Order Code RS21870
Updated February 16, 2007
Education Tax Benefits:
Are They Permanent or Temporary?
Linda Levine
Specialist in Labor Economics
Domestic Social Policy Division
Summary
Federal income tax benefits available to individuals to mitigate escalating costs
associated with postsecondary education have multiplied within the past decade. Some
of these benefits are authorized permanently (e.g., the Hope Scholarship Credit, Lifetime
Learning Credit, Coverdell Education Savings Accounts, and Section 529 Programs —
Prepaid Tuition Plans and College Savings Plans), while others are authorized
temporarily (e.g., the Higher Education Deduction and the Educator Classroom Expense
Deduction). But complicating this distinction is the Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA, P.L. 107-16), in which Congress enhanced
temporarily aspects of permanent education tax benefits. This report very briefly
describes the education tax benefits available to individuals and highlights their
permanent-versus-temporary features. It discusses legislation that would remove the
applicability of EGTRRA’s sunset provision to these education tax benefits and bills
that would extend the higher education deduction for tuition and related fees authorized
by EGTRRA. This report will be updated as legislative activity occurs.
Education Tax Benefits
Permanently Authorized Provisions
The Taxpayer Relief Act of 1997 (P.L. 105-34) established two permanent federal
income tax credits — the Hope Scholarship and Lifetime Learning Credits — for
qualified postsecondary education expenses. Since tax year 1998, persons with income
tax liabilities1 may subtract from them the tuition and related fees paid on behalf of
1 To take advantage of nonrefundable credits, taxpayers must have income tax liabilities
remaining after they have taken personal/dependency exemptions, standard or itemized
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students (e.g., a child, spouse, or themselves) claimed as exemptions on their returns.
Before determining the amount of the tuition and fees for which the credits can be
claimed, qualified expenses must be reduced by any tax-free scholarships and financial
aid (e.g., Pell Grants) awarded to the student. The two credits are intended to aid different
student populations: for the Hope credit, students enrolled at least half-time in a program
leading to an educational credential who are in their first two years of postsecondary
school; and for the Lifetime credit, students enrolled in one or more courses at the
undergraduate or graduate level who need not be pursuing an educational credential. The
Hope credit is capped at $1,650 per student in tax year 2006, and the Lifetime credit at
$2,000 per return. Only one of the credits may be claimed for a given student. In tax year
2006, the amount of the credits is gradually reduced for a single return tax filer with a
modified adjusted gross income (AGI) between $45,000 and $55,000 (a joint filer,
between $90,000 and $110,000). AGI limits may be adjusted annually for inflation.2
The Education Savings Bond program, which became effective in 1990 pursuant to
Section 6009 of the Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647)
is permanent as well. Bond owners who apply the principal and interest of Series EE and
I bonds toward tuition and related fees on behalf of a dependent student at the
undergraduate or graduate level in the same year in which the bonds are redeemed may
be eligible to exclude the interest from their taxable income. The bond must be registered
in the taxpayer’s and/or spouse’s name rather than the dependent’s name. The taxpayers
must claim an exemption for the student and must meet AGI limits in the year in which
bond proceeds are used toward tuition and related fees. In tax year 2006, the exclusion
begins to phase out at an AGI above $63,100 for a single filer and above $94,700 for a
joint filer. The exclusion cannot be taken by single filers whose AGI is at least $78,100
(for joint filers, $124,700). AGI limits may be adjusted annually for inflation.3
Temporarily Authorized Provisions
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L.
107-16) extended through December 31, 2010 the temporary exclusion for employer-
provided educational assistance, which was set to expire for courses beginning after
December 31, 2001. It also allowed the $5,250 annual limit on education assistance to
again cover graduate as well as undergraduate courses. The income exclusion originated
with enactment of the Revenue Act of 1978 (P.L. 95-600).4
1 (...continued)
deductions, and other personal credits.
2 For additional information, see CRS Report RL31129, Higher Education Tax Credits and
Deduction: An Overview of the Benefits and Their Relationship to Traditional Student Aid, by
Adam Stoll and Linda Levine. (Hereafter cited as CRS Report RL31129, Higher Education Tax
Credits and Deduction.)
3 For additional information see CRS Report RL32155, Tax-Favored Higher Education Savings
Benefits and Their Relationship to Traditional Federal Student Aid, by Linda Levine and
Charmaine Mercer. (Hereafter cited as CRS Report RL32155, Tax-Favored Higher Education
Savings Benefits.)
4 For additional information, see CRS Report 97-243, The Current Status of Employer Education
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The Higher Education Deduction originated in EGTRRA, which authorized the
deduction for tuition and related fees for tax years 2002 through 2005. In December
2006, the Congress reauthorized the deduction retroactive to its expiration date and
extended it to December 31, 2007, in the Tax Relief and Health Care Act of 2006 (P.L.
