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Count on Congress streamlining the hodgepodge of education tax breaks to make them simpler and to target more of the benefits to low-income families and community college students. Democratic leaders in Congress are intent on making the changes, which was one of their top campaign promises of the 2006 elections.
But the overhaul won’t be easy. Lawmakers will argue over who will get a bigger portion of the aid generated by the tax breaks –- low- or middle-income students. The $10 billion price tag will also give taxwriters fits, but in the end, the congressional Democratic leaders won't let budget concerns stop them from enacting a broad education bill. Odds of passage this year are good, although final action could slip to 2008. President Bush will be leery of signing such a costly piece of legislation, but he'll have trouble vetoing college assistance for families so close to the 2008 elections.
A major goal of the changes is to simplify the current laws, consolidating three tax breaks into one. Two tax credits will get the ax: The HOPE credit of up to $1650 per student, which can only be taken for the first two years of college; and the lifetime learning credit, which is available for the latter years of school, for up to $2000 per family. Also on the chopping block is the $4000 deduction for college tuition.
In their place, expect to see a much heftier credit of between $2500 and $3000 per student, with a lifetime maximum of about $12,000 per student. The good news for middle-income families is that the new credit will be structured so as to not dry up as quickly as those in current laws. The HOPE and lifetime learning credits both begin to phase out when married couples reach $94,000 in adjusted gross income ($47,000 for single taxpayers). However, the new credit's phase-out likely will start at around $120,000 for couples and $60,000 for singles. More good news: You'll be able to partly offset the credit against the alternative minimum tax.
Low-income families won't get quite as much assistance as Democratic lawmakers would like to give them. Democrats want to make the new credit refundable, which isn't the case now for the HOPE or lifetime learning credits. Refundability allows taxpayers whose credit is more than their total tax liability to get the full benefit of the credit. But refundability has a huge revenue cost, so in the end lawmakers will have to scale back that goal and let only a small portion of the credit be refundable.
Some benefits of the education overhaul package will be targeted to community college students and the undergrad students attending four-year public colleges. For example, the new credit will be expanded to cover not just tuition and fees, but also books, transportation, lab equipment and room and board as well. And it will be calculated on a sliding scale so that a greater percentage of the first few thousand dollars of college expenses qualifies.
The college-aid tax package will be an opportunity for legislators to attach other education proposals. Because of budget concerns, not everyone's favorite add-on will make it, but here are some that are likely to be approved:
- Extending the deduction for teachers' school supplies beyond its Dec. 31, 2007 expiration date and raising it to $400 or more.
- Increasing the deduction for student loan interest which is currently capped at $2500 a year.
- Enhancing the write-off for donating computer supplies and books to schools.
- Improving the Zone Academy Bond program by raising the funding cap and letting bonds finance new construction.
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