Legislative update - Education tax incentive provisions in Ways and Means chairman’s tax reform “discussion draft” 

March 3:  The tax reform “discussion draft,” released last week by House Ways and Means Chairman Dave Camp, proposes changes relating to education tax incentive provisions, available for individual taxpayers.

Repeal current educational incentives; replace with permanent, modified American Opportunity Tax Credit

Under provisions of the discussion draft, all existing higher education tax credits (i.e., the American Opportunity Tax Credit, the Hope Scholarship Credit, and the Lifetime Learning Credit) and a series of other educational tax incentives would be repealed and generally replaced with one, permanent credit in the form of a modified American Opportunity Tax Credit (AOTC).

The proposed AOTC would:

  • Continue to provide for a 100% tax credit for the first $2,000 in qualifying higher education expenses, and a 25% tax credit for the next $2,000 of such expenses
  • Continue to be available for up to four years of higher education
  • Continue to define eligible expenses to include tuition, fees, and course materials

However, the modified AOTC would provide that a larger amount of the credit would be refundable (i.e., $1,500 as compared to the current amount of $1,000).

Also, the new AOTC would phase out at lower rates for modified adjusted gross income—between $86,000 and $126,000 for joint filers and $43,000 and $63,000 for other filers (current version is phased out between $160,000 and $180,000 for joint filers and $80,000 and $90,000 for other filers). These phase-outs would be indexed for inflation, starting in 2018.

In arriving at this singular educational credit, the following current educational incentives are proposed to be repealed:

  • Exclusion of income from U.S. savings bonds used to pay higher education and fees (Code section 1203)
  • Deduction for interest on educational loans (section 1204)
  • Deduction for qualified tuition and related expenses (section 1205)
  • New contributions to Coverdell education savings accounts (section 1206)
  • Exclusion for discharge of student loan indebtedness (section 1207)
  • Exclusion for qualified tuition reductions (section 1208)
  • Exclusion for education existence programs (section 1209)
  • Exception to 10% penalty for higher education expenses (section 1210)

KPMG observation

Because the discussion draft proposes to repeal and eliminate currently available educational incentives in favor of just one tax credit (albeit one of the more beneficial credits), many individuals now eligible for education-related tax incentives would no longer receive any benefit for their previously qualifying expenditures.

For example, the proposed revised version of the AOTC would have a significantly reduced AGI phase-out which would prevent many individuals from benefiting from this new credit. In addition, the AOTC would be limited to the first four years of post-secondary education. Therefore, many individuals who were benefiting from certain incentives for post- graduate studies (such as through the Lifetime Learning Credit or the tuition deduction) would no longer be able to benefit.

Further, individuals who are no longer incurring costs for qualifying education but still have significant student loan interest payments would no longer receive any benefit for such interest payments made.

Expansion of Pell Grant exclusion from gross income

Under current law, qualified scholarship amounts (such as Pell Grants) received by a degree candidate at a qualifying educational organization are generally excluded from gross income only if such funds are used for qualified tuition and related expenses (but not room and board). Under the provisions of the discussion draft, all Pell Grant amounts would be excluded from income regardless of how such funds might be used.

For more information, contact a tax professional with KPMG’s Washington National Tax:

Tracy Stone

(202) 533-4186

Scott Hamm

(202) 533-3095

Ben Francis

(202) 533-5708

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