109-432). The tax provision allows both itemizers and non-itemizers to take the
deduction (i.e., it is “above-the-line”). It is meant to assist the same student population
as the Lifetime Learning credit, but the deduction extends to taxpayers with incomes
somewhat above the limit for the credit (i.e., an AGI of $65,000 or less for a single
filer/$130,000 or less for a joint filer). It is capped at $4,000 per return, and cannot be
taken for the same student for whom a Hope Scholarship or Lifetime Learning credit is
claimed. A smaller deduction, capped at $2,000 per return, is available to higher-income
taxpayers whose AGI does not exceed $80,000 for a single return and $160,000 for a joint
return. Neither the amount of the deduction nor the AGI limits are adjusted for inflation,
and the amount of the deduction is not phased out as AGI increases.5
The above-the-line deduction for classroom expenses of elementary and secondary
(K-12) school educators initially was authorized for tax years 2002 and 2003 in the Job
Creation and Worker Assistance Act of 2002 (P.L. 107-147). It was reauthorized
retroactive to its expiration date and through December 31, 2005 as part of the Working
Families Tax Relief Act of 2004 (P.L. 108-311). Like the higher education deduction, it
subsequently was reauthorized retroactive to its expiration date and extended to December
31, 2007, in P.L. 109-432. As a result, the classroom expense deduction is available in
tax years 2006 and 2007 to teachers, instructors, counselors, principals, and aides
employed at least 900 hours in a school year at public and private K-12 schools. It is
limited to $250 for purchases of certain items (e.g., books and supplies) used by educators
in the classroom.6
Permanently Authorized Provisions
with Temporary Amendments
EGTRRA changed temporarily, typically for tax years 2002 through 2010, certain
aspects of three other permanently authorized education tax benefits. Two of the benefits
are meant to encourage individuals to save toward future educational expenses (i.e., the
Coverdell Education Savings Accounts and Section 529 Programs). The third is the
Student Loan Interest Deduction.
Coverdell Education Savings Accounts (CESAs). These trust or custodial accounts
originated as Education IRAs in P.L. 105-34 for the purpose of providing a tax-free
savings vehicle for higher education expenses. They became available in 1998. The
appeal of the permanently authorized CESAs was enhanced in EGTRRA starting in tax
4 (...continued)
Assistance, by Linda Levine.
5 See CRS Report RL31129, Higher Education Tax Credits and Deduction.
6 For additional information see CRS Report RS21682, The Tax Deduction for Classroom
Expenses of Elementary and Secondary School Teachers, by Linda Levine. (Hereafter cited as
CRS Report RS21682, The Tax Deduction for Classroom Expenses of Elementary and Secondary
School Teachers.)

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year 2002, but on January 1, 2011, absent congressional action, the following
modifications will be supplanted by their prior versions:7
! The annual limit on individuals’ after-tax contributions to a beneficiary’s
account was quadrupled to $2,000 from $500.
! The “marriage penalty” was eliminated as well, such that a joint filer with
an AGI below $220,000 is now eligible to make contributions to CESAs
compared to prior law when their AGI had to be below $160,000.
! CESA withdrawals accorded tax-free treatment were extended from
payment of qualified higher education expenses (e.g., tuition, books, and
supplies) to payment of qualified K-12 expenses (e.g., tuition, tutoring,
computers, supplies, and uniforms).
! Higher education expenses were expanded to include, for example,
special needs services for special needs beneficiaries.8 For special needs
beneficiaries, the under-18 age limit for contributions to CESAs was
eliminated, as was the requirement that funds in CESAs generally be
distributed to beneficiaries by age 30.
! The date by which contributions to CESAs can be made was extended to
the tax filing date for that year. The length of time for corrective
withdrawals of excess contributions and associated earnings to avoid a
6% excise tax was extended to June 1 from the due date of the
beneficiary’s tax return for the contribution year.
! The definition of a beneficiary’s family members was extended to first
cousins into whose accounts funds may be rolled over tax-free from
existing accounts and who may be named as new beneficiaries of existing
accounts. This too is the case for Section 529 Plans, discussed below.
! Before determining the qualified expenses that CESA withdrawals can
offset, expenses must be reduced by the amount of tax-free scholarships
and financial aid (e.g., Pell Grants). Taxpayers then can claim a Hope or
Lifetime Credit or a Higher Education Deduction for the remaining
tuition and fees of a given student, as well as make tax-free withdrawals
from CESAs if the withdrawals do not go toward the same expenses for
which the other benefits are claimed. (Before January 1, 2002, taxpayers
could not claim the credits unless they waived the tax-free treatment of
CESA withdrawals.) If, through December 31, 2010, CESA withdrawals
become taxable because of receipt of tax-free assistance and of education
credits or deductions, the withdrawals will not be subject to the 10% tax
penalty usually assessed nonqualified distributions. This too is the case
for Section 529 Plans.
Section 529 Programs. Few states sponsored Qualified Tuition Programs (QTPs)
before their federal tax treatment was clarified at Section 529 of the Internal Revenue
Code by the Small Business Job Protection Act of 1996 (P.L. 104-188). There are two
types of permanently authorized QTPs or 529 Programs for higher education expenses:
7 For additional information see CRS Report RL32155, Tax-Favored Higher Education Savings
Benefits.
