Buried in the huge tax cut bill awaiting President Bush's signature is a bouquet of new tax breaks to help families save and pay for college, a politically popular move to provide relief to parents facing crushing tuition bills.
The bill within a few years would provide middle-income families with a tax deduction of $4,000 a year for tuition expenses. It also would expand tax breaks for people who save for college in special tax-free education accounts. It's all part of a package of education-related tax breaks worth almost $30 billion over 10 years that were piggybacked onto Bush's broader drive to cut income taxes across the board.
"This is a recognition from Congress that college is increasingly expensive and our families need help paying for it," said Judy Miller, a financial planner in Alameda, Calif., who specializes in helping people plan for college costs.
By 2004, the full tuition deduction would be available to couples with up to $130,000 annual income and individuals making up to $65,000, a broader pool of beneficiaries than is covered by tax credits for tuition now available to lower-income families.
Deduction Will Expire After 2005
In a quirk designed to hold down the overall cost of the tax bill, the tuition deduction is supposed to expire after 2005, only one year after it takes full effect. But tax and education analysts assume there is little chance Congress would kill a tax break with such a broad and politically powerful constituency.
"Once it's enacted, I can't imagine Congress five years from now will say, 'Sorry, we're eliminating that deduction,' " said Joel Packer, a lobbyist for the National Education Assn.
Indeed, the tuition deduction is a vivid example of several devices Congress relied on to squeeze an array of new tax breaks into a $1.35-trillion, 10-year package. Rather than drop pet projects from the bill, Congress postponed key provisions, imposed artificial expiration dates or otherwise jury-rigged the bill to obscure its likely cost, analysts say.
"[Lawmakers] would have had to make some choices to make the bill fit into the $1.35-trillion box," said Robert Bixby, policy director of the Concord Coalition, a nonpartisan budget analysis group. "The choice they made was to come up with a bunch of gimmicks."
Bush included none of the education tax breaks in his original $1.6-trillion tax cut plan. But Congress for years has been eager to help families save and pay for college costs. In 1997, a measure that became law allowed tax credits of up to $1,500 a year for college costs--but only for individuals earning up to $40,000 annually or couples making up to $80,000.
Congress also has repeatedly passed bills to expand education savings accounts--but the measures were vetoed by President Clinton, who objected to provisions that would have allowed parents to use the funds to pay for private school tuition.
The bipartisan support for education tax breaks demonstrates the powerful political appeal of providing relief for more middle- and upper-income families at a time when total annual college costs are averaging $11,338 at public universities and $24,946 at private universities, according to an analysis by the nonprofit College Board. The study found these costs have been rising about 5% a year.
The tuition deduction was included in the tax bill largely at the insistence of Sen. Robert Torricelli (D-N.J.), a key swing vote in the narrowly divided Senate.
Starting in 2002, the benefit would allow those who qualify to deduct up to $3,000 in tuition expenses from their taxable income. That deduction would rise to $4,000 in 2004-05.
Also in 2004-05, a more limited deduction of $2,000 would be available to more affluent taxpayers--individuals earning up to $80,000 annually and couples up to $160,000. The deduction would be available even to people who do not itemize their deductions. However, the bill specifies that taxpayers who also qualify for the tuition tax credit established in 1997 for lower-income people cannot take both the credit and the new deduction.
A key reason that few believe the tuition deduction will be allowed to expire after 2005 is that the income class receiving the benefit tends to be more politically active and "very cognizant of their tax benefits," said Sheldon E. Steinbach, general counsel of the American Council on Education.
"There will be a sufficient constituency built between now and 2005 that will make it very difficult for this provision to expire," he said.
Another of the bill's provisions would establish new incentives for people to put money in education savings accounts by increasing the maximum contribution allowed each year and making more people eligible for the benefit. Under current law, people can put up to $500 a year into the accounts in which interest accrues and funds can be withdrawn tax-free--so long as the money is used for higher education expenses.
Higher Income Limit to Generate Savings
The new tax bill will allow couples (not individuals) to save up to $2,000 in education savings accounts beginning in 2002 and allow withdrawals to be used for elementary and secondary education costs, including private school tuition. The annual income limit on couples' eligibility for these savings accounts would be increased from $190,000 now to $220,000.
Proponents say this change will spur additional savings at a time when analysts estimate only 5% of the population has saved more than $5,000 for future college costs. But critics say the tax break simply rewards people who already are wealthy enough to have $2,000 a year to save and does nothing for those who can't afford to save that much.
The bill also includes a new tax break for an increasingly popular college savings program available to taxpayers of all income levels--state-run college savings programs that allow investors to defer paying taxes on accumulated interest until the money is withdrawn. Under current law, withdrawals used for college costs are taxed at the child's tax rate, which is usually lower than that of the parents. Under the new law, such withdrawals will not be taxed at all.
Taken together, the bill is "making it possible to save for college in very advantageous ways," said Miller, the financial planner. "Those of us who really care about education have a real banner to wave: Wake up and pay attention! It is in your best interest to save early."
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College Tuition Deduction
A key provision in the tax cut bill soon to become law would create a deduction from taxable income for college costs.
Who qualifies*? Year Limit on deduction Up to $65,000 (single) 2002-03 $3,000 Up to $130,000 (married) Up to $65,000 (single) 2004-05 $4,000 Up to $130,000 (married) $65,000-80,000 (single) 2004-05 $2,000 $130,000-160,000 (married)
* Taxpayers annual income
Times staff writer Greg Miller contributed to this story.