May 16, 2008
HP-982

Week 3 Wrap-Up: Treasury Sent 15.575 Million Stimulus Payments This Week

This week the Treasury Department sent out 15.575 million economic stimulus payments to American households totaling $13.562 billion.  So far, Treasury has sent out 45.463 million total economic stimulus payments totaling $40.793 billion.

Week Three (May 12-16)

Total Number of Payments: 15.575 million
Total Amount of Payments: $13.562 billion

Week Two (May 5-9)

Total Number of Payments: 22.180 million
Total Amount of Payments: $20.138 billion

Week One (April 28-May 2)

Total Number of Payments: 7.708 million
Total Amount of Payments: $7.091 billion

Cumulative Total

Total Number of Payments: 45.463 million
Total Amount of Payments: $40.793 billion

The Treasury Department will announce at the end of every week the total number of payments that have been sent to households, and the total amount of payments sent.  Payments began April 28^th and will continue via direct deposit or paper check through mid-July.  For a single filer, the minimum payment is generally $300 and the maximum payment is $600.  For joint filers, the minimum is generally $600 and the maximum $1,200.  There is also an additional $300 payment for each qualifying child. 

For tax returns processed by the Internal Revenue Service by April 15 households will receive their payments according to the last two digits of the Social Security number on the tax form.  On a joint return, the first number listed will determine when a stimulus payment will be sent. 

REPORTS

• Direct Deposit Payments

May 13, 2008
hp-975

Treasury, IRS Issue 2009 Indexed Amounts for Health Savings Accounts

Washington, DC--The Treasury Department and Internal Revenue Service today issued new guidance on the maximum contribution levels for Health Savings Accounts (HSAs) and out-of-pocket spending limits for High Deductible Health Plans (HDHPs) that must be used in conjunction with HSAs.  These amounts have been indexed for cost-of-living adjustments for 2009 and are included in Revenue Procedure 2008-29, which announces changes in several indexed amounts for purposes of the federal income tax.

The new levels are as follows:

New Annual Contribution Levels for HSAs:

• For 2009, the maximum annual HSA contribution for an eligible individual with self-only coverage is $3,000. 
• For family coverage, the maximum annual HSA contribution is $5,950.
• Catch up contribution for individual who are 55 or older is increased by statute to $1,000 for 2009 and all years going forward.
• Individuals who are eligible individuals on the first day of the last month of the taxable year (December for most taxpayers) are allowed the full annual contribution (plus catch up contribution, if 55 or older by year end), regardless of the number of months the individual was an eligible individual in the year.  For individuals who are no longer eligible individuals on that date, both the HSA contribution and catch up contribution apply pro rata based on the number of months of the year a taxpayer is an eligible individual.

New Amounts for Out-of-Pocket Spending on HSA-Compatible HDHPs:

• For 2009, the maximum annual out-of-pocket amounts for HDHP self-coverage increase to $5,800 and the maximum annual out-of-pocket amount for HDHP family coverage is twice that, $11,600.

Minimum Deductible Amounts for HSA-Compatible HDHPs:

• For 2009, the minimum deductible for HDHPs increases to $1,150 for self-only coverage and $2,300 for family coverage.

In addition, a fiscal year plan that satisfies the requirements for an HDHP on the first day of the first month of its fiscal year may apply that deductible for the entire fiscal year.

Revenue Procedure 2008-29 is attached. 

-30-

REPORTS

• Revenue Procedure 2008-29

May 9, 2008
HP-973

Week 2 Wrap-Up: Treasury Sent 22.180 Million Stimulus Payments This Week

This week the Treasury Department sent out 22.180 million economic stimulus payments to American households totaling $20.138 billion.  So far, Treasury has sent out 29.888 million total economic stimulus payments totaling $27.230 billion.

 Week Two (May 5-May9)

Total Number of Payments: 22.180 million
Total Amount of Payments: $20.138 billion

Week One (April 28-May 2)

Total Number of Payments: 7.708 million
Total Amount of Payments: $7.091 billion

Cumulative Total

Total Number of Payments: 29.888 million
Total Amount of Payments: $27.230 billion

The Treasury Department will announce at the end of every week the total number of payments that have been sent to households, and the total amount of payments sent.  Payments began April 28th and will continue via direct deposit or paper check through mid-July.  For a single filer, the minimum payment is generally $300 and the maximum payment is $600.  For joint filers, the minimum is generally $600 and the maximum $1,200.  There is also an additional $300 payment for each qualifying child. 

For tax returns processed by the Internal Revenue Service by April 15, households will receive their payments according to the last two digits of the Social Security number on the tax form.  On a joint return, the first number listed will determine when a stimulus payment will be sent. 

