H.R. 3393

Student and Family Tax Simplification Act

Committee
Ways and Means

Date
July 24, 2014 (113th Congress, 2nd Session)

Staff Contact
David Smentek

Floor Situation

On Thursday, July 24, 2014, the House will consider H.R. 3393, the Student and Family Tax Simplification Act, under a rule.  H.R. 3393 was introduced on October 30, 2013 by Rep. Diane Black (R-TN) and referred to the Committee on Ways and Means, which ordered the bill favorably reported, as amended, by a vote of 22-13.[1]

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[1] See Committee Report 113-526, at 12.

Bill Summary

H.R. 3393 consolidates four higher education tax benefits – the American Opportunity Tax Credit (AOTC); the Hope Scholarship Credit (HSC); the Lifetime Learning Credit (LLC); and the tuition deduction – into one permanent, reformed AOTC.  The new, permanent AOTC (as under the current-law AOTC, which is scheduled to expire at the end of 2017) provides a 100-percent tax credit for the first $2,000 of certain higher education expenses and a 25-percent tax credit for the next $2,000 of such expenses (for a maximum credit up to $2,500).  Eligible expenses include tuition, fees, and course materials.  The credit is available for the first four years of higher education, and the first $1,500 of the credit is refundable.  The new AOTC phases out at a Modified Adjusted Gross Income (MAGI) threshold between $160,000 to $180,000 for joint filers and $80,000 to $90,000 for other filers.  The credit and phase-out amounts will be indexed for inflation starting in 2018.

The bill also excludes all Pell Grants from income regardless of how they are used, and deems Pell Grants to be applied first against expenses not covered by the AOTC.  Under this legislation, qualified tuition and related expenses that would be used in calculating the AOTC would be reduced only to the extent the Pell Grants exceed the non-AOTC covered costs of college attendance.  In order to be eligible for the credit, the taxpayer is required to include the taxpayer identification number of the student and the employer identification number of the higher education institution.  The bill would be effective beginning after 2014.

Background

Under current law, the American Opportunity Tax Credit (AOTC) replaces the Hope Scholarship Credit (HSC) through the end of 2017.  The AOTC provides a 100-percent tax credit for the first $2,000 of certain higher education expenses and a 25-percent tax credit for the next $2,000 of such expenses, for a maximum credit of $2,500.  Forty percent of the AOTC is refundable (up to a maximum refundable amount of $1,000).[2]  After the AOTC expires, taxpayers may claim the HSC.  The HSC provides a credit of 100 percent on the first $1,000 of qualified tuition and related expenses (not including course materials) and 50 percent on the next $1,000 in expenses (for up to $1,500 per eligible student per year).[3]  The HSC is also only available for the first two years of post-secondary education; phases out at MAGI of $80,000 to $100,000 for joint filers and $40,000 to $50,000 for other filers; and is not refundable.   Those amounts are indexed for inflation.[4]  Alternatively, taxpayers can elect the Lifetime Learning Credit (LLC) for 20 percent of up to $10,000 of qualified expenses ($2,000) for post-secondary education.  The LLC phases out for taxpayers with MAGI between $110,000 and $130,000 for joint filers and $55,000 to $65,000 for other filers, which are adjusted for inflation.  Prior to 2014, an individual could claim an above-the-line deduction for qualified tuition and related expenses as an alternative to the above-the-line credits.  The maximum amount of the deduction was $4,000 for taxpayers with an adjusted gross income (AGI) that did not exceed $65,000 ($130,000 for joint filers), and $2,000 for taxpayers whose AGI did not exceed $80,000 ($160,000 for joint filers).

Under current law, there are 15 different tax benefits relating to education that often overlap (such as the AOTC, HSC, and LLC tax credits).  Current law benefits are ineffective and underutilized, as many taxpayers struggle to determine the tax benefits for which they are eligible.  This legislation would streamline education tax benefits, allowing taxpayers to better understand their eligibility.  Moreover, improving the tax treatment of Pell Grants and how they interact with other benefit will more effectively help those most in need cope with the increasing costs of higher education.[5]

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[2] See Committee Report 113-526, at 7.
[3] See Committee Report 113-526, at 7.
[4] Id. at 7.
[5] Id. at 6.

Cost

The Joint Committee on Taxation (JCT) estimates that enacting this legislation would reduce revenue by about $22.7 billion over the 2014-2024 period and increase outlays by $73.7 billion over the 2014-2024 period.[6]  In total, JCT estimates the bill would increase budget deficits by about $96.5 billion over the 2014-2024 period.

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[6] http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr3393.pdf

Additional Information

For questions or further information contact the GOP Conference at 5-5107.

Additional Views

STATEMENT OF ADMINISTRATION POLICY
H.R. 3393 – Student and Family Tax Simplification Act
(Rep. Black, R-Tennessee, and Rep. Davis, D-Illinois)

The Administration supports making permanent the American Opportunity Tax Credit and looks forward to working with Congress to ensure that students and working families have ongoing access to this and other important middle class tax benefits that are also scheduled to expire in just a few years.  However, the Administration opposes H.R 3393 because it is part of a broader effort to pass permanent, unpaid-for extensions of traditional tax extenders that, taken together, would add approximately $800 billion to the deficit.