The 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 2012 by the Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of
2010 (P.L. 111-312)-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
temporarily replaced the Hope Credit from 2009 through the end of
2012 (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) indicates 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 recipients of these benefits 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 in these credits.
Alternatively, Congress may want to examine alternative ways to
reduce the cost of higher education.
General
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