REPORTS

• Direct Deposit Payments

Prepared Remarks of Treasurer Anna Escobedo Cabral on the Economic Stimulus Package

Secretary Henry M. Paulson, Jr. Remarks on the Economic Stimulus

Kansas City, Mo.--Thank you; it is great to be back in Kansas City.  I have just come from one of Treasury's bureaus here, the Financial Management Service Regional Financial Center, where they are printing the economic stimulus checks that will put money in the hands of American families and boost our economy this year.  It's fitting that I see this economic stimulus become a reality in Kansas City, because my visit here last December was among the events that convinced me that we needed to boost the U.S. economy, and do it early so it could make a difference in 2008.

In December, I was at the Bruce Watkins Cultural Heritage Center and Museum for a town hall meeting.  I met with and heard from many homeowners about mortgage and other housing difficulties.  They also talked of their concerns about the broader economy in Kansas City and Missouri.  During that week, I also spent time in Florida and California, where I heard similar concerns.  And when I got back to Washington, I talked to people in a variety of industries; I asked them what their business was telling them about where the economy was headed.  My travels, my discussions with industry leaders and a review of the economic data with the rest of the President's economic team convinced me in mid-December that the economy had taken a sharp turn for the worse and the risks were to the downside going forward.

The President recognized the downturn early, and took decisive action.  At the beginning of January, President Bush told the nation we were considering an economic stimulus package.  Congressional leaders also saw the weakening economy and the need for action.  The President directed me to work with Congress to craft legislation that would put cash in the hands of American consumers and help American businesses invest and create jobs.   And the President directed me to get this job done quickly, because we needed to bolster both consumer spending and business investment to protect the health of our economy. 

And today, we are seeing that our action couldn't have been more timely.  We didn't wait for the twenty-twenty hindsight of economic data to confirm a slow economy, we knew it was happening.  And because we didn't wait, the bipartisan stimulus package the President and the Congress enacted is injecting dollars into the economy now, when it can make a real difference. 

It was a pleasure to work in a bipartisan spirit with House and Senate leaders.  Together, we crafted a stimulus package that is big enough to have an impact, easy to implement, provides targeted payments and is temporary.  We acted quickly to support our economy and help create jobs this year.

The package includes stimulus payments to households, and tax incentives for businesses to invest and create jobs.  For households, single filers generally will receive a minimum of $300 and as much as $600, and joint filers will generally receive at least $600 and up to $1,200.  There is also an additional $300 payment for each qualifying child.  Total cash to households will be over $100 billion. 

In 2001 and 2003, tax relief payments to individuals and families stimulated the broader economy by increasing consumer spending.  Evidence suggests that households spent one-third to two-thirds of their 2001 and 2003 payments, and the current stimulus package is almost three times as large as what was enacted in 2001 --- $38 billion then, versus $100 billion now.

For businesses, there is a temporary change to the tax code that will allow them to buy new equipment this year and deduct an additional 50 percent of that investment cost in 2008.  In addition, the package expanded the current expensing limits for small businesses, allowing up to $250,000 of qualifying purchases to be deducted for tax years beginning in 2008.  Businesses will save approximately $50 billion in near-term taxes and lower taxes will help create new jobs this year.

At $150 billion – or around 1 percent of GDP --- these business and household measures are large enough to make a real difference as we weather the current economic slowdown and, by the end of this year, will lead to the creation of over 500,000 new jobs that would not have been created otherwise.  And just as important, these initiatives are temporary – so as not to impact our long-term fiscal position.   The cooperation between the Administration and the Congress demonstrated to the nation and to the world that we can come together to address the needs of the American people.

On February 13th the President signed the Economic Stimulus Act of 2008, the bipartisan bill that set this stimulus process in motion.   Just 75 days later, on April 28th, the first electronic direct deposits were sent into Americans' bank accounts.  Last week, the first week of payments, 7.7 million individual direct deposits averaging $920 were sent, amounting to more than $7 billion.  And we are continuing this process every week, until about 44 million stimulus payments have been made through direct deposits. 

This morning at the FMS center I saw employees printing checks non-stop on high speed printers.  There are machines manufacturing envelopes and wrapping the envelopes around the checks. Checks are being sorted by zip code and loaded onto trays for pickup by the U.S. Postal Service. Today is the first day that economic stimulus checks are being mass produced --- more than two million checks are being printed at FMS centers across the country, and this is just the first big batch.   During the rest of May, Kansas City will print 2.5 million checks a week.  In June and July, once the regular tax filing season is finished, we expect Kansas City will send 3.75 million stimulus checks per week.  FMS centers in Philadelphia, Austin and San Francisco are also preparing checks that will be, without a doubt, in the mail soon.  In total, we will send an estimated 88 million stimulus payments as paper checks through the mail.        

By the end of May, we will have pumped almost $50 billion into the economy and another $50 billion will follow --- by early July, about 130 million households will have almost $100 billion of payments in-hand.  

We expect that these payments will help right away --- help individuals, families and our economy.  Giving people cash means they can decide how best to use it.  Seniors, veterans, moms, dads and grandparents can each put their payments toward what is important to them --- whether it's gas for a summer vacation, clothes for back to school, or a trip to see the grandkids.

