the taxpayer relief act of 1997 kate jeffery uc office of the president 1998 wasfaa presentation

The Taxpayer Relief Act of 1997

Kate JefferyUC Office of the President

1998 WASFAA Presentation

Goals for Today

• Describe provisions of the Taxpayer Relief Act of 1997 from a consumer perspective.

• Describe IRS institutional reporting requirements.

• Describe impacts of TRA on financial aid.

The Taxpayer Relief Act of 1997

• Hope tax credit

• Student loan interest deductibility

• Education IRAs

• Tax exemption for employer paid undergraduate tuition

• Tax exemption for TA/RA tuition remission

• Penalty-free withdrawals from IRA for educational expenses

• Penalty-free withdrawals from state college savings and prepaid tuition plans for room & board costs

• Lifetime Learning tax credit

Today’s Focus

• Hope tax credit

• Student loan interest deductibility

• Lifetime Learning tax credit

Student Loan Interest Deduction


• Beginning January 1, 1998

• Tax deduction = up to $1000

• Phased out at:

$40,000 through $55,000 for single filers

$60,000 through $75,000 for joint filers

• Taxpayers need not itemize deductions

• Just for the first 60 months of repayment


A “qualified education loan” MUST...

... cover “qualified higher education expenses,” i.e., the cost of attendance (which includes tuition, fees, books, and living expenses, minus refunds and non-taxable grants, scholarships, fee waivers, etc.).

… be an indebtedness incurred for “qualified higher education expenses” that paid for enrollment that was at least half-time.

A “qualified education loan”CAN...

… be a loan that was incurred by the: •taxpayer;•taxpayer’s spouse; or•taxpayer’s dependent

… include indebtedness used to refinance qualified education loans

… be any loan that was incurred before, on, or after the date of enactment of the new tax law

… be a loan that hospitals or health care facilities offer to internsand residents

… a deferred payment plan that charges a processing or application fee in lieu of interest

A “qualified education loan” is NOT...

… a non-interest-bearing delinquent debt against which a penalty fee or late charge is assessed

… a delinquent debt that was originally non-interest-bearing but now charges interest because: - the default interest rate provision is being charged - judgment interest is being charged

Loan Interest Reporting Requirements

Student loans on a billing servicer

system, servicer will handle the reporting

Student loans NOT on a billing servicer

system, the institution will have to do the

reporting

• Note that the lender has to report interest only if the amount due and paid on one or more loans is at least $600 for an individual borrower in the calendar year (i.e., interest is aggregated at the borrower level, not the loan level).

• This does not mean that a borrower cannot claim a deduction for smaller amounts.

Implications for Designing Receivables

• Categorize any additional charges -- whether or not calculated as a percentage of the original bill -- as either an “administrative fee” or a “penalty”

Can reduce required reporting if:

• Define all campus receivables as non-interest-bearing charges

Hope and Lifetime Learning Tax Credits

Common Features of the Hope and Lifetime Learning Tax Credits

• Tax credits -- not tax deductions

• Not refundable

• Phased out at:

$80,000 through $100,000 for joint filers$40,000 through $50,000 for single filers

• For student or person claiming student as a dependent

• Student must be enrolled at an institution that is eligible to participate in Title IV programs

qualified tuition and related expense payments

which equal

non-taxable grants, scholarships, fee waivers, refundsless

Net out-of-pocket costs

• Tax credits are available for...

Common Features of the Hope and Lifetime Learning Tax Credits

Effective Date

Hope Tax CreditLifetime Learning

Tax Credit

January 1, 1998 July 1, 1998

Enrollment Status


Tax Credit

Must be enrolled:

1) in first two years ofpostsecondary education;and

2) at least half-time

No requirement

Eligible Educational Programs


Tax Credit

•degree;•certificate; or•recognized credential

•degree;•certificate;•recognized credential;or•improved job skills

Maximum Claims


Tax Credit

No maximum tax credit per taxpayer; maximum tax

credit per student =

100% of first $1000 plus50% of second $1000

= $1500

Maximum tax credit per taxpayer =

20% of first $5000

= $1000

Maximum Claims


Tax Credit

May only take tax credit for 2 years

May take tax credit for a lifetime!

