Margot L. Crandall-Hollick Analyst in Public Finance
American Opportunity Tax Credit (AOTC)—enacted on a temporary basis by the
American Recovery and Reinvestment Act (ARRA; P.L. 111-5) and extended
through the end of 2017 by the American Taxpayer Relief Act of 2012 (P.L.
112-240; ATRA)—is a partially refundable tax credit that provides
financial assistance to taxpayers who are attending college, or whose children are
attending college. The credit, worth up to $2,500 per student, can be claimed
for a student’s first four years of post-secondary education. In addition,
40% of the credit (up to $1,000) can be received as a refund by taxpayers
with little or no tax liability. The credit phases out for taxpayers with
income between $80,000 and $90,000 ($160,000 and $180,000 for married couples
filing jointly) and is hence unavailable to taxpayers with income above
$90,000 ($180,000 for married couples filing jointly). There are a variety
of other eligibility requirements associated with the AOTC, including the
type of degree the student is pursuing, the number of courses the student is taking,
and the type of expenses which qualify.
Prior to the enactment of the AOTC, there were two permanent education tax
credits, the Hope Credit and the Lifetime Learning Credit. The AOTC has
temporarily replaced the Hope Credit from 2009 through the end of 2017
(the Lifetime Learning Credit remains unchanged). A comparison of these
two credits indicates that the AOTC is both larger—on a per capita and aggregate
basis—and more widely available in comparison to the Hope Credit. Data from the Internal
Revenue Service (IRS) indicate that enactment of the AOTC contributed to a more
than doubling of the amount of education credits claimed by taxpayers.
Education tax credits were intended to provide federal financial assistance to
students from middle-income families, who may not benefit from other forms
of traditional student aid, like Pell Grants. The enactment of the AOTC
reflected a desire to continue to provide substantial financial assistance
to students from middle-income families, while also expanding the credit to
certain lower- and upper-income students. A distributional analysis of the
AOTC highlights that this benefit is targeted to the middle class, with
more than half (53%) of the estimated $16 billion of AOTCs in 2009 going
to taxpayers with income between $30,000 and $100,000.
One of the primary goals of education tax credits, including the AOTC, is to
increase college attendance. Studies analyzing the impact education tax
incentives have had on college attendance are mixed. Recent research that
has focused broadly on education tax incentives that lower tuition costs
and have been in effect for several years, including the Hope and Lifetime
Learning Credits, found that while these credits did increase attendance
by approximately 7%, 93% of credit recipients would have attended college
in their absence. Even though the AOTC differs from the Hope Credit in key
ways, there are a variety of factors that suggest this provision may also have
a limited impact on increasing college attendance. In addition, a recent
report from the Treasury Department’s Inspector General for Tax
Administration (TIGTA) identified several compliance issues with the AOTC.
There are a variety of policy options Congress may consider regarding the AOTC,
including extending the credit, extending a modified AOTC, or repealing
the Hope and Lifetime Credits and extending a modified AOTC that includes
provisions included from both credits. Alternatively, Congress may want to
examine alternative ways to reduce the cost of higher education.
Date of Report: January 16, 2013
Number of Pages: 24 Order Number: R42561 Price: $29.95
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