Yeshiva teachers could face a significant tax increase under the House of Representatives current tax bill proposal. The statute, which was expected to be voted on by the House after this article went to press, eliminates section 117(d) of Title 26 of the United States code. That section declares that “gross income shall not include any qualified tuition reduction.” This includes “any reduction in tuition provided to an employee of an organization.”
“This is the section of the tax bill that allows teachers and employees of private schools to deduct tuition reduction plans from their income,” said Brian Galle, a professor of taxation and non-profit law at Georgetown University Law Center. “If 117(d) is eliminated, teachers would need to pay taxes on that benefit as income.”
The proposed legislation still has a long way to go before becoming law and must pass a number of hurdles in the House before final negotiations with the Senate, which is currently drafting and debating its own version of tax reform. Current indications are that the Senate bill will preserve the qualified tuition reduction exemption and may even increase tax benefits for parents who send their kids to a private religious school. Senator Orrin Hatch (R-UT) filed an amendment, which is viewable through the Senate Finance Committee website, this past Monday that will allow 25 percent of “qualified tuition” to “be treated as a charitable contribution.”
When the two chambers of Congress negotiate a final draft of the legislation, it is possible that section 117(d) could be preserved or modified as part of a compromise.
The Orthodox Union is aware of the ongoing debates regarding tax reform and is “very engaged on the tax bill,” said Nathan Diament, executive director of the OU Advocacy Center. “We have been quietly working with key members on the proposals.”
Many private schools and private colleges offer teachers and other employees a reduction in tuition for their children as part of overall compensation. “The system provides a benefit to both parties,” added Professor Galle. Schools can keep tuition costs low by not paying teachers higher salaries and teachers avoid the taxes that would have been paid on the extra income necessary to afford the full cost of tuition, he said.
This is similar to many other benefits that employees earn tax free as part of their compensation. For example, many workers do not pay taxes on health care benefits and may also take advantage of flexible spending accounts to avoid taxes on meal plans or public transportation costs.
But for teachers, who often sacrifice other career options to help raise and educate the next generation, the loss of this tax benefit would be especially painful.
“In the short term, it increases the tax burden of communal workers, people who gave up lucrative careers in order to serve the community,” said Rabbi Gil Student, a Jewish Link contributor and the editor of Torahmusings.com.
For many teachers, who are already expecting the loss of state and local tax deductions, the increase in their federal taxes could total into the thousands of dollars.
“They should expect an increase on the taxes they owe,” said Professor Galle. “But it is worth mentioning that this change would likely only be impacted as part of the income tax. Tuition reduction plans would still be exempt from the payroll tax.”
While the immediate costs would be felt by individual teachers and rabbanim, the broader implications of this change would be borne by the overall community. “This exemption change constitutes a tax on yeshiva tuition,” explained Rabbi Student. “In the long term, it will be absorbed by an even higher tuition burden on parents who are already struggling to pay for both public school taxes and yeshiva tuitions.”
This is an ongoing news story.
By Zachary Schrieber
Fair Lawn’s Zachary Schrieber is in his third year at Columbia Law School. You can follow him on twitter @zschrieber.