Potential Maximum for Students and Families


Tax Credit

$390

$1400

$1500

$1500

Tuition Level

$78

$360

$760

$1000

$390

$1800

$3799

> $5000

Who benefits from the Hope and Lifetime Learning tax credits?

• Middle-income dependent students

• Married students with working spouses

• Independent students who are working

Who DOESN’T benefit from the Hopeand Lifetime Learning tax credits?

• Low-income financial aid recipients

• Upper-middle and upper-income dependent students

• Low-income single independent students

Tax Credit Eligibility of UC StudentsSimulation Based on 1995-96 Data

All UCstudents

UG need-basedaid recipients

Eligible for full or partial tax credit 36.5% 27.7%

Ineligible for any tax credit 63.4% 72.3%

Does not meet citizenship/permanent residencyrequirements

4.0% 0.3%

Income exceeds income limitations 14.4% 1.0%

No tax liability due to low income 25.7% 42.2%

No net out-of-pocket expenses due toscholarship/grant assistance

19.4% 28.8%

Total 100.0% 100.0%

Note: Students enrolled solely in extension or summer session courses are not included.

Report to students by January 31, 1999

Report to IRS by February 28, 1999

Report to students or other taxpayers

(e.g., parents) by January 31 of the following year

Report to IRS by February 28 of the

following year

IRS Reporting Requirements1999 Tax Yearand beyond...

1998 Tax Year

?


1998 Tax Year

Option to report on...

all students

OR

just those with net out-of-pocket

payments


1998 Tax Year

1) Name, address, SSN of student

2) Name, address, SSN of taxpayer

3) Name, address, EIN of institution, name & phone # of contact person

4) Half-time enrollment status

5) Information to calculate out-of-pocket tuition and related expenses

6) 1st and 2nd year postsecondary

1) Name, address, SSN of student

2) (No reporting requirement)

3) Name, address, EIN of institution, name & phone # of contact person

4) Half-time enrollment status

5) (No reporting requirement)

6) Graduate student

What charges may be considered qualified tuition and related expenses?

Tuition and related expenses that are academically related

What charges are probably not considered qualified tuition and related expenses?

Books and supplies

Meals, lodging, transportation, personal expenses

Student activities

Athletics

Insurance

Do student loans count as tuition payments or are they considered financial aid?

Loans are the same as cash payments. Under the Taxpayer Relief Act of 1997, “financial aid” is only gift aid.

Note: A loan disbursed before January 1, 1998 will not count as a tuition payment for the Hope tax credit. Loan disbursements delayed until January 1, 1998 or after will count toward the Hope credit.

What are the reimbursements and refunds to be deducted from qualified tuition and related expenses?

Nontaxable scholarships and grants

Tuition refunds

Other nontaxable educational assistance such as...

• Employer benefits

• Withdrawals from savings instruments (e.g., new Education IRAs)

Who will make the decision about what scholarships and grants will be deducted ?

1. Taxpayer

• Base decision on whether paid taxes on the scholarship(s) or grant(s)

If no taxes are paid deduct from tuition paidIf taxes are paid do not deduct from tuition paid

• Reporting implication: tuition and grant/scholarship aid are reported separately

Who will make the decision about what scholarships and grants will be deducted ?

2. IRS (using an algorithm)

• Attribute grant/scholarship aid first to tuition

• Reporting implication: net figure (tuition minus grant/ scholarship)

3. Institution • Base decision on

(a) how aid was actually credited; or (b) intended purpose of aid

• Reporting implication: net figure (tuition minus grant/ scholarship)

What if a student pays fees in the fall to enroll in a term the following year?

Fees paid in one tax year can cover a period of enrollment that occurs within the first 3 months of the next calendar year.

The taxpayer would be eligible for the tax credit in the year in which the qualified fees were paid.

What is the definition of “at least half-time enrollment” as applied to the Hope Tax Credit?

• Students will meet enrollment criterion for the Hope Credit if they were enrolled at least half-time at any point during the tax year.

• “Half-time” enrollment definition conforms to Title IV definition.

What is the definition of “at least half-time enrollment” as applied to the Hope Tax Credit?

Enrollment to be determined on any of the following three dates:

• 30 days after the first day of the academic term.

