The Taxpayer Relief Act of 1997

1. The Taxpayer Relief Act of 1997 Kate Jeffery UC Office of the President 1998 WASFAA Presentation

2. 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.

3. The Taxpayer Relief Act of 1997 • Hope tax credit • Lifetime Learning tax credit • Student loan interest deductibility • Tax exemption for employer paid undergraduate tuition • Tax exemption for TA/RA tuition remission • Education IRAs • Penalty-free withdrawals from IRA for educational expenses • Penalty-free withdrawals from state college savings and prepaid tuition plans for room & board costs

4. Today’s Focus • Student loan interest deductibility • Hope tax credit • Lifetime Learning tax credit

5. Student Loan Interest Deduction

6. 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

7. Student Loan Interest Deduction • Taxpayers need not itemize deductions • Just for the first 60 months of repayment

8. 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.

9. … be a loan that was incurred by the: • taxpayer; • taxpayer’s spouse; or • taxpayer’s dependent A “qualified education loan”CAN... … 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 interns and residents … include indebtedness used to refinance qualified education loans

10. A “qualified education loan” is NOT... … a deferred payment plan that charges a processing or application fee in lieu of interest … 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

11. Student loans on a billing servicer system, servicer will handle the reporting Loan Interest Reporting Requirements 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.

12. Implications for Designing Receivables Can reduce required reporting if: • Define all campus receivables as non-interest-bearing charges • Categorize any additional charges -- whether or not calculated as a percentage of the original bill -- as either an “administrative fee” or a “penalty”

13. Hope and Lifetime Learning Tax Credits

14. Common Features of the Hope and Lifetime Learning Tax Credits • Tax credits -- not tax deductions • Student must be enrolled at an institution that is • eligible to participate in Title IV programs • For student or person claiming student as a dependent • Not refundable • Phased out at: $40,000 through $50,000 for single filers $80,000 through $100,000 for joint filers

15. which equal qualified tuition and related expense payments less non-taxable grants, scholarships, fee waivers, refunds Common Features of the Hope and Lifetime Learning Tax Credits • Tax credits are available for... Net out-of-pocket costs

16. Effective Date Lifetime Learning Tax Credit Hope Tax Credit January 1, 1998 July 1, 1998

17. Enrollment Status Lifetime Learning Tax Credit Hope Tax Credit Must be enrolled: 1) in first two years of postsecondary education; and 2) at least half-time No requirement

18. Eligible Educational Programs Lifetime Learning Tax Credit Hope Tax Credit • degree; • certificate; or • recognized credential • degree; • certificate; • recognized credential; • or • improved job skills

19. No maximum tax credit per taxpayer; maximum tax credit per student = Maximum tax credit per taxpayer = 100% of first $1000 plus 50% of second $1000 = $1500 20% of first $5000 = $1000 Maximum Claims Lifetime Learning Tax Credit Hope Tax Credit

20. Maximum Claims Lifetime Learning Tax Credit Hope Tax Credit May only take tax credit for 2 years May take tax credit for a lifetime!

21. Potential Maximum for Students and Families Lifetime Learning Tax Credit Hope Tax Credit Tuition Level $390 $1800 $3799 > $5000 $390 $1400 $1500 $1500 $78 $360 $760 $1000

22. Who benefits from the Hope and Lifetime Learning tax credits? • Middle-income dependent students • Independent students who are working • Married students with working spouses

23. 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

24. Tax Credit Eligibility of UC Students Simulation Based on 1995-96 Data

25. Report to students or other taxpayers (e.g., parents) by January 31 of the following year Report to students by January 31, 1999 Report to IRS by February 28 of the following year Report to IRS by February 28, 1999 IRS Reporting Requirements 1999 Tax Year and beyond... 1998 Tax Year

26. Option to report on... all students OR IRS Reporting Requirements 1999 Tax Year and beyond... 1998 Tax Year ? just those with net out-of-pocket payments

27. IRS Reporting Requirements 1999 Tax Year and beyond... 1998 Tax Year 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 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

28. What charges may be considered qualified tuition and related expenses? Tuition and related expenses that are academically related

29. What charges are probablynot considered qualified tuition and related expenses? Books and supplies Meals, lodging, transportation, personal expenses Student activities Athletics Insurance

30. 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.

31. 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)

32. 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 àdeduct from tuition paid If taxes are paid àdo not deduct from tuition paid • Reporting implication: tuition and grant/scholarship aid are reported separately

33. 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)

34. 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.

35. 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.

36. 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.

37. How should we determine the “first two years of postsecondary education” in 1999-2000 and beyond? No guidance on this yet, but the possibilities include: Unit calculations What about students with advanced placement units or students who take heavy loads? Lapsed time calculations What about students who take time out from school? Enrolled time What about less-than-full-time students?

38. 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.

39. How to get by 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.

40. How to get by in 1998... 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.

41. 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 • A new question will need to be added to the FASFA for reporting the tax credit amount claimed by students/parents • The tax credit will be treated as an allowance against income in the need analysis formula

42. Treat as - an allowance against income (as in federal need analysis); or - income (i.e., add credit back into federal formula) How do the new tax credits affect financial aid? 2. How should the tax credits be treated in need analysis for state and institutional grant aid? • Determined by state or institution

43. How do the new tax credits affect financial aid? 3. How might tax credits affect grant packaging policy? • Goal: take all student resources into account • How: if a student receives a tax credit treat it as a resource • 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

44. How do the new tax credits affect financial aid? 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

45. How do the new tax credits affect financial aid? 4. How might grant program structure or institutional grant packaging policies be modified to maximize tax credit eligibility? • 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)

46. How do the new tax credits affect financial aid? 4. How might grant program structure or institutional grant packaging policies be modified to maximize tax credit eligibility? • 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

47. How do the new tax credits affect financial aid? 5. How might tax credits affect institutional or state fee policy? • Goal: enable institution or state to capture a larger federal subsidy • How: increase fees, which would be offset by tax credit • Impact: institution or state receives more fee/tuition revenue

48. How do the new tax credits affect financial aid? 5. How might tax credits affect institutional or state fee policy? • Issues - antithetical to federal intent which was to provide benefit to students/families, not to provide benefit to institution/state - generally there is not a dollar to dollar correspondence between fee increases and increased tax credit eligibility

49. 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