And these payments will provide a boost to the U.S. economy as we go through a difficult patch.  Our economy had been growing for more than six straight years when growth started to slow last winter.  And it has remained slow in the first part of 2008.  Wages have risen, but so have the costs of food, gasoline, and health care.

In addition, after years of unsustainable home price appreciation, we are experiencing an inevitable and necessary housing correction.  We are working  to minimize the impact of the housing correction on the rest of the economy, but we do not want to impede its progress --- because the sooner the correction is completed, the sooner we will see home values stabilize, the sooner we will see more people buying homes, and the sooner housing will again contribute to economic growth. 

The ongoing housing correction and volatility in the financial markets are causing many Americans to feel uncertain. That is understandable and reasonable, and it's also true that the long-term economic prospects of the United States remain solid.  I never tire of repeating that we have the most resilient economy in the world --- because it is true --- and that we will emerge from this period as we have emerged from past periods of difficulty and move on to new heights. 

These stimulus payments will reduce the impact of the downturn on households across the nation.  I am pleased to be here and have seen the evidence that when we say the check will be in the mail, we mean it.  Thank you.

-30-

Reminder: Treasury Secretary to Visit Printing Facility in Kansas City
Thursday to Observe Stimulus Checks Rolling off the Presses

Washington, DC--Treasury Secretary Henry M. Paulson, Jr. will tour a Treasury Department printing facility in Kansas City Thursday to observe the first mass production printing and packaging of the 2008 stimulus checks.  He will also deliver remarks on the economic stimulus payments at the Kansas City Central Library.

"By the end of June nearly 130 million stimulus payments should be in the hands of Americans, providing an immediate boost to the economy and helping to create more than 500,000 new jobs by the end of the year," said Paulson. 

The following events are open to the press:

What  
Facility Tour with Treasury Secretary Henry M. Paulson, Jr.
When  
Thursday, May 8, 8:00 a.m. CDT
Where  
Kansas City Regional Financial Center
4241 NE 34th Street
Kansas City, MO
Note 
All media should RSVP to Francie Abbott at (816) 414-2151, or Lauren Ray (816) 414-2113 with the following information: full name, Social Security number and date of birth, position, and organization. 

***

What  
Remarks by Treasury Secretary Henry M. Paulson, Jr. on Economic Stimulus
When  
Thursday, May 8, 9:30 a.m. CDT
Where  
Kansas City Central Library
Helzberg Auditorium
14 West 10th Street
Kansas City, MO
Note  
Media will need to show ID at the door; RSVPs not necessary.

Treasurer Cabral To Visit Treasury Printing Facility in San Francisco
Next Week to Observe Stimulus Checks Rolling off the Presses

Washington, DC--U.S. Treasurer Anna Escobedo Cabral will tour a Treasury Department printing facility in San Francisco next Thursday to observe the first mass production printing and packaging of the 2008 stimulus checks. 

The following event is open to the press:

Who              
Treasurer Anna Escobedo Cabral

What            
Facility Tour and Press Availability

When            
Thursday, May 8, 11:00 a.m. PDT

Where          
San Francisco Regional Financial Center
1650 65th St, Suite A
Emeryville, CA 94608

Note             
All media should RSVP to Abbie Loftus at (510) 594-7100, or Fay Rurup (510) 594-7330 with the following information: full name, Social Security number, date of birth, position, and organization. 

Week 1 Wrap-Up:
Treasury Sent 7.708 Million Stimulus Payments This Week

This week the Treasury Department sent out 7.708 million economic stimulus payments to American households totaling $7.091 billion. 

Week One (April 28-May 2)

• Total Number of Payments: 7.708 million
• Total Amount of Payments: $7.091 billion

The Treasury Department will announce at the end of every week the total number of payments that have been sent to households, and the total amount of payments sent.  Payments began April 28^th and will continue via direct deposit or paper check through mid-July.  For a single filer, the minimum payment is generally $300 and the maximum payment is $600.  For joint filers, the minimum is generally $600 and the maximum $1,200.  There is also an additional $300 payment for each qualifying child. 

For tax returns processed by the Internal Revenue Service by April 15 households will receive their payments according to the last two digits of the Social Security number on the tax form.  On a joint return, the first number listed will determine when a stimulus payment will be sent. 

Direct Deposit Payments

A small percent of tax returns will require additional time to process and to compute a stimulus payment amount.  For these returns, stimulus payments may not be issued in accordance with the schedule above, even if the tax return was processed by April 15.  In these cases, the stimulus payment will be issued approximately 2 weeks after the tax return is ultimately processed.

-30-

U.S., New Zealand to Negotiate Protocol to Income Tax Treaty

Washington, DC--The United States and New Zealand announced today that they plan to begin negotiation of a protocol to amend the bilateral income tax treaty, which entered into force in 1983.  The first round of negotiations is expected to take place beginning June 16 in Washington, D.C. 

The Treasury Department welcomes written comments from the public regarding the upcoming negotiations.  Comments should be sent to John Harrington, International Tax Counsel, Room 3054 Main Treasury Building, 1500 Pennsylvania Ave., NW, Washington, DC 20220.  

