In today's tax structure, there are eight different "education incentive provisions," including tuition credits, Education IRA’s, state deductible tuition programs, limited interest deductions, and employer provided assistance programs. In addition, we note with dismay that a number of changes to and expansions of these programs, as well as the establishment of new education incentives, were recently proposed in the Administration's FY 2001 Budget. The various provisions contain numerous and differing eligibility rules. For many taxpayers, analysis and application of the intended incentives are too cumbersome to deal with compared with the benefits received.

For example, eligibility for one of the two education credits depends on numerous factors including the academic year in which the child is in school, the timing of tuition payments, the nature and timing of other eligible expenditures, and the adjusted gross income level of the parents (or possibly the student). Further, in a given year a parent may be entitled to different credits for different children, while in subsequent years credits may be available for one child but not another. Both types of credits are dependent on the income levels of the parents or the child attempting to claim them. Further complicating the statutory scheme, the Code precludes use of the Lifetime or Hope Credit if the child also receives tax benefits from an Education IRA. Although the child can elect out of such benefits, this decision also entails additional analysis.

An additional complicating factor is the phase-out of eligibility based on various AGI levels in five of the eight provisions. This requires taxpayers to make numerous calculations to determine eligibility for the various incentives. Since there are so many individual tests that must be satisfied for each benefit, taxpayers may inadvertently lose the benefits of a particular incentive because they either do not understand the provision or because they pay tuition or other qualifying expenses during the wrong tax year.

Separately, college graduates are entitled to deduct a portion of any interest paid on student loans. The amount deducted is limited or eliminated when AGI exceeds certain thresholds. These phase-out thresholds are different from the Credit and Education IRA thresholds.

Harmonize and simplify education incentives.

Possible measures for simplifying the tax benefits for higher education include:

1. Combine both credits into one.
    
2. Simplify the definition of "student".
    
3. Establish a single amount eligible for the credit.
    
4. Eliminate or standardize the income ranges required for eligibility.
    
5. In lieu of the credits, grant additional exemption amounts to taxpayers who qualify for the credit under current law.
    
6. Ease the requirements for interest deduction and coordinate the phase-out amounts with other education incentives.
    
7. Replace current tax benefits with a new universal education deduction or credit, i.e., develop one or two education-related deductions or credits to replace the myriad current provisions.