Tax credits and deductions for education are too complicated and so confusing that most taxpayers cannot determine which provisions are best for them, the American Institute of CPAs said in written testimony to the Senate Finance Committee.
The testimony was submitted Thursday for the record of the Finance Committee’s July 25 hearing on education tax incentives and tax reform.
“Few, if any, taxpayers are aware of all the education tax incentives and familiar with their details. Fewer still can perform the analysis to determine which incentive is most advantageous to them,” the AICPA said.
The AICPA said the Tax Code contains at least 14 provisions that can be divided into two general categories—those intended to help taxpayers meet current higher education expenses and those that encourage taxpayers to save for future higher education expenses.
Contributing to taxpayers’ confusion are requirements, eligibility rules, definitions and income phase-outs that vary from incentive to incentive. 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), the AICPA noted. 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.
Another complication is that some of the provisions, such as Section 222 for qualified tuition and related expenses, are temporary provisions that are sometimes renewed retroactively, making it difficult for taxpayers to plan for optimal usage of the education provisions. Section 222 expired on Dec. 31, 2011, although Congress may still act to extend the provision.
The AICPA recommended that Congress replace multiple tax incentives—such as the Hope Credit, the American Opportunity Tax Credit, the Lifetime Learning Credit and the tuition and fees deduction—which are intended to help taxpayers meet current higher education expenses, with one new or revised credit. Combining features of these tax breaks into one credit would simplify the tax benefits and remove duplicative provisions relating to higher education expenses.
The AICPA also suggested creating a uniform definition of “qualified higher education expenses” for all education-related tax provisions. Specifically, QHEE should include tuition, books, fees, supplies and equipment.
The Institute also recommended that Congress coordinate the phase-out amounts for the student loan interest deduction and the educational savings bonds and Coverdell Education Savings Accounts exclusions with the new or revised tax credit intended to help taxpayers meet current higher education expenses.