Education Tax Incentives Are Too Complicated, AICPA Tells Congress

August 15, 2012

The nation’s education tax credits and deductions 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 submitted Aug. 8 to the Senate Finance Committee.  The testimony was submitted 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 Internal Revenue Code contains at least 14 provisions that can be divided into two general categories – those that are 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, the AICPA said, 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.

Another complication is that some of the provisions, such as Section 222, 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.

AICPA recommendations to Congress included:

• Replace multiple tax incentives (i.e., Hope Credit, American Opportunity Tax Credit, Lifetime Learning Credit and the tuition and fees deduction) intended to help taxpayers meet current higher education expenses with one new or revised credit.  Combining features of these into one credit would simplify the tax benefits and remove duplicative provisions relating to higher education expenses.

• Create a uniform definition of “qualified higher education expenses” (QHEE) for all education-related tax provisions.  Specifically, QHEE should include tuition, books, fees, supplies and equipment. 

• 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.