BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 1148 (Stone) - Personal income taxes: deductions: qualified
tuition
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|Version: May 11, 2016 |Policy Vote: GOV. & F. 5 - 0 |
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|Urgency: No |Mandate: No |
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|Hearing Date: May 23, 2016 |Consultant: Robert Ingenito |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary: SB 1148 would allow a deduction for qualified tuition
and related expenses to be taken by a taxpayer as an
above-the-line deduction when calculating adjusted gross income
(AGI).
Fiscal
Impact: The Franchise Tax Board (FTB) estimates that the bill
would result in a General Fund revenue loss of $120 million in
2016-17, $80 million in 2017-18, and $85 million in 2018-19.
FTB's implementation costs have yet to be determined, but could
total in the hundreds of thousands of dollars annually (General
Fund).
Background: Federal law allows for the deduction of certain expenses when
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calculating adjusted gross income (AGI). Examples include moving
expenses, qualified tuition and related expenses, and interest
on education loans. All taxpayers with this type of expense
receive the benefit of these deductions, and they are referred
to as "above-the-line" deductions.
Specifically, an above-the-line deduction is one that allows a
taxpayer to subtract amounts from gross income when calculating
AGI. If the deduction is taken above the line, it is used to
determine the taxpayer's AGI. As noted above, an above-the-line
deduction can be taken by any taxpayer regardless of whether the
taxpayer itemizes. Moreover, an above-the-line deduction
reduces AGI, and having a smaller AGI can lower many subsequent
calculations, thereby further reducing tax liability.
Consequently, above-the-line deductions are more advantageous
than those taken below the line.
Through taxable year 2016, federal law allows a taxpayer to
deduct qualified tuition and related expenses for higher
education paid by the taxpayer during the taxable year. The
term "qualified tuition and related expenses" includes tuition
and fees required for the enrollment or attendance at an
eligible institution of higher education of the taxpayer, the
taxpayer's spouse, or any dependent of the taxpayer for whom the
taxpayer may claim a personal exemption. The expenses must be
in connection with enrollment at an institution of higher
education during the taxable year. The deduction is not allowed
to an individual if that individual is claimed as a dependent on
another taxpayer's return.
The maximum deduction is $4,000 for an individual whose AGI for
the taxable year does not exceed $65,000 ($130,000 for joint
returns), or $2,000 for other individuals whose AGI does not
exceed $80,000 ($160,000 for joint returns). No deduction is
allowed for an individual whose AGI exceeds the limitations, for
a married individual who does not file a joint return, or for an
individual claimed as a dependent by another taxpayer for the
taxable year. In addition, the deduction is phased out for
individual taxpayers with modified AGI of $65,000 to $80,000
($130,000 to $160,000 for joint returns). The amount of
qualified tuition and related expenses is reduced by certain
scholarships, educational assistance allowances, Hope or
Lifetime Learning credits claimed, and other amounts paid for
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the benefit of the student. Qualified higher education expenses
are defined as the student's cost of attendance, which generally
includes tuition, fees, room and board, and related expenses.
California law allows various income tax credits, deductions,
and sales and use tax exemptions to provide incentives to
compensate taxpayers that incur certain expenses, such as child
adoption, or to influence behavior, including business practices
and decisions, such as research and development credits. The
Legislature typically enacts such tax incentives to encourage
taxpayers to do something that but for the tax credit, they
would not do. The Department of Finance is required to annually
publish a list of tax expenditures. Currently, tax expenditures
exceed $57 billion dollars annually. State law lacks a
comparable deduction to the federal education deduction.
Consequently, taxpayers who deduct such expenses on their
federal tax returns must report the amount deducted for federal
purposes as a California adjustment.
Proposed Law:
The bill would, for taxable years 2016 through 2020, provide for
modified conformity to the federal deduction, when determining
AGI, for the amount paid or incurred by a taxpayer for qualified
tuition and related expenses. Specifically, the bill would
conform to the federal deduction, but not conform to the federal
date of the deduction.
Staff
Comments: FTB estimates that about 1 million Californians would
qualify for the bill's deduction. Federal data indicate that the
average deduction amount currently claimed is $1,800; thus, FTB
estimates total deductions from the bill would be $1.8 billion.
FTB assumed an average tax rate of 4 percent, and made a small
adjustment to its revenue estimate to account for nonresidents.
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