Four Ways the Fiscal Cliff Could Affect Your Employees

This article is co-authored by Robert Weinerman and Shannon Vasconcelos.

The 'Fiscal Cliff' and its potential resolution have been all over the news for last several months, and the outcome will have real impact on your employees.  Here at College Coach, we have been taking a close look at the specific details relating to saving for college and paying for college.  For human resource executives focused on employee well being, it is important for you to understand these factors that will impact your employees with college-bound children.

Many aspects of the U.S. tax code are due to expire at the end of 2012, and financial planning beyond January, 2013 is especially difficult.  If Congress fails to extend existing tax breaks, your employees are likely to face higher tax bills, along with unexpected college funding dilemmas.  Tax laws can affect the college savings and financial aid processes in surprising ways, and College Coach is here to educate your employees about 2013's pending changes so that these busy working parents can make the best financial decisions for their families. 

Here are four of the biggest looming changes that may affect college savers, payers, and borrowers:
  1. The capital gains tax increase:

    When the "Bush Tax Cuts" expire at the end of 2012, the long-term capital gains tax rate is set to increase from the current 15% to 20% and the tax rate on dividends from 15% to as high as 39.6%.  Financially savvy employees holding long-term assets may rush to sell these assets before December 31st in order to take advantage of the 2012 tax rates before they expire.

    Employees with children in 12th grade or college may not realize, however, the financial aid implications of this stock sale.  Selling a taxable asset increases income visible to the financial aid office, and higher income results in lower financial aid eligibility.  Without College Coach advice, the rush to save a bit of taxes in 2012 may create a larger loss of financial aid in 2013.
  2. The expiration of the American Opportunity Credit (AOC):

    The American Opportunity Credit currently provides a tax break of up to $2,500 per year for parents with annual incomes up to $180,000 paying the college expenses of dependent children.  When the AOC is replaced with the Hope Tax Credit in 2013, the income limit drops to $120,000.  Therefore, parents with incomes between $120,000 and $180,000, no longer able to claim a tax credit, will experience an effective increase in college costs of $10,000 ($2,500/year for 4 years).  College Coach can help these upper-middle income parents manage these higher costs through increased saving, cost-reduction strategies, exploring more affordable schools, and educational borrowing.
  3. Coverdell changes:

    Beginning in 2013, a parent cannot make a tax-free withdrawal from a Coverdell Education Savings Account (ESA) AND take advantage of a Hope or Lifetime Learning education tax credit in the same year.  Also, Coverdell contribution limits will drop to $500 per year, with stricter income restrictions on ESA eligibility.  Your employees who use Coverdells need to understand these changes to avoid facing penalty taxes, and evaluate Coverdell ESAs versus other college saving options like 529 Savings Plans.
  4. Student Loan Interest Deduction changes: 

    Students who borrowed to pay for college and their parents may be able to deduct the interest they pay on their student loans on their income tax returns. Changes that expanded access to this tax break expire at the end of 2012. Your employees who are currently taking this deduction may not be able to do so in 2013, or may not be able to figure out if they are eligible to do so. College Coach's finance team has experts who have studied this issue and can help people figure out if they can continue to take this deduction in 2013.
As you can see, the fiscal cliff and associated tax changes in 2013 and beyond can have a tremendous effect on your employee's college savings and payment options.  College Coach can keep your employees informed about pending tax changes, help them understand the college finance implications, and help them to strategize about how to keep the most money in their pocket in an uncertain tax world.

This translates into a workforce with greater control of their finances, improved well being, and a deeper engagement with the employer who provided the expertise to help them through this confusing and stressful time. Contact College Coach to learn more about how our college admissions and college finance experts can help your employees with children reduce their stress and improve their children's educational outcomes.

Written by: Shannon Vasconcelos

About the Author

Shannon works with Bright Horizons Education & College Advising corporate clients to deliver college financing workshops and provide personalized counseling to employees. She has over 10 years of experience in student financial assistance, at Boston University and Tufts University, and has also served as an active member of MASFAA’s Early Awareness and Outreach Committee, as a trainer for DOE’s National Training for Counselors and Mentors, and as a volunteer for FAFSA Day Massachusetts.