University of Minnesota students may be losing out on nearly $2,500 of tax benefits each year.
President Barack Obama’s tax reform proposal released earlier this month could help ensure students receive all eligible education tax incentives, including tuition reductions, by simplifying the application process.
The proposal is part of a larger tax reform proposal that aims to ensure lower- and middle-class families collect all tax credits for which they qualify. The plan would raise capital gains and dividends rates for high-income households.
Under the proposal, the American Opportunity Tax Credit would become a permanent part of the federal tax code. The credit allows low- and middle-income families to receive tax benefits of up to $2,500 each year for four years for college expenses. It started in 2009, and is set to expire in 2017.
Fourteen percent of taxpayers don’t claim tax credits they’re eligible for, according to a 2012 report from the Government Accountability Office that was cited in the proposal. The office also found that 27 percent of families that claimed one tax benefit would have benefited from claiming another.
Shannon McGinnis, director of the University’s Volunteer Tax Assistance Program — a campus group that does students’ taxes for free — said she’s surprised that number isn’t higher.
McGinnis said she sees many students enter the VTAP offices who are confused by the process and often don’t know what will most benefit them.
“It’s not something I would have known how to do three years ago,” she said.
Humphrey School of Public Affairs senior fellow and former Minnesota Commissioner of Finance Jay Kiedrowski said tax credits are a good way for people to get financial support, but she agreed that many people get overwhelmed with their options or fill out their taxes hastily.
“There are a number of the tax credits that aren’t taken by eligible tax payers,” he said.
Although it’s good Obama is looking out for college students, Kiedrowski said, it’s unlikely the proposal will pass in its entirety.
Jim White, director of tax issues for the Government Accountability Office, said the sheer number of available programs often overwhelms taxpayers. The proposal aims to consolidate programs to make the process simpler.
“One of the leading explanations is that people are overwhelmed by the choice here and either not making any choice or they’re making bad choices,” he said.
White said the office recommended that the Internal Revenue Service and the Department of Education look into the issue further.
He said the office recommended that the IRS find similarities in the people who aren’t selecting the appropriate tax credits in order to identify the right strategy to help them.
Simplifying the system “would definitely help lower- [and] middle-class individuals and families,” McGinnis said, but it’s not necessarily feasible, and she doesn’t see tax laws becoming simple any time soon.
