So Sorry You Couldn’t Stay

We can’t help but feel a little wistful at the yesterday’s passing of line 33, the Student Loan Interest Deduction. We were happy, gleeful even, to get rid of Educator Expenses, but we’ve been wondering if we were too hasty with Loan Interest.

Why the long faces, you wonder?

1. Loan Interest had a greater impact on taxes for approximately the same paperwork burden as Educator Expenses.
2. It was much less vulnerable to fraud and manipulation by ne’er-do-wells. Since your lender reports how much interest you pay to the IRS, it is difficult to scam the credit.
3. It gave us $87.

Still, we think we made the right decision for a couple of reasons. There are already 3 other seperate provisions in the tax code that address the obscene costs of college (Hope, Lifetime Learning Credits and Tuition and Fees Deduction). If policymakers are determined to give tax incentives towards higher education, we sure wish they’d expand the ones they’ve already got instead of adding more snarl to the tax code.

We also didn’t talk about the phase-out yesterday. The tax deduction slowly diminishes for people who make more than $55,000/yr, disappearing entirely at $70,000. This frustrated poster makes a very good point: Heavy borrowers in professional school will make too much money to qualify for the deduction once they graduate.

Doctors and lawyers, for example, tend to have higher student loan balances right out of school, but also far more income than would qualify them to take a deduction. This is the Catch 22 of the student loan interest tax break.

The only people who are significantly (more than $87) helped by the Interest Deduction are those who pursue an expensive graduate degree only to work low wage jobs upon graduation. That isn’t behavior the tax code should encourage.

Iiiiinteresting

Today we will consign another misguided creation of Bill Clinton’s to the depths, the Student Loan Interest Deduction.

 

For this post we don’t even have to make up a fictional taxpayer, we’ve got a real live one…us! We graduated in 2003 with just under $20,000 in student loans – almost exactly as much as the average college graduate has these days. How much help can we expect towards our education costs? We’ve banished the tedious calculations to the comments again, but in the end we’ll save $87 in 2007.

$87? Excuse us, but that doesn’t seem like a whole lot. When we look at the $87 next to the $16,545.88 we still owe or even compared to the $1,865.64 that we paid off during 2007, we’re not convinced it has made a “material impact” in our ability to pay for college. Since we hate tax code clutter without good and solid reasons, this deduction will have to go.

Don’t get us wrong, we would like to have the $87 but we’re willing to give it up if we can have a tax code that is simple to use and fair to everyone.

Pirates Ho!

In yesterday’s post, we deliberately ignored one problem with line 23 so we could devote today’s post to it. As a practical enforcement matter, line 23 allows any K-12 educator to deduct $250 from their AGI without consequence.   

Let’s add a third fictional teacher to the mix. A mother with several young children, Brenda spends much more $250 on paper, books and other supplies for her family and herself. Being a regular reader of Wonk the Plank, Brenda knows a great deal about the enforcement holes in the tax code. She decides to deduct $250 from her AGI and pretend her purchases were for her classroom. After all, she has the receipts and how could anyone ever prove the deductions are not legitimate?

More jaded commentators than us have called line 23 a giveaway to the teacher’s unions. We don’t think is an example of malfeasance, we just think it is a stupid idea.

The Plank’s First Victim – Line 23

When Wonk the Plank looks at the federal income tax code, we see so many stupid ideas we scarcely know where to begin. But we’ve decided to kick things off with a look at line 23 of the 1040, Educator Expenses.

 

Enacted by President Clinton in his first term, this tax break allows K-12 teachers to deduct up to $250 for classroom expenses they incur out of pocket. Proponents of this idea argue that teachers constantly dip into their own funds to keep their classrooms maintained, thus educators deserve a tax break on the money they spend.

 

We agree that it is wholly unjust for teachers to spend their own money on school supplies. But the tax code is no place for redress.

 

To show the futility of this approach, we’ve enlisted the aid of two fictional teachers, Katie and Dan. Katie is a fresh faced educator straight out of college working an entry level job for $32,000. A 25 year veteran teacher, Dan’s pay is $70,000. We’ve hidden the boring calculations away in the comments, but brave souls can have a look if they so choose. In the end, Katie saved $24 and Dan saved $46.88. Those amounts are what financial types would call “immaterial.”

 In other words, line 23 has almost no impact, save to make taxes a little more complicated.

The instructions for the 2007 Form 1040 check in at 92 action-packed pages. By the IRS’s own embarrassing admission on page 84, the average taxpayer will spend 26.4 hours and $207 on his 2007 return. Line 23 is an example of complexity for the sake of complexity and it should go.

 

The trouble with small tax credits and deductions is that they are delightfully easy to give out but very difficult to retract. Who could argue with a tax break for teachers, after all? We can, and we just did.