• Date enrollment data must be reported to ED for the Integrated Postsecondary Education Data System.

• Date enrollment data must be reported to the institution’s governing board or to an external governing body.

How should we determine the “first two years of postsecondary education” in 1999-2000 and beyond?

Unit calculations

Lapsed time calculations

What about students with advanced placement units or students who take heavy loads?

What about students who take time out from school?

Enrolled time

What about less-than-full-time students?

No guidance on this yet, but the possibilities include:

How to get by in 1998...

Consider that students or parents may request information on how much they paid

in tuition and fees net of non-taxable gift aid and other refunds in 1998.

Consider that students or parents may request information on how much they paid

in tuition and fees net of non-taxable gift aid and other refunds in 1998.


Consider using an outside agency to handle TRA-related administrative tasks, such as the following:

• Creating and maintaining a database linking students to taxpayers.

• Merging data from different campus offices to create single institutional report.

• Sending reports to IRS, students, and taxpayers.

• Fielding routine questions.

Consider using an outside agency to handle TRA-related administrative tasks, such as the following:

• Creating and maintaining a database linking students to taxpayers.

• Merging data from different campus offices to create single institutional report.

• Sending reports to IRS, students, and taxpayers.

• Fielding routine questions.


Identify an institutional contact person.

Identify and train personnel to answer questions about the content of the tax reports (without giving tax advice).

Consider assigning an alias so that more than one employee can fill this role and so that staff will know what the incoming call is regarding.

Identify an institutional contact person.

Identify and train personnel to answer questions about the content of the tax reports (without giving tax advice).

Consider assigning an alias so that more than one employee can fill this role and so that staff will know what the incoming call is regarding.

How do the new tax credits affect financial aid?

1. How should tax credits be treated in federal need analysis?

• Federal statute forbids consideration of tax credit eligibility in need analysis

• The tax credit will be treated as an allowance against income in the need analysis formula

• A new question will need to be added to the FASFA for reporting the tax credit amount claimed by students/parents


2. How should the tax credits be treated in need analysis for state and institutional grant aid?

• Determined by state or institution

• Treat as

- an allowance against income (as in federal need analysis); or- income (i.e., add credit back into federal formula)


3. How might tax credits affect grant packaging policy?

• Impact -- institutional perspective: reduction in need for grant funding-- student perspective: there is no net gain

• Issue: Need to project current year tax credit eligibility

• Goal: take all student resources into account

• How: if a student receives a tax credit treat it as a resource


4. How might grant program structure or institutional grant packaging policies be modified to maximize tax credit eligibility?

• Goal: make students who are not eligible for the tax credit eligible

• How: selectively reduce grants for students not currently eligible because of their grant aid

• Impact: more grant dollars are available to other needy students



• Issues

1. How to identify such students - have to be able to proactively project tax credit eligibility - need to know income and income tax liability - need to know grant aid receiving and other student data (e.g., domestic or international, eligible siblings)



• Issues

2. Use of bridge loans - provide short-term loans to students who are potentially eligible for tax credit - provide loan cancellation to students who do not receive tax credit - student who are eligible for tax credit must repay loan


5. How might tax credits affect institutional or state fee policy?

• How: increase fees, which would be offset by tax credit

• Goal: enable institution or state to capture a larger federal subsidy

• Impact: institution or state receives more fee/tuition revenue


5. How might tax credits affect institutional or state fee policy?

- generally there is not a dollar to dollar correspondence between fee increases and increased tax credit eligibility

• Issues

- antithetical to federal intent which was to provide benefit to students/families, not to provide benefit to institution/state

Sources of additional information...

Federal sources:Taxpayer Relief Act of 1997

http://speakernews.house.gov/taxrelief.htm

Notice 97-60: Q&A from Treasury Dept.http://www.irs.ustreas.gov/prod/hot/not97-60.pdf

Notice 97-73: Q&A from Treasury Dept.ftp://iris.irs.ustreas.gov/pub/irs-drop/n-97-73.pdf

This presentation on the UC Office of the President Student Financial Support web page:

http://www.ucop.edu/sas/sfs/legislation

the taxpayer relief act of 1997 kate jeffery uc office of the president 1998 wasfaa presentation

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