Comments also may be sent by fax to (202) 622-0646, or by e-mail to John.Harrington@do.treas.gov.

-30-

May 1, 2008
HP-955

Testimony of Deputy Assistant Secretary for Tax Policy
Karen Gilbreath Sowell
Before the House Ways and Means Subcommittee on Select Revenue Measures
on Tax Incentives for Higher Education

Washington --Mr. Chairman, Ranking Member English, and distinguished Members of the Subcommittee:

Introduction

Thank you for the opportunity to appear before the Subcommittee today to discuss tax incentives for higher education, which currently include more than a dozen credit, deduction, exclusion, and deferral provisions.  While my testimony today focuses on tax incentives, I note that there are numerous non-tax governmental and other programs to help make higher education affordable and that figure into an individual's or family's decisions regarding higher education.  The principal Federal student financial assistance programs are authorized under Title IV of the Higher Education Act of 1965, as amended, and this year will provide more than $90 billion in grant, loan and work-study assistance to students and their families.  The Title IV programs include Federal Pell Grants, which serve low-income undergraduate students, and Federal student loans, both the bank-based Federal Family Education Loan program and the Department of Education's Direct Loan program, which serve undergraduate students and their parents, as well as graduate professional school students.  In addition, colleges, universities, non-profit organizations, and the private sector furnish scholarships, tuition programs, and other assistance to students pursuing higher education, which according to the College Board exceeds $35 billion annually.  

Education is important to the Administration, and we recognize that there is room for improvement in the tax benefits currently provided through the Internal Revenue Code to encourage higher education.  We believe that the goal of providing incentives to make higher education affordable is best achieved by identifying the most efficient ways to address student needs and effectively utilizing those mechanisms.  My testimony will focus first on a brief review of current tax incentives for college and other post-secondary education, and then discuss areas for potential improvement. 

Over the last several decades, various provisions have been added to the Internal Revenue Code to facilitate savings for, and to incentivize the pursuit of, post-secondary education.  Building on these existing provisions, the Administration and Congress have made significant progress during the past seven years to provide tax benefits related to higher education, particularly in helping families save for post-secondary education.  Notably, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) expanded Qualified Tuition Programs, also known as section 529 plans, to permit tax-free distributions from plan accounts to be used for post-secondary education expenses, and to allow private educational institutions (in addition to states) to create section 529 plans.  The Pension Protection Act of 2006 made these changes to section 529 of the Internal Revenue Code permanent, which helped eliminate uncertainty with respect to this education savings vehicle.  Further, the Administration's Budget for FY 2009 includes a proposal to extend the Saver's Credit to contributions to section 529 plans in order to encourage and assist lower-income families in saving for higher education. 

EGTRRA also expanded Coverdell education savings accounts (formerly known as Education IRAs) by raising the annual contribution limit to Coverdell accounts from $500 to $2,000, and increasing the income phase-outs for joint filers.  In addition, EGTRRA eliminated the disallowance of qualified distributions from Coverdell accounts or section 529 plans for those taxpayers who claim an education credit.

Notwithstanding these savings programs for those who have the ability and who have sufficient time to save for higher education, students and families who are facing immediate education-related costs must confront a patchwork of education-related tax incentives.  Current law tax incentives may take the form of a credit against tax liability, a deduction from gross income, an exclusion from gross income, or a deferral of (or exemption from) tax.  A detailed table of all the major tax incentives related to post-secondary education is attached as Table 1. 

Set forth below is a brief overview of certain of the significant provisions under current law.  Focusing on but a few of the available incentives reveals the complexity of these tax incentives, all of which are aimed at post-secondary education, but which apply to different people, in different circumstances, and for different educational ends.  It is important to keep in mind that consideration of tax incentives is only one piece of the financial puzzle.  Students pursuing higher education – be they recent high school graduates, high school graduates returning to higher education after entering the job market or raising a family, or professionals interested in pursuing an advanced degree or a different career – also have available to them the panoply of government grant and loan programs, as well as the many forms of non-governmental assistance available from educational institutions, non-profit organizations and the private sector.

Overview of Major Current Law Tax Incentives for Post-Secondary Education

As noted above, current law tax incentives may take the form of a credit, deduction, exclusion, or deferral.  Many of these incentives have unique eligibility requirements, different phase-out limits, and various filing requirements.  Generally, if an expense would qualify under more than one provision, current law allows only one tax benefit for the particular educational expense. 

Credits

In 1997, Congress enacted a pair of tax credits to help families pay for higher education – the Hope Scholarship Credit (Hope Credit) and the Lifetime Learning Credit.  In 2008, a taxpayer may claim a Hope Credit for 100 percent of the first $1,200 and 50 percent of the next $1,200 in qualified tuition and related expenses (for a maximum credit of $1,800 per student) for the first two years of college for a student enrolled at least half-time.  A taxpayer may claim a Lifetime Learning Credit for 20 percent of up to $10,000 in qualified tuition and related expenses (for a maximum credit of $2,000) per taxpayer for any post-secondary education.  Both credits are subject to an adjusted gross income (AGI) phase-out.  In 2008, the credits phase out between $48,000 and $58,000 of AGI ($96,000 and $116,000 if married filing jointly).  Only one credit may be claimed by each eligible student. 