8 Definitional changes relate to room and board as well. They similarly apply to Section 529
Programs.

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prepaid tuition plans and college savings plans. After-tax contributions to beneficiaries’
529 college savings plans are invested by account owners in one of many portfolios
predetermined by state sponsors, and withdrawals from the accounts can pay for a variety
of postsecondary expenses. After-tax contributions to prepaid tuition plans on behalf of
beneficiaries are collectively invested by plan sponsors to serve as a hedge against tuition
inflation. EGTRRA extended sponsorship of prepaid tuition plans from states to
institutions of higher education effective through December 31, 2010. The Pension
Protection Act of 2006 (P.L. 109-280) made permanent this and other temporary
amendments to 529 plans included in EGTRRA. For example, P.L. 109-280 made
permanent the tax-free treatment of 529 withdrawals used to pay qualified education
expenses and the ability of taxpayers to contribute to a 529 Plan and a CESA in the same
year for the same beneficiary without incurring a penalty; to take an education credit or
deduction for tuition and fees in the same year that tax-free withdrawals are made from
a 529 plan, provided that the distributions are not used toward the same expenses for
which the credit or deduction is claimed; and to make one tax-free same-beneficiary
rollover in a 12-month period.9
Student Loan Interest Deduction. An above-the-line deduction from taxable income
of up to $2,500 in annual interest payments on student loans was permanently authorized
as of 1998 in the Taxpayer Relief Act of 1997. The loans must have been used toward
the cost of attendance for students enrolled at least half-time in undergraduate and
graduate programs leading to an educational credential. In tax years 2002 through 2010,
the deduction no longer is restricted to interest paid within the first 60 months during
which interest payments are required. Unlike under prior law, EGTRRA also allows
voluntary payments of interest to be deducted over the period. In addition, the act
temporarily raises the AGI of a taxpayer who may claim the tax benefit (from $55,000 to
$65,000 for a single filer and from $75,000 to $130,000 for a joint filer), effective in
2002. From tax year 2003 through 2010, the income limits may be adjusted annually for
inflation.
Legislation Related to the Relationship Between
EGTRRA and Education Tax Benefits
The 110th Congress is expected to consider the application of EGTRRA’s sunset
provision (Title IX) to the act’s “Affordable Education Provisions” (Title IV) generally,
and to the Higher Education Deduction that the act authorized specifically: Subtitle A —
Education Savings Incentives; Subtitle B — Educational Assistance; Subtitle C —
Liberalization of Tax-Exempt Financing Rules for Public School Construction; and
Subtitle D — Other Provisions (i.e., section 431's establishment of the Higher Education
Deduction).
9 For additional information, see CRS Report RL32155, Tax-Favored Higher Education Savings
Benefits; and CRS Report RL31214, Saving for College Through Qualified Tuition (Section 529)
Programs, both by Linda Levine.

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Activity During the 109th Congress
Two pieces of legislation were enacted during the 109th Congress that pertain to the
education tax benefits previously discussed in this report. The first — the Pension
Protection Act of 2006, P.L. 109-280 — included making permanent only the
enhancements to Section 529 plans provided in EGTRRA. The second — the Tax Relief
and Health Care Act of 2006 (P.L. 109-432) — included extending the higher education
deduction and educator deduction through December 31, 2007.
Activity During the 110th Congress
The Administration’s FY2008 revenue proposals would permanently extend the
enhancements that EGTRRA made to the aforementioned education tax benefits — with
the exception of the above-the-line deduction for higher education (tuition and fee)
expenses. The Administration also would make permanent the above-the-line deduction
for classroom expenses of eligible educators and allow the Saver’s Credit for
contributions to Section 529 plans.10
Some Members appear to support retaining the Higher Education Deduction as
evidenced by legislation to expand the tax provision or extend it permanently (e.g., H.R.
193 and H.R. 411). S. 359 would remove applicability of EGTRRA’s sunset provision
to the Higher Education Deduction and enhance the deduction, while also amending the
deduction’s definition of an eligible student to conform to that of the Hope credit (i.e.,
carrying at least half the normal full-time work load for the course of study being
pursued).
Some Members also appear to favor simplifying use of the federal tax code to help
individuals better afford college.11 For example, S. 614 would replace the higher
education deduction and two education credits and with one credit, and S. 97 would
replace the two credits with one credit. Proposals to eliminate the Higher Education
Deduction and Lifetime Learning Credit or to retain them but substitute the Hope Credit’s
definition of an eligible student would curtail people’s access to tax provisions that reduce
the cost of taking courses during one’s working life to acquire or improve job skills.
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10 For information on legislative activity related to the educator deduction CRS Report RS21682,
The Tax Deduction for Classroom Expenses of Elementary and Secondary School Teachers.
11 For examples of the complexity that families face chosing between the three tax provisions see
CRS Report RL31129, Higher Education Tax Credits and Deduction

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