Grassley Pledges Renewed Push to Make Education Tax Incentives Permanent
WASHINGTON – Sen. Chuck Grassley, chairman of the Committee on Finance, today said he will continue working to refine and make permanent education tax incentives enacted under his chairmanship, citing the popularity and usefulness of those tax breaks.
“Our economy demands well-educated workers,” Grassley said. “Tax incentives are onlypart of the solution, but they’re an important part. The popularity of education tax incentives is goodnews and strong encouragement for Congress to keep them going.”
Grassley convened a hearing this week to examine whether the tax incentives he helped toenact in 2001 and 2002 are working as intended. The 2001 incentives included removing thelimitation on the deductibility of student loan interest, a longtime Grassley priority; raising theamount that can be contributed to an education saving account from $500 to $2,000; makingdistributions from pre-paid college savings plans and tuition plans tax-free; and making permanentthe tax-free treatment of employer-provided educational assistance.
Dr. Robert Paxton, president of Iowa Central Community College, testified that “many of thestudents we have currently enrolled and in the past, could not have afforded, nor their families beenable to afford, to attend our community college” without these “targeted and very effective” taxincentives.
For example, Paxton said of the approximately 5,100 students Iowa Central students, 3,479were notified by the IRS that they or their parents were eligible to receive the HOPE and LifetimeLearning Credits. These credits offset the costs of higher education by reducing the amount ofincome tax. The estimated average benefit of these credits for each Iowa Central CommunityCollege student is approximately $841 annually. If each of those students/parents took advantageof those credits, Iowa Central and those families would have received an in-direct benefit of over$2.9 million.
Statewide, in 2001, more than 95,000 students were able to take advantage of these creditswith a value of over $72 million.
Section 529 plans also are very helpful, according to Oregon State Treasurer RandallEdwards. These state-sponsored plans give families a flexible vehicle to save for college. In 2001,Congress made withdrawals from these plans exempt from federal taxes, a move that experts sayincreased the plans’ popularity.
More than 400,000 students nationwide already have used their 529 resources to pay forcollege, and another six million are waiting to use their accounts when they go to college.In February, Grassley introduced legislation to make permanent the education tax incentivesenacted in 2001 and 2002. Most of the incentives expire in 2010. Grassley said that even thoughthe expiration dates are not imminent, parents prefer to have security in their planning foreducational expenses. Also, it’s important not to have any lapse in these important programs.
“Congress is willing to consider permanent tax relief for companies to buy machinery,”Grassley said. “Tax relief for education is an investment in the mind. It’s just as important as jobcreatingtax incentives for businesses. Some will say we can’t afford this, but we really can’t affordto lose billions of dollars of help for Americans working hard to educate their kids.”
Grassley’s first bill is the Lower Expenses for Students Seeking Opportunities Now(LESSON) Act, which makes permanent the college tuition tax deduction that Grassley worked toenact as part of the 2001 tax relief law. Due to the lack of money for all priorities, that provision waseffective only through 2005.
For parents who struggle to afford ever-increasing college tuition for their children, thetuition tax deduction is important, Grassley said. At between $2,000 and $4,000 -- depending onincome -- it is a beneficial tax incentive for many middle-income Americans, he said.
Taxpayers with adjusted gross income of up to $65,000 for singles and up to $130,000 forcouples receive a tuition deduction of $4,000; taxpayers with adjusted gross income of $80,000 to$160,000 receive a maximum deduction of $2,000. If Congress takes no action, this deductionexpires Dec. 31, 2005.
The second bill, the Anticipatory Initiatives for Matriculation (AIM) Act, makes permanentthe rest of the education tax incentives in the 2001 tax relief law, and the teacher deduction forclassroom materials and continuing education costs that was included in the 2002 tax relief law. Theteacher deduction expired Dec. 31, 2003. The other provisions will expire Dec. 31, 2010, ifCongress takes no action. Details of the tax incentives include:
Removing the limitation on the deductibility of student loan interest. Grassley led the effortto restore the deduction after Congress totally eliminated it in 1986. Congress reinstated thededuction with a 60-payment limit in 1997; in 2001, Grassley won removal of the 60-payment limitand increased the income limits, allowing more students to claim the deduction.
Improvements to education savings accounts. These incentives help parents save money fortheir children’s higher education. Corporations, unions, charitable organizations, foundations andother entities also can contribute to a child’s account. Parents can withdraw from the educationsavings accounts for kindergarten through 12th grade expenses.
The 2001 law increased contribution limits from $500 to $2,000; set new income phase-outranges for adjusted gross income of $95,000 and $110,000 for singles and $190,000 to $220,000 forjoint filers; allowed contributions beyond age 18 for special needs beneficiaries; and madedistributions tax-free as long as the money is not used for the same educational expenses for whicha tax credit is claimed with the HOPE or Lifetime Learning Credit.
Making distributions from pre-paid college savings plans and tuition plans tax-free andpermitting consortia of private colleges and universities to offer pre-paid tuition plans. Before the2001 law, states could offer tuition plans to which people contribute money for the higher educationexpenses of a beneficiary. The earnings were taxed at withdrawal to the beneficiary. Now thewithdrawals are tax-free.
A key incentive is already permanent, via the 2001 tax relief law. That law made permanentthe tax-free treatment of employer-provided educational assistance. Educational expenses paid byan employer for its employees were generally deductible to the employer. For employees, employerpaideducational expenses were excluded from gross income if provided under certain assistanceplans. The exclusion was set to expire on Dec. 31, 2001, and didn’t apply to graduate classes. Underthe 2001 law, this exclusion became permanent and applied to graduate classes as well.
For more information, taxpayers can look at http://www.irs.gov/pub/irs-pdf/p970.pdf.
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