Dependent Related Deductions and Credits

For parents supporting college students, there is an extension of the benefit provided by the personal exemption for full-time students aged 19 through 23.  Dependent children over the age of 18 do not qualify as children for the personal exemption unless they remain full-time students (through age 23).  In 2008 the personal exemption amount is $3,500.

This favorable treatment of a full-time student aged 19 through 23 as a qualifying child also applies for purposes of the Earned Income Tax Credit (EITC).  The EITC is a refundable tax credit for working families with low incomes.  The EITC for families with one eligible child phases in over the first $8,580 of earned income for a maximum credit of $2,917.  The credit phases out between $15,740 and $33,995 of earned income ($18,740 and $36,995 for joint filers).  For families with modest incomes, allowing dependent students to qualify as children for EITC purposes provides the families supporting the students with a large tax benefit.

Deductions

A deduction may be allowed above-the-line (i.e., without itemization) for up to $2,500 of interest per year on any qualified education loan, subject to an AGI phase-out beginning at $55,000 ($115,000 if married filing jointly).  In addition, through 2007, a taxpayer could claim an above-the-line deduction for qualified tuition and related expenses.  The maximum amount of the deduction was $4,000 for taxpayers with AGI below $65,000 ($136,000 if married filing jointly), or $2,000 for taxpayers with AGI between $65,000 and $80,000 ($136,000 and $160,000 if married filing jointly) in 2007.  

Moreover, deductions may be allowed to taxpayers for work-related education expenses.  An employee who itemizes deductions may deduct work-related education expenses as one of a class of miscellaneous itemized deductions subject to a floor of 2 percent of AGI.  Similarly, if an employer pays an employee's education expenses and the reimbursement does not take place through an accountable plan, the amount reimbursed is included in the employee's gross income, but the employee may deduct the expenses as a miscellaneous itemized deduction subject to the 2-percent floor. 

Exclusions from Income

In addition to any available credits or deductions, any student who receives a qualified scholarship to a degree-granting program (including certain Federal medical training programs) may exclude from gross income amounts used to pay qualified tuition and related expenses, including fees, books, supplies, and required equipment.  Under another provision, originally enacted in 1976, a student may exclude from gross income the amount of a loan that is forgiven if the student works for a required period of time in certain professions or locations.  For example, after graduating from college, a student might have a loan forgiven if he or she were to become a teacher in an underserved community.  Additionally, there is an unlimited exclusion from the gift and generation-skipping transfer tax for tuition paid directly to a school on behalf of a student, resulting in an incentive to make gifts of college tuition

There are also incentives for individuals to continue their education while employed.  An employee may exclude employer-provided education expenses (up to $5,250 since 1986) that are part of an Educational Assistance Program (EAP).  Under an EAP, there is no requirement that the education be work-related.  In addition, like other work-related expense reimbursements, an employee may exclude from gross income employer reimbursements for work-related education made under an accountable plan. 

Certain colleges and universities offer tuition-reduction programs to their employees (which can include the employee's spouse or dependent child).  Tuition benefits under such programs may be excluded from gross income.  Also, certain graduate students employed in teaching or research may exclude tuition reductions from gross income. 

Savings Related Deferrals and Exclusions

Traditionally, tax deferral has been afforded to income saved for retirement in an Individual Retirement Arrangement (IRA).  Since 1998, an IRA distribution for qualified higher education expenses has been permitted, with penalties waived, although tax attributable to the amounts distributed is still due.  The exclusion covers both Traditional and Roth IRAs (effectively without income limits on contributors), encompasses grandchildren as beneficiaries, and extends qualified expenses beyond tuition and required fees to room and board (for students attending college at least half time), books, and supplies.

As noted above, tax deferral on income saved for college expenses has been available since 1996 through Qualified Tuition Programs, also called section 529 plans.  Individuals at all income levels may contribute to a section 529 account or prepaid tuition plan.  Contributors may use up to five years of annual gift tax exclusion amounts in advance for a gift-tax-free contribution to a student in a single year (for a total of $60,000 in 2008).  There is no limit on the number of permissible student donees per year.  Some states permit contributors to deduct a limited amount of contributions for state income tax purposes.  Not only does income accumulate tax-free in a section 529 account, but distributions from the account, which include a return of contributions and earnings on those contributions, are also excluded from gross income as long as they are used for qualified higher education expenses. 

