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Can You Name All of the Tax Breaks to Support Higher Education?
The tax code is a mess. Even those pointy-headed economists that can bicker about anything (except the gas tax) agree that it is too complicated. They cry in virtual unison that the growth of tax deductions, credits, and deferrals leads to inefficiencies and market distortions (yikes!).
To confirm these fears, we need look no further than the education arena. Do you know how many tax provisions there are designed to support post secondary education and workforce training? It's a long list.
There are tax breaks for contributions to specific accounts and savings plans such as Coverdell education savings accounts, section 529 college savings plans, pre-paid tuition plans, and penalty-free withdrawals from IRAs. Further, there are other tax breaks that cover the treatment of educational expenses. These include the Hope Credit, Lifetime Learning Credit, deduction for tuition and fees, and the deduction for interest on student loans. So, that's a count of at least 8.
Many of these overlap and as such they cause a great deal confusion among consumers. Last week the House Ways and Means Commitee held a hearing on this topic and I sent in some testimony that offered my take on the matter.
I’m in favor of serious tax reform. We probably need to consolidate and simplify. That said, we have learned a great deal with the experience of 529 college savings plans over the past few years which provides a blueprint for how to construct an attractive savings platform for education and training. We need to stop adding tax breaks to support savings for a growing number of purposes and spend more energy looking at how to create the institutional supports that maximize savings. I'll gladly make this point again when serious tax reform is put back on the political front burner.
Complexity out of hand
The various education tax breaks in the federal tax law are a good examples of how we can make taxes so complicated by trying to solve almost all of our problems within the tax system. IRS Publication 970 on education tax breaks lists 12 education tax breaks, one of which expired at the end of 2007. That publication is 80 pages long! And it doesn't list some rules we might not think of as education tax breaks, but they are, such as getting a dependency exemption on a child under age 24 if they are a full-time student. Some of these rules can't be used in combination with others, definitions vary and some phase out as one's income rises. The GAO report discussed at the May 1 hearing noted that for 2005, of the roughly 2.1 individuals eligible for an education tax break, almost one out of five failed to claim such a break. About another 10% failed to claim the maximum benefit they were likely entitled to. About half of these returns were completed by paid tax return preparers. Also, some tax breaks for education don't fit well within the tax law because they are helping to subsidize current education. But unless someone adjusted their wage withholding, the benefit comes after filing a tax return, not just before the start of the fall semester when needed. Benefits for current education can likely be delivered more effectively outside of the tax law - through scholarships and grants from the government. Thanks for the entry on this important topic.
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