NAICU Washington Update

Much Ado About Nothing: Congress Leaves Town Without Tax Extender Action

August 06, 2012

The past couple weeks saw a flurry of House and Senate activity on bills that would temporarily extend a host of already-expired or expiring tax benefits - including many important to college students and their families.  However, when the dust settled and Congress adjourned for its August recess, no final agreement had been reached.  More work on the tax extenders will likely occur in the "lame duck" session following the November elections.

In late July the Senate passed S. 3412, which would extend a host of tax provisions set to expire December 31.  Included  were one-year extensions through 2013 of the American Opportunity Tax Credit (AOTC), Section 127 employer-provided education assistance, and improvements made to the Student Loan Interest Deduction and Coverdell Education Saving Accounts (ESAs).  The bill's provisions, however, would only be available to taxpayers earning less than $200,000 per year; $250,000 for married/joint filers.

The House passed a similar one-year extension on August 1, though its bill doesn't include the AOTC which was part of the 2008 economic stimulus legislation backed by the Obama administration.  House bill H.R. 8 does, however, extend the temporary tax provisions from the 2001-03 Bush-era tax bills also set to expire December 31. The House version doesn't include income cap limitations.

The AOTC has emerged as somewhat controversial.  Sen. Orrin Hatch (R-Utah), ranking member of the Senate Finance Committee, opposes extending the AOTC.  His view is that it was never meant to be a permanent part of the law, but rather part of economic stimulus provisions meant to be “targeted, timely and temporary.”  Sen. Charles Schumer (D-N.Y.) has taken the lead in supporting the AOTC, and has introduced legislation to improve it and make it permanent.  House Ways and Means Committee members generally support the college tax credit, but House Republicans are less enamored with its partial refundability and high cost.

The AOTC is the largest of all the tuition tax benefits available to families. Currently, it is available to taxpayers earning less than $80,000 for individuals and $160,000 for married/joint filers. The credit is worth up to $2,500 of qualifying higher education expenses, and is available for the first four years of postsecondary education.  In addition, students and families with no taxable income are also eligible for a 40% refundable credit.

Also in play is another tax bill passed by the Senate Finance Committee on August 3. This bill would retroactively extend for two years another group of provisions that expired at the end of 2011.  These include the IRA charitable rollover and tuition deduction.  The bill would extend these items for all of 2012 and 2013, but it hasn't been considered on the Senate floor.

Beyond these tax extender bills, there was a July 25 Senate Finance Committee hearing on education tax benefits. Committee members and witnesses discussed the current benefits, their effectiveness, and how they could be consolidated and improved.  The hearing also looked at college costs and university endowments.

The bills passed by the House and Senate this summer will serve as a starting point for building the final bill to be addressed before the end of the year. The fight over income limits on the tax benefits will continue to dominate the debate, particularly in the weeks leading up to the November elections.  Watch for possible forward movement once Congress reconvenes in its lame duck session following Election Day.