Education Incentives
Harmonize and simplify education incentives. In today's tax
structure, there are eight different "education incentive provisions", including
tuition credits, Education IRA’s, state deductible tuition programs, limited interest
deductions, and employer provided assistance programs. In addition, we note with dismay
that a number of changes to and expansions of these programs, as well as the establishment
of new education incentives, were recently proposed in the Administration's FY 2001
Budget. The various provisions contain numerous and differing eligibility rules. For many
taxpayers, analysis and application of the intended incentives are too cumbersome to deal
with compared with the benefits received.
For example, eligibility for one of the two education credits depends on
numerous factors including the academic year in which the child is in school, the timing
of tuition payments, the nature and timing of other eligible expenditures, and the
adjusted gross income level of the parents (or possibly the student). Further, in a given
year a parent may be entitled to different credits for different children, while in
subsequent years credits may be available for one child but not another. Both types of
credits are dependent on the income levels of the parents or the child attempting to claim
them. Further complicating the statutory scheme, the Code precludes use of the Lifetime or
Hope Credit if the child also receives tax benefits from an Education IRA. Although the
child can elect out of such benefits, this decision also entails additional analysis.
An additional complicating factor is the phase-out of eligibility based on
various AGI levels in five of the eight provisions. This requires taxpayers to make
numerous calculations to determine eligibility for the various incentives. Since there are
so many individual tests that must be satisfied for each benefit, taxpayers may
inadvertently lose the benefits of a particular incentive because they either do not
understand the provision or because they pay tuition or other qualifying expenses during
the wrong tax year.
Separately, college graduates are entitled to deduct a portion of any
interest paid on student loans. The amount deducted is limited or eliminated when AGI
exceeds certain thresholds. These phase-out thresholds are different from the Credit and
Education IRA thresholds.
Possible measures for simplifying the tax benefits for higher education
include:
- Combine both credits into one.
- Simplify the definition of "student".
- Establish a single amount eligible for the credit.
- Eliminate or standardize the income ranges required for eligibility.
- In lieu of the credits, grant additional exemption amounts to taxpayers who qualify for
the credit under current law.
- Ease the requirements for interest deduction and coordinate the phase-out amounts with
other education incentives.
- Replace current tax benefits with a new universal education deduction or credit, i.e.,
develop one or two education-related deductions or credits to replace the myriad current
provisions.
