How Tax Law Changes Could Impact You: Municipal Bonds, Fringe Benefits, and Educational Tax Credits

With key provisions of the Tax Cuts and Jobs Act (TCJA) set to expire in 2025, taxpayers face an evolving landscape that could bring meaningful changes to municipal bonds, fringe benefits, and education-related tax advantages. Understanding these developments now can help you make informed financial decisions and optimize your tax strategy in the years ahead.

Municipal Bonds: A Changing Tax Landscape

Municipal bonds have long been a favored investment for their ability to generate tax-exempt income at the federal – and often state and local – levels. However, with the expiration of TCJA provisions on the horizon, this tax advantage may be subject to change.

Key Considerations:

• Potential Changes to Tax-Exempt Interest: Currently, municipal bond interest is federally tax-free, making it a strategic investment for high-income earners. If this exemption is altered, however, investors could face increased tax burdens.
• Shifts in the SALT Deduction Cap: The TCJA imposed a $10,000 cap on state and local tax (SALT) deductions, making tax-free municipal bond income more attractive in high-tax states. Ongoing discussions about raising or eliminating this cap could influence the broader tax implications of municipal bond investments.
• Potential Higher Tax Brackets: With individual tax rates temporarily lowered under the TCJA, a reversion to higher rates in 2025 could enhance the appeal of tax-free municipal bond income – assuming its preferential treatment remains intact. However, municipal bond interest still factors into Alternative Minimum Tax (AMT) calculations, requiring careful planning.

Fringe Benefits: The Expanding Scope of Taxable Perks

Fringe benefits – such as company cars, tuition assistance, and wellness programs – have long been a valuable component of compensation packages. However, the push to classify more of these perks as taxable income is gaining momentum, potentially increasing employees’ tax obligations.

Which Benefits May Become Taxable?

• Personal use of company vehicles
• Employer-provided housing
• Tuition reimbursement (above certain limits)
• Employee discounts (beyond a set threshold)
• Gift cards and cash bonuses
• Commuter expense benefits

If these benefits are reclassified as taxable, employees will see them reported on their W-2s as additional income – potentially increasing their overall tax liability. Employers, in turn, will need to determine whether to absorb these costs or pass them on to employees.

What Benefits May Remain Tax-Free?

While many fringe benefits may become taxable, certain perks are expected to remain untaxed, including:

• Employer-sponsored health insurance
• Retirement contributions
• De minimis perks (e.g., complimentary office coffee)

Tax Planning Tip:

Employees should review their W-2 statements for any taxable benefits and consult a tax professional to avoid unexpected liabilities. 

Proposed Changes to Educational Tax Benefits

Students and borrowers who rely on education-related tax benefits may see adjustments to programs designed to ease the financial burden of higher education. Programs such as the American Opportunity Tax Credit (AOTC), the Lifetime Learning Credit (LLC), and the Student Loan Interest Deduction are under review, with potential reductions – or even eliminations – being considered.

Key Benefits at Risk:

• AOTC & LLC: The AOTC provides up to $2,500 per student for eligible college expenses, while the LLC covers a broader range of education-related costs, including career training and continuing education.
• Student Loan Interest Deduction: This provision allows borrowers to deduct up to $2,500 in interest paid on student loans, potentially lowering taxable income based on earnings.

What This Could Mean for You:

Without these credits and deductions, students and borrowers may face higher tax bills and fewer options to offset education costs. Even employer-sponsored tuition assistance and certain scholarships could be affected, possibly becoming taxable under new regulations.

How to Prepare:

• Stay Informed: Monitor policy discussions to understand how potential changes could impact your education-related tax benefits.
• Explore Alternative Funding: Seek out scholarships, employer tuition programs, and grants, while remaining aware of any evolving tax implications.
• Advocate for Education Benefits: If these programs are critical to your financial plan, consider voicing your concerns to policymakers and organizations advocating for tax relief in education.
  

Concluding Thoughts

As tax law continues to evolve, proactive planning will be key to minimizing surprises and making the most of available opportunities. Whether it's reassessing municipal bond investments, preparing for potential shifts in fringe benefit taxation, or understanding changes to education-related tax breaks, staying informed will help you make strategic financial decisions. 

We encourage you to consult with your Farther advisor or tax professional for tailored guidance to help you navigate these developments with confidence.