December 5, 2006

Families brace for possible loss of tuition deduction

Posted in Student Loan News at 10:07 AM by Joe From Boston

Here’s an article I thought you’d all find interesting


Kathy Marsico of Emerson has $1,000 riding on whether Congress extends a tax deduction for college tuition that expired at the start of the year.

That’s how much she was able to lower her taxes by using the deduction for her two sons’ tuition last year, and how much more she’ll have to pay by April 15 if Congress does not act.

Time is running out for her, and thousands of other North Jersey families.

The House and Senate return to Washington on Tuesday for what is expected to be their final two weeks of work before adjourning for 2006.

While there is bipartisan support for extending the tuition deduction, recent history has shown that may not be enough to assure passage, especially if the lame-duck Congress tacks on provisions that lack that broad support.

For last year, couples filing jointly with incomes of up to $130,000 were able to deduct up to $4,000 in tuition and fees; those with incomes between $130,001 and $160,000 could deduct up to $2,000.

“It’s one of the few ways that I consider middle-income families have of getting some relief from the cost of higher education,” said Jean McDonald-Rash, director of financial aid at Rutgers University, where full-time, in-state tuition is more than $7,900 a year.

Middle-income families often are squeezed, she said, because there are more financial aid programs for the poor, and the wealthy can afford tuition more easily.

In 2004, the most recent year for which data are available, more than 168,000 New Jersey families wrote off $447 million in tuition, according the Senate Finance Committee.

For Marsico and other taxpayers in the 25 percent bracket, a $4,000 deduction means a tax cut of $1,000.

With a combined tuition bill of more than $30,000 for two sons in college now, and a daughter likely to start next fall, Marsico wishes she could deduct up to $4,000 for each child. But she’ll settle for not having to pay $1,000 more in taxes.

“It’s a big help,” she said. “A thousand dollars is a thousand dollars you would instead have to take out in extra loans.”

The Congressional Budget Office estimated that extending the tax cut for 2006 would cost the federal budget about $420 million.

Congressional wrangling

An extension of the tuition deduction passed the House twice this year, and the Senate once. But it still has not made it to President Bush’s desk.

In February, both chambers included the tuition deduction in a bill extending capital gains and dividend tax cuts, but the break was stripped out of a final conference committee report that meshed differing House and Senate versions.

Because the capital gains cuts were not due to expire until 2009 and the tuition break had already expired, Democrats complained about Republican priorities, charging they were putting investors ahead of working families.

The tuition deduction also was included in a bill that passed the House in September, but that measure failed in the Senate because it had been packaged with a permanent reduction in the estate tax, which many Democrats opposed.

House and Senate aides say some kind of tax cut extension bill will be considered this month, but no details were available. There are signs that some members of Congress are leery about providing too much support for higher education.

At a hearing Tuesday, the Senate Finance Committee plans to question representatives of colleges and universities about some of their financial priorities, including the use of tax-exempt endowments and big salaries for administrators and coaches.

“With tuition going up every year, endowments growing bigger every year and the salary of another college president breaking the million-dollar mark seemingly ever week, it’s important for the Finance Committee to closely examine what colleges and universities are doing,” said Sen. Chuck Grassley, R-Iowa, the committee chairman. “We need to make sure that colleges and universities don’t respond to every new tax incentive for students and parents with new tuition increases.”

A Senate aide, however, said talks about extending the tax deduction are proceeding on a different track from the investigation of universities’ priorities.

The tuition deduction was created in the first tax cut bill enacted by Bush in 2001. One of its advocates at the time was Sen. Robert Torricelli, D-N.J., who touted the measure often in his aborted 2002 reelection campaign.

To minimize the long-term impact on the federal deficit of the tax cuts, Congress mandated that they expire at certain points. Many of the 2001 tax cuts expire in coming years, setting up a showdown over tax policy.

Read your IRS materials

Even if Congress extends the tuition tax break, however, some taxpayers could end up paying more if they don’t read their tax booklets carefully. That’s because the Internal Revenue Service last month started printing the 17 million tax forms and booklets that will be mailed out in late December and early January.

The final 1040 form does not include a tuition deduction as it did a year ago, but there is a note in the instruction booklet with a large exclamation point explaining that Congress was still considering the issue at press time. Taxpayers were urged to check the IRS Web site,, for the latest information.

“The forms and instructions sent to print reflected the law in effect at that time,” said IRS spokesman Gregg Semanick. “The IRS will issue further guidance and a publication if the legislation is enacted.”


* * *

Tuition tax deduction

Last year, taxpayers were able to deduct up to $4,000 in tuition and fees from their federal tax returns, but that deduction has expired. If Congress does not extend the deduction during its final working days this month, some families could be surprised by an increase in taxes. Here’s how many taxpayers took advantage of the deduction in 2004, and how much their tax liability was reduced.

U.S. N.J.

Tax returns taking deduction 3.6 million 168,246

Amount deducted from taxes $6.7 billion $447 million

Average savings at 25% tax rate $465 $664

Sources: Internal Revenue Service, Senate Finance Committee


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