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Hope vs. Opportunity: Higher Education Tax Incentives - Emil Estafanous, CPA : Emil Estafanous, CPA

Hope vs. Opportunity: Higher Education Tax Incentives

The Administration proposes to make a proxy American Opportunity Tax Credit (AOTC) for certain aloft preparation losses a permanent sustenance starting after 2010 (Treasury Dept., General Explanations of a Administrations’ Fiscal Year 2011 Revenue Proposals (PDF), Feb 2010, pages 21-22). This essay compares a AOTC to a Hope Scholarship credit that it would replace, analyzes a offer opposite beliefs of good taxation routine and describes additional, associated issues Congress competence cruise in evaluating a Administration’s proposal.

AOTC vs. Hope vs. Reality

The AOTC was enacted as one of many proxy reserve of a American Recovery and Reinvestment Act of 2009 (ARRA) (PL 111-5; Feb 17, 2009; IRC §25A(i)). The AOTC broadens a Hope Scholarship credit for 2009 and 2010. The Hope Scholarship credit was combined as a permanent sustenance with a Taxpayer Relief Act of 1997 (PL 105-34; Aug 5, 1997). It was enacted along with a Lifetime Learning credit. The AOTC is identical in proceed to a Hope Scholarship credit, yet is incomparable and relates some-more broadly. The draft subsequent compares these credits and includes comparison information on today’s college experience.




College years covered

First 4 years

First dual years

Less afterwards 60% of college students connoisseur in 6 years. About 36% connoisseur in 4 years. Graduation rates change by a institution’s selectivity and either private or public, and students’ race/ethnicity, gender, and income.*

Costs covered

Tuition, fees and march materials

Tuition and fees

Tuition, fees, books, supplies, computer-related expenses, room and board, travelling expenses, investigate abroad, co-curricular activity expenses, insurance

Maximum credit available

$2,500 per year (100% of competent losses adult to $2,000 + 25% of subsequent $2,000 of expenses)

$1,800 per year (100% of competent losses adult to $1,200 + 50% of subsequent $1,200 of expenses)

For 2007-08, normal annual fee and fees during private universities was $21,588, and $5,950 during open universities.**

Modified AGI phase-out starts during (MFJ)


$100 ,000

For 2007, 87% of particular earnings reported AGI of $100,000 or less; 97% reported AGI of $200,000 or less.***

No credit if mutated AGI (MFJ) exceeds



Inflation adjustments?

Administration’s offer calls for adjustments to credit and AGI amounts.

Credit and AGI amounts practiced annually formed on §1(f) cost-of-living adjustment.

College costs tend to boost some-more fast than acceleration rates. Tuition during open four-year universities was 6.6% aloft in 2007-08 than in 2006-07.****


40% unless petitioner is child with unmerited income taxed during parent’s rate


Usable opposite AMT?



For additional information on a credits and other aloft preparation taxation incentives, see IRC 25A, IRS Publication 970 (PDF), and a IRS website Tax Incentives for Higher Education.

* Data is accessible from several sources including:

** NCES, Table 332.
*** IRS, Statistical Tables, Table 1.
**** College Board, Trends in College Pricing (PDF), 2007.

Rationale for a AOTC

The Treasury Department suggests that a mutated facilities of a AOTC helps some-more low-income families compensate for college costs and improved enables students to stay in propagandize to graduation. Treasury also records a advantage to a republic of a broadened AOTC:

“If college is not done some-more affordable, a republic runs a risk of losing a whole era of intensity and productivity.” (General Explanation (PDF), page 21.)

A Jun 2010 news by a Georgetown University Center on Education and a Workforce concludes that a U.S. will have during slightest 3 million fewer college graduates than a 22 million indispensable by 2018. To strech a compulsory series of graduates, a Center estimates that colleges need to boost their series of graduates by 10 percent annually. The Center estimates continued boost in a series of jobs requiring a college degree, flourishing from 59 percent to 63 percent over a subsequent decade (in 1973, a figure was 28%). (Help Wanted — Projections and Jobs and Education Requirements Through 2018.)

A news by a Public Policy Institute of California estimates that California’s workforce will be brief one million college graduates by 2025. (Closing a Gap, Apr 2009.)


For decades, governments have supposing poignant appropriation to aloft preparation around publicly financed institutions, grants for students and faculty, scholarships, and taxation incentives. This history, along with a flourishing need to boost a series of college graduates to accommodate destiny workforce needs, indicates that supervision appropriation will continue. The doubt that should be addressed yet is what form of appropriation is many effective in assembly a varying needs of students. Factors to cruise embody that turn of supervision should yield a funding, how supports should be allocated between students and institutions, and a best smoothness resource (such as grants, scholarships, loans and/or taxation incentives).

