Refundable Tax Credits

Income and work supports may be provided through the tax system as well as through benefit programs. The most important tax credits for low-income households are the refundable Earned Income Tax Credit and the Child Tax Credit (credits that together lifted an estimated 8.7 million people out of poverty in 2011), and the partially refundable American Opportunity Tax Credit, which reduces the cost of postsecondary education.  These credits were improved by the 2009 American Recovery and Reinvestment Act, and these improvements were extended through 2018 by the American Taxpayer Relief Act of 2012. 

Jul 23, 2014  |  PERMALINK »

Education Tax Credits Bill Takes a Partisan Turn on Way to House Floor

By Elizabeth Lower-Basch

This week, the House of Representatives is expected to take up H.R. 3393, the Student and Family Tax Simplification Act.  When this bill was introduced last fall by Reps. Diane Black (R-TN) and Danny Davis (D-IL) , CLASP along with our partners in the Higher Education Tax Reform Consortium had applauded it  as an important step forward in simplifying the multiple tax benefits that support higher education and in making these credits more useful to low-income students.

In particular, the bill includes a number of provisions consistent with the Consortium’s recommendations:

  • It would make permanent the partially refundable American Opportunity Tax Credit (AOTC), which is currently scheduled to revert to the non-refundable Hope credit at the end of 2017.  It would also index the value of the AOTC to inflation, starting in 2018. 
  • It would Increase the portion of the credit that is refundable. Under current law, students who don’t earn enough to owe federal income taxes can receive only up to 40 percent of the AOTC as a refundable credit.  In other words, students who qualify for the maximum $2,500 credit can receive up to $1,000 as a refundable credit.  The bill would make the first $1,500 of the credit refundable.  This would particularly help students attending the lowest-cost institutions, such as community colleges, who now do not receive even the full $1,000 refundable credit if they have less than $4,000 in qualified expenses. 
  • It would improve coordination between Pell grants and the AOTC, and would ensure that Pell grants are never counted as taxable income, even when they are used for educational costs other than tuition.   A similar proposal is in President Obama’s budget. 
  • Under the original bill, the costs of the expanded refundabilty would have been offset by lowering the income eligibility limits for the AOTC and by eliminating the Lifetime Learning Credit.

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