AICPA Recommends Modifying Legislation to Consolidate Education Tax Credits

April 24, 2014

The American Institute of CPAs recommended modifications to H.R. 3393, the Student and Family Tax Simplification Act, in a March 27, 2014 letter to Congress.  Many of the provisions of H.R. 3393 are included in House Ways and Means Committee Chairman Dave Camp’s Tax Reform Act of 2014 discussion draft (Tax Reform Act). 

The education incentives in H.R. 3393 and Chairman Camp’s discussion draft propose consolidating various credits, including the Hope Credit, the existing American Opportunity Tax Credit, the Lifetime Learning Credit and the deduction for qualified tuition and related expenses, in a new, combined American Opportunity Tax Credit (AOTC).

The AICPA noted that there are currently more than 13 different education-related incentives, and that the requirements, eligibility rules, definitions and income phase-outs vary from incentive to incentive.

A few of the important features included in both H.R. 3393 and the Tax Reform Act are as follows:

  • Makes the AOTC a permanent credit.

  • Provides a 100 percent tax credit on the first $2,000 of eligible higher education expenses and a 25 percent credit for the next $2,000 of expenses.  In addition, the first $1,500 tax credit is refundable.

  • Makes the credit available for up to four years of post-secondary education.

  • Allows the use of the AOTC to offset expenses for tuition, fees and course materials.

  • Provides phase-out limitations of the new AOTC to between $86,000 and $126,000 (married filing joint).  The phase-outs for single filers are half these amounts.

  • Harmonizes the new AOTC with Pell Grants.

The AICPA stated it “generally supports the specific provisions in H.R. 3393 and the education proposals of the Tax Reform Act.”  However, to “further simplify and encourage the use of the new combined AOTC,” the AICPA recommended to lawmakers that they:

  • Provide further clarification on whether the new AOTC will have a limitation of one credit per family or if the credit is available on a per student basis.  The AICPA recommended offering the credit on a “per student” rather than a “per taxpayer” basis, providing a potentially larger tax benefit per family.

  • Make the new AOTC 100 percent refundable to minimize the complexity of compliance for taxpayers.

  • Make the new AOTC available for any six years of post-secondary education, including graduate-level and professional degree courses.

  • Review and monitor credit limits continuously to ensure they remain consistent with the rate of rising tuition costs.  Although the new AOTC is indexed for inflation, the rate of increase for tuition costs is often higher than the inflation index.

The AICPA reminded lawmakers that the recommendations in the March 27 letter “are only a small portion of the comprehensive list of tax-related education proposals that we have developed.”  The AICPA’s complete set of recommendations provides comments on incentives intended to help taxpayers meet current higher education expenses as well as the incentives that encourage taxpayers to save for future expenses.  These additional AICPA recommendations were submitted to both the House Committee on Ways and Means and the Senate Committee on Finance in July 2013, and many of these proposals are incorporated in Chairman Camp’s Tax Reform Act of 2014 discussion draft.