With honour to examining existent and due taxation incentives, beliefs of good taxation routine yield a useful approach. Application of some of these beliefs to a permanent AOTC follows:

  • Equity: The element of equity calls for likewise situated taxpayers to be treated similarly. The refundable inlet of a AOTC creates it estimable in that a value of a advantage does not count on one’s taxation bracket. In contrast, a time limitation on a AOTC, indicates a pattern that best helps aloft income students attending a form of establishment where graduating in 4 years is some-more likely. The AOTC is reduction auspicious for low-income students attending institutions with a reduction resourceful admissions routine who are approaching to be in college for some-more than 4 years. In addition, a high income boundary for a AOTC will outcome in supports going to people who are doubtful to need a financial assistance, causing fewer supports to be accessible for students who need some-more financial assistance.
  • Simplicity: By itself, a AOTC is sincerely simple. Complicating factors come into play yet in that it is yet one of several taxation advantages for aloft preparation expenses. IRS Publication 970 that describes a incentives is 99 pages long. A 2008 news by a Government Accountability Office (GAO) found that a good series of people destroy to explain preparation taxation breaks they seem to be authorised for. The GAO suggests that complexity is a approaching reason. (Higher Education: Multiple Higher Education Tax Incentives Create Opportunities for Taxpayers to Make Costly Mistakes, GAO-08-717T, May 1, 2008.)
  • Convenience of Payment: A taxation should be due during a time and in a demeanour available for a taxpayer. Extending this element to a AOTC points out a accountability of taxation incentives for aloft preparation losses — they do not strech a taxpayer during a time fee is due.
  • Economy of Collection: Costs to collect a taxation should be kept during a smallest for both taxpayers and a government. In 2006-07, 75 percent of full-time students attending a open four-year establishment perceived financial assist (NCES, Mar 2009, supra). The sovereign supervision provides over $100 billion annually in grants (such as Pell grants), loans and work-study programs that assistance about 14 million students. The Federal Student Aid Office within a U.S. Department of Education has a staff of 1,100 to discharge these programs. They also routine approximately 14 million Free Application for Federal Student Aid (FAFSA) forms annually. Distribution of advantages for aloft preparation losses by both a Department of Education and a taxation complement increases costs. It also overlooks an existent entrance of directing supports to students many in need, as evidenced by a information collected on a FAFSA.

    The preparation credits also engage costs for colleges. IRC §6050S requires educational institutions to emanate Form 1098-T to students and a IRS, stating a volume paid or billed and other information. A 2009 report, Taxpayers Erroneously Claim Education Tax Credits, by a Treasury Inspector General for Tax Administration (TIGTA) found that a forms were not used by a IRS with a outcome that colleges were “needlessly expending approximately 5.1 million hours any year to finish Forms 1098-T and an estimated $3.8 million to mail a Forms to students.”

  • Accountability: While information exists on a volume of Hope and AOTC claimed, there is no requirement to collect information on how it affects students’ ability to attend college. There is no information on either a inducement reduces time to degree. To best safeguard that a credit is assembly a preferred goals, specific information should be collected and analyzed. As partial of a origination of a AOTC by a ARRA, Congress destined Treasury to control dual studies:
    1. How to coordinate a Hope and Lifetime Learning credits with a Pell extend module and
    2. Whether village use should be a requirement for claiming a credits.

Related Issues

In a past several years, a congressional tax-writing committees have hold hearings on taxation manners associated to aloft preparation and requested reports from a Congressional Budget Office. Based on these activities, it is probable that care of a Administration’s AOTC offer will also lead to care of a following matters, in further to topics lonesome by a reports Congress requested as partial of a ARRA.

  • How to facilitate a brew of aloft preparation incentives to make them some-more fit and effective (House Ways Means Committee hearing of May 1, 2008).
  • Rising fee costs (Senator Charles Grassley (R-IA) testimony (PDF) during Dec 5, 2006 Senate Finance Committee hearing).
  • Large endowments and use of tax-exempt standing and tax-exempt holds (Senator Charles Grassley (R-IA), supra).
  • Tax arbitrage (CBO report of Apr 2010).
  • Tax preferences for collegiate sports (CBO report of May 2009).

Looking Forward

Several factors call for examination and alteration of a allocation and use of sovereign dollars for aloft education. These factors embody complexity of a stream brew of incentives, identifying a many effective use of funds, and a approaching destiny necessity of college graduates, that could adversely impact a economy. Expiration of a aloft AOTC advantages this year will approaching pull a discussion. Whether a contention will go over anticipating a income offset, yet also addressing a issues remarkable in this article, stays to be seen.

About Emil Estafanous, CPA
Certified Public Accountant (CPA) Tax Professional committed in representing taxpayers and resolving their tax problems.

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