In 1997, an additional deferral vehicle was created in the form of an Education IRA.  Subject to an AGI phase-out, contributors were allowed to contribute in the aggregate up to $500 per year to an Education IRA.  As noted above, EGTRRA increased contribution limits to Education IRAs, now named Coverdell Education Savings Accounts, to $2,000.  Not only does income accumulate tax-free in a Coverdell account, but distributions from the account, which include a return of contributions and earnings on those contributions, are also excluded from gross income as long as they are used for qualified education expenses, including college expenses.

Since 1988, there also has been a college saving incentive in the form of an exclusion of interest on qualified United States Savings Bonds, provided that the proceeds are used to pay for qualified higher education expenses, subject to an AGI phase-out. 

Complexity of Tax Incentives

As reflected in the overview above, the education tax incentives under current law are numerous, often overlapping, and complex.  The incentives vary in terms of who may receive benefits, which expenses may be covered, and how large an exclusion, deduction, or credit may be allowed.  For example, part-time students may be eligible for the education credits (at least half-time in the case of the Hope Credit) and savings bond interest exclusion.  Only full-time students may qualify for the dependent deduction or EITC.  Some provisions, like the Hope Credit, are calculated per student, but others, like the Lifetime Learning Credit and the student loan interest deduction, are calculated per taxpayer.  Different expenses qualify under different provisions.  For example, books, supplies and equipment are qualified expenses for many savings provisions but not for purposes of the credits.  Finally, phase-outs with different thresholds apply for purposes of the credits, dependent deduction, student loan interest deduction, Coverdell account contribution, and savings bond interest exclusion. 

Consider the following examples and their disparate results. The examples show the value of education benefits available under 2007 law to typical families facing a wide range of circumstances regarding their education expenses.[1]  In each example, we calculate the tax benefits that typical families would receive from five tax provisions that may help families with education expenses as in effect for 2007: (a) the Hope Credit, (b) the Lifetime Learning Credit, (c) the tuition deduction (expired December 31, 2007), (d) the dependent exemption, and (e) the EITC.   Savings incentives, such as Coverdell accounts and section 529 accounts are not considered.  

Because the provisions interact, and because only the EITC is refundable, some families may not have sufficient tax liability to benefit fully from all provisions for which they are eligible.  The examples show that total tax benefits vary with the family's specific circumstances: family income, filing status, age of the student, dependent status of the student, whether the student attends part-time, year of study, and their expenses.  The families in the examples presented are otherwise typical of families with similar incomes.  Of course, the results may vary as the facts vary from the typical family model.

Taxpayers may often be eligible for more than one benefit and only some benefits may be used together.  Thus, in many instances, the family must choose among the various benefits.  The first example shows the optimal choice may not be obvious before computing the family's taxes. 

Example 1:  A Family May Need to Make Many Calculations to Determine the Best Outcome

A family of three (Family A) has an income of $100,000.  Their 19-year-old son is a full-time freshman at the local state university.  His tuition and fees for the year are $6,000.  The family knows that they are eligible for the Hope Credit, the Lifetime Learning Credit, the tuition deduction, and the dependent exemption that the family would not be eligible for if the son were not a full-time student.  The family may use no more than one of the following three benefits: the Hope Credit, the Lifetime Learning Credit, or the tuition deduction.  The family is in the phase-out range for the education credits.

• Family A could receive $2,005 – from the Hope Credit ($1,555) and the dependent exemption ($850).
• Family A could receive $1,690 – from the Lifetime Learning Credit ($840) and the dependent exemption ($850).
• Family A could receive $1,850 – from the tuition deduction ($1,000) and the dependent exemption ($850).

Note that if this family had additional children with education expenses, the calculation exercise would be even more complicated.  For example, the Lifetime Learning Credit provides a maximum of $2,000 per family and thus, may be limited for families whose total tuition expenses exceed $10,000.

The remaining examples calculate the optimal education benefit for a series of taxpayers with different incomes, filing status, and education needs to demonstrate the potential range of results.

Example 2:  Individual in Part-time Training Programs – Income Affects Tax Benefits

A single taxpayer attends a training program that costs $1,000.  He attends less than half-time, is not in a degree program, and is not in his first two years of post-secondary study.

• If Taxpayer B earns $25,000, B could receive a Lifetime Learning Credit of $200 (the tuition deduction would be worth $150).
• If  Taxpayer B earns $50,000, B could receive a tuition deduction worth $250 (the Lifetime Learning Credit would be worth only $140 due to the phase out).

Example 3:  Moderate Income Students Working Toward an Associate's Degree – Family Structure Affects Tax Benefits

A student begins work on an associate's degree at the local community college.  The student's family has income of $25,000.  The student attends at least half-time.  Tuition and required fees are $4,000.

• C, a single student who is not dependent on his or her parents, could receive the maximum Hope Credit of $1,650.
• D, a married student who is not a dependent, could receive a Hope Credit or a Lifetime Learning Credit for $750.  (D's family does not have sufficient tax liability to benefit from the education credit fully.)
• E, the married parents of a 19-year old living at home and supported by his or her parents, could receive benefits totaling $2,387 from the Hope Credit ($410), the dependent exemption ($340), and the EITC ($1,637).

