college a relative attends. The new Obama tax deal makes individual giving a little easier. Under the new deal, Individual Retirement Account owners who are over the age of 70 can make tax-free charitable contributions from their IRA’s—up to a value of $100,000 per year. The charitable contributions can be made to any qualified charity, including nonprofit colleges.
Under the Obama tax cuts, individuals can also contribute up to $2,000 per year tax-free to Coverdell Education Savings Accounts—special savings accounts designed for individuals to give money to college students for school expenses. Before the Obama tax cut compromise, distributions from Coverdell Savings Accounts could be distributed tax-free, but the contributors were taxed on the monetary gifts themselves. Under the new rule, the money donated to a Coverdell Savings Account is tax-free to the donor as well as to the beneficiary. Donations can be made for any school expenses for any child up until the age of 18.
Both sides have reason to dislike the Obama tax cuts. But there are several reasons why college students should be happy. Under the new plan, corporations have additional incentive to contribute to employee tuition, and college students get extended tax credits and deductions for college expenses and interest. Individuals can now more easily give money to colleges and student tuition accounts. And companies can now contribute more to college research facilities tax-free—which could improve the experience for students at research universities. Hopefully, under the new Obama tax cut plan, college students and their families will find college just a little easier to pay for.
The Chronicle of Higher Education: Colleges and College Students Would Benefit from Obama Tax Cut Compromise
President Obama’s Weekly Address: Selling the Tax Cut Compromise
WhiteHouse.gov: Tax Cuts, Unemployment Insurance, and Jobs
Kiplinger.com: Tax Credits vs. Deductions
Brookings Institute: 2011 Tax Budget Proposals
IRS.gov: Coverdell Savings Accounts
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