quagmire of college finances|
Here's the problem: These tax
breaks are way too complicated. They need to be simplified. Our representatives
and senators had good intentions, but they created a morass of complex rules and
regulations that require an intimate understanding of the tax code. And the tax
code is an inscrutable piece of literature that's better left to CPAs and other
financial masochists to decipher.
The GAO report observes that students and their families
get a lot of handholding-type of help from the federal government and the colleges
they enroll in when it comes to getting traditional sources of funding: namely
grants and loans. But when it comes to taking advantage of higher education tax
breaks, they're on their own.
The report explains: "They must
understand the rules in light of their own situation, identify applicable tax
preferences, understand how these tax preferences interact with one another and
with federal student aid, keep records sufficient to support their tax filing,
and correctly claim the credit or deduction on their return."
Unfortunately, families have limited success because they
fail to understand all these nuances. The GAO reports that many people who were
eligible for the Hope credit, the Lifetime Learning credit or the tuition deduction
didn't claim them.
"Among filers who were apparently eligible to claim
one of the three tax preferences, 27 percent, representing about 374,000 tax filers,
failed to do so," according to the report. "The amount by which these tax filers
failed to reduce their tax averaged $169; 10 percent of this group could have
reduced their tax liabilities by over $500."
Here's another sad fact: These
mistakes weren't solely the fault of taxpayers. About half of the returns containing
errors had been prepared by paid tax professionals!
claimed a Lifetime Learning credit when they would have been better off getting
the tuition deduction, or vice versa. It gets even more complicated for folks
who wish to use several tax breaks at once, since the use of one may impinge on
the ability to use others. For instance, anti-double-dipping rules might prevent
families from taking a tax-free distribution from a 529 plan if they also make
use of a tuition deduction. (For an example of how this works, see page 25 of
the GAO report.)
Tax preparers aren't the only professionals
who are capable of making mistakes. Financial planners also see the college-planning
terrain as fraught with potential landmines. "A continuously shifting landscape
in the area of college financing is causing confusion, an increased risk of giving
bad planning advice and high liability exposure for advisers across the country,"
writes Paula Hogan of Hogan Financial Management in an article
published in the Journal of Financial Planning.