Example 4a:  Students Attending the Local State University – Income Affects Tax Benefits

A college-age student enrolls full-time at the local state university where tuition and fees are $6,000.  The student is in his or her first year of study. 

• F, a family earning $25,000, would receive $2,387 – from the Hope Credit ($410), the dependent exemption ($340), and the EITC ($1,637).
• G, a family earning $50,000, would receive $2,160 – from the Hope Credit ($1,650) and the dependent exemption ($510).
• H, a family earning $100,000, would receive $2,005 – from the Hope Credit ($1,155) and the dependent exemption ($850). 
• I, a family earning $150,000, would receive $1,350 – from the tuition deduction ($500) and the dependent exemption ($850).
• J, a family earning $200,000, would receive $952 – from the dependent exemption.

Example 4b: This example is the same as Example 4a, except that the student is enrolled in his or her third year of study.  As a result, the Hope Credit would no longer be available. 

• F, a family earning $25,000, would still receive $2,387 – from the Lifetime Learning Credit ($410), the dependent exemption ($340), and the EITC ($1,637).
• G, a family earning $50,000, would receive $1,710 – from the Lifetime Learning Credit ($1,200) and the dependent exemption ($510).
• H, a family earning $100,000, would receive $1,690 – from the Lifetime Learning Credit ($840) and the dependent exemption ($850). 
• I, a family earning $150,000, would still receive $1,350 – from the tuition deduction ($500) and the dependent exemption ($850).
• J, a family earning $200,000, would still receive $952 – from the dependent exemption.

Attached as Table 2 are figures that illustrate graphically the tax value of education benefits under 2007 law, taking into account the same five major tax provisions.  The figures show the value of the education benefits for typical families by AGI.  As in the examples above, the value of these provisions depends on a student's or family's circumstances:  the cost of tuition; family income (including whether the family has any income tax liability); whether the student attends college full-time or part-time; filing status; and for the Hope Credit, whether the student is in the first two years of post-secondary education. 

The tax savings for a student or family vary significantly with income and tuition level.  At the tuition levels paid by most full-time students whose families are eligible for the credits, the Lifetime Learning Credit offers less assistance than the Hope Credit.  The Hope Credit, however, is only available to students in their first two years of college.  Thus, the tax value associated with a college freshman or sophomore is larger in many cases than the tax value associated with a college junior or senior.

In general, families with incomes under $100,000 in 2007 owing tuition expenses would have maximized their benefits by claiming an education credit; higher income families would have claimed a tuition deduction.  As income rises further, the dependent deduction phases out.  Families with no income tax liability receive no benefit from the dependent deduction, the tuition deduction, or education credits.  However, a college student may qualify a low-income or moderate-income family for the EITC.  Large families may lose the benefit of the dependent deduction because they are more likely to be subject to the alternative minimum tax. 

Like the family filing a joint return, higher income individuals who file single returns would have maximized their benefits by claiming the tuition deduction, while individuals with incomes under $50,000 would have claimed a credit.  A low-income independent student may be eligible for the EITC, but there is no additional education-related benefit from the EITC and thus, the EITC benefit would be the same as for other low-income individuals.  Because independent students receive no benefit from the dependent deduction and no education-related benefit from the EITC, the tax value of the benefits associated with an independent student is smaller than the corresponding tax value for a dependent student.

As illustrated in the examples above and the figures in Table 2, the value of various tax incentives attributable to a student may range from a few hundred to a few thousand dollars depending on filing status and AGI.  In addition, a claim of one credit or deduction may adversely affect a taxpayer's eligibility for another credit or deduction.  From this variety of incentives, a student or parent must discern the optimal combination of tax benefits, which may require many taxpayers to generate alternative complex computations.  As in Example 1 above, taxpayers with dependent students who are eligible for a tuition deduction as well as a Hope or Lifetime Learning Credit must run multiple calculations to determine their maximum benefits.  Because a qualified expense may not be eligible for more than one benefit, careful recordkeeping is required to ensure both the optimal distribution of expenses and compliance.

Because of the complexity, it may be difficult for a student or parent to determine the value of the tax incentives.  In addition, for incentives based on AGI, their value is necessarily retrospective unless the student or parents can predict their income with precision.  The more difficult it is to predict the value of the tax benefit accurately, the less effective these benefits are as incentives for the pursuit of a college education.

In addition to the challenges that students face in navigating the myriad education tax incentives to optimize their use, the complexity of these provisions increases the record-keeping and reporting burden on taxpayers, while making it difficult for the IRS to monitor compliance.  For example, to claim an education credit, a taxpayer must file a Form 1040 even if he or she otherwise qualifies to file a Form 1040EZ, and the taxpayer must file an IRS Form 8863, a 17-line form with two pages of instructions. 

