While President Donald Trump’s tax bill cut rates for most Americans, low-income Yalies may be forced to pay more taxes on their financial aid scholarships.
The new plan, signed into law on Dec. 22, 2017, taxes “unearned” income for full-time students under the age of 24 at higher rates. Many fear that these changes could drastically increase the amount low-income students on significant amounts of financial aid must pay in yearly taxes.
For tax purposes, financial aid is split into two categories: taxable and non-taxable. According to the Internal Revenue Service, a scholarship is taxable if it is earmarked for any expense other than a “qualified education expense.” Qualified expenses include tuition, fees, books and equipment covered by a scholarship. It does not cover any costs associated with travel, room and board, or other cash grants. For many Yale students who showed the News their financial aid letters, their “unearned income” was more than $18,000. While the new tax plan does not change these tax designations, it does change the rates at which these parts of scholarships are taxed.
“The treatment of income hasn’t changed,” said Tim Steffen, director of advanced planning at Baird Private Wealth Management. “What has changed is the tax rate. Income is classified like it always was. The taxes are just calculated differently.”
Steffen, a tax expert, spoke to the News about the impact the new tax plan will have on low-income students who receive significant amounts of financial aid.
He explained that the rules were established in a 1986 tax law, colloquially called the “Kiddie Tax.” The original purpose of the tax was to disincentivize wealthy families from putting assets in their children’s names in order to have earnings from those assets be taxed in a lower tax bracket.
According to new law, all income in a child’s possession earned by someone other than that child faces a higher tax rate.
Under Trump’s new plan, however, the “unearned income” is not taxed at parent’s levels; instead, it is taxed following the tax rules for trust funds, according to Steffen. He explained that in tax rules pertaining to trusts, the tax brackets are “very condensed.” Thus, the rates increase quicker for smaller increments of income. Smaller incomes will face higher tax rates than before.
“This means that there will be high tax rates, with low rates of income,” Steffen said.
He explained that a family who makes a net of $50,000 will have the bulk of their income taxed in the 12 percent bracket. He explained that, because of Trump’s tax bill, any unearned expense a child makes above $2,550, will be taxed at 24 percent. The limit at which Yale guarantees an expected family contribution of $0 is a family income of $65,000.
“It is possible and likely that high-need students might end up with higher taxable income and pay more tax on it because of [the new] plan,” Steffen said.
Several Yale students on significant amounts of financial aid, who spoke with the News under condition of anonymity to speak candidly, emphasized the anxiety this bill has put them under.
“Yale gives you all these grants and encourages you to go abroad because they want to give you that experience, but at the end of the day, you are going to going to pay taxes on all of it when you get into these programs,” said one student, who recently discovered that the higher tax rate would affect the non-tuition and fees portion of the International Summer Award.
The student felt “upset because you still want to have all the opportunities of everyone else,” but low-income students are still limited. They described the extra tax burden as “digging themselves into a hole.” The student added that the new tax law made it feel like low-income Yalies are “already screwed from the start.”
“I really wish [room and board] wasn’t taxed at such a high rate,” the student said. “It’s not like I can go to school here and not live here. It’s just frustrating especially because Yale isn’t very transparent about it. They encourage you to get a job through student employment, but do not say that they will tax your room and board, which [I] assumed was a direct cost of attending the school.”
When asked about future plans, the student said the situation would either present an extra burden on their already cash-strapped parents or necessitate a loan to pay for taxes.
Another student who also spoke on the condition of anonymity was uncertain and worried of the new potential unexpected financial burden.
“It doesn’t make much sense to me that I have to pay more money because I have less money,” the student said. “It is difficult for me to wrap my head around the logic of the law, and I know it will present a significant burden on me when it comes time to pay taxes in April.”
The News also spoke to a parent of a student on financial aid who said that despite the added hardship, the family is still grateful for the tremendous amounts of financial aid the school does give out.
“[Yale is] changing lives every day,” the parent said in a phone interview. “I think what Yale has done with financial aid is changing the trajectory of my child’s life. I’ll figure out a way to pay taxes. I’ll adjust and pick up more hours. I will do what I have to do to make sure [my child] can keep attending.”
Director of Undergraduate Financial Aid Scott Wallace-Juedes declined to comment on the changes, saying that the Financial Aid Office is unable to provide tax advice or an evaluation of potential tax implications.
“Financial aid officers are not licensed tax professionals nor certified financial planners, and we would highly recommend for students and families to check with their licensed tax professional or consult IRS publications for additional advice,” he wrote in an email. “I would just say that due to these complexities and the individualized nature of tax law, it would be very difficult to say how recent changes in tax law will impact any group of students.”
$52,800 is the average need-based scholarship in 2018–19, according to the Yale College Undergraduate Admissions Financial Aid website.
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