Observations on Simplification

Despite the complexity, because the tax incentives may provide significant value to a family or individual in pursuit of higher education, it appears the various incentives are widely utilized.  Table 3 sets forth statistics on the use of the education credits and the tuition deduction based on the most recent IRS data available (for tax year 2005).  In the fall of 2005, more than 17 million students were enrolled in college in the United States.  As noted in Table 3, a substantial number of these students claimed some combination of the deduction and credits.  Overall, in 2005, more than 11.6 million taxpayers claimed an education credit or tuition deduction.  Our data cannot capture whether students and families are utilizing the tax incentives optimally, nor what impact, if any, the tax incentives have on decision-making regarding post-secondary education.  However, one would anticipate that the complexity would detrimentally affect the efficient utilization and administration of the benefits.        

Because the value of a particular tax incentive may not become apparent until the end of the tax year, which may be months after the tuition or other expense was due, and the tax year does not coincide with the academic year, the tax system is not well suited to provide assistance on the "front end" of funding higher education.  Generally, tax benefits become available only after year-end (especially in the case of benefits limited by AGI, which is determined at year-end).  As a result, the complexity of the current provisions makes it difficult for even a very sophisticated taxpayer to adjust withholding to "advance" the benefit.

In addition, it is important to remember that recent high school graduates do not constitute the only type of person interested in pursuing a college education.  Prospective students also include older persons who entered the job market after high school as well as those who have an interest in pursuing an advanced degree or a career different from the one in which they were originally engaged.  The provision of different tax incentives for similar higher education expenses may result in the unequal tax treatment of similarly situated taxpayers.  

Suggestions have been offered regarding potential simplifications, primarily along three themes.  First, it has been suggested that uniform definitions for operative terms such as "qualified higher education expenses" or "qualified tuition and related expenses" and "eligible education institution" be adopted.  For example, currently only tuition may qualify for tuition reduction for college employees and gift tax exclusions; tuition and required fees may qualify for the Hope and Lifetime Learning Credits, tuition deduction, and savings bond interest exclusion; tuition, fees, books, supplies, and equipment may qualify for the scholarship exclusion, employer EAP, and student loan interest deduction; and tuition, fees, books, supplies, equipment (and in the case of a student attending at least half time, room and board) may qualify for penalty-free distributions from IRAs, section 529 accounts, and Coverdell accounts.   

A second suggestion has been to conform the phase-out thresholds and ranges and index all amounts for inflation.  As noted above, different income thresholds apply to the education credits, dependent deduction, student loan interest deduction, and the different savings provisions.

Third, it has been suggested that the education credits be consolidated along with certain deductions.  In particular, the AGI phase-out for the credits could be increased to eliminate the need for the tuition deduction; or a single credit could be designed to cover the same population. 

While there is clearly a need to address the complexity concerns arising from the current welter of tax incentives, it is important to remain cognizant that revisions to the tax regime may lead to unintended consequences, and any revision may unsettle taxpayer expectations.  Recognizing budgetary constraints, legislative reform of tax incentives will almost invariably result in additional benefits for certain taxpayers and fewer benefits for others.  Because of the varying profiles of those who seek the benefits of tax incentives for higher education, it may be challenging to streamline the incentives in a way that would benefit the entire target group.  Legislative reform of tax incentives would also need to address transition issues for those students or families who may be planning to rely on relevant provisions under current law.

In contemplating legislative reform of current tax incentives, a good starting point would be to focus on clear, simple ways to help students and their families meet the cost of higher education.  While efforts can be made to consolidate and streamline the education tax incentives, to be successful, those efforts should not overlook the non-tax benefits that are available to many students, especially those in low-income and middle-income families, either from Department of Education and other federal and state governmental programs or from private-sector sources.   

Thank you Mr. Chairman, Ranking Member English, and distinguished Members of the Subcommittee for the opportunity to participate in today's hearing on this important subject.  I would be pleased to respond to your questions. 

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REPORTS

• Table 1 - Summary of Tax Provisions Related to Higher Education
• Table 2 - The Tax Value of a Student under 2007 Law
• Table 3 - Use of Tax Incentives for Higher Education

April 28, 2008
hp-949

Paulson Approves Stimulus Distribution Plan, Payments for American Samoa, Guam, U.S. Virgin Islands, Commonwealth of the Northern Mariana Islands

Washington, DC--Treasury Secretary Henry M. Paulson, Jr. today approved the stimulus distribution plan and payment amount for American Samoa, and payments amounts to Guam, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands. 

As required by the Economic Stimulus Act of 2008, the Secretary of the Treasury had to approve distribution plans for "non-mirror code" territories (Puerto Rico and American Samoa), and payment amounts to territories with "mirror codes" (Guam, U.S. Virgin Islands, and the Commonwealth of the Northern Mariana  Islands).  Puerto Rico's distribution plan was approved on April 16, 2008.

Copies of the approval letter for the American Samoa plan, as well as payment amount approval letters for the remaining territories are attached.   

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REPORTS

• Paulson Letter to American Samoa
• Paulson Letter to Guam
• Paulson Letter to U.S. Virgin Islands
• Paulson Letter to Commonwealth of Northern Mariana Islands