The Student and Family Tax Simplification Act, H.R. 3393, would replace 15 tax credits and deductions for education with one simple American Opportunity Tax Credit.
Representative Diane Black’s (R-TN) opening statement on the bill suggested that parents and students may be giving up on gaining the tax benefits that help finance higher education because of the current complexity of programs. She explained that the legislation consolidates four main existing education provisions of tax law — the Hope Credit, the American Opportunity Tax Credit (AOTC), the Lifetime Learning Credit, and the tuition deduction — into a single, modernized and strengthened AOTC.
“Streamlining the number of education provisions and retooling those that are most effective allows us to simplify the [Internal Revenue] Code and reduce some of the confusion that exists today,” Black explained.
Puerto Rico has 200 accredited institutions of higher learning whose students are eligible for the AOTC.
The Child Tax Credit Improvement Act of 2014, H.R. 4935, would increase the maximum amount of the Child Tax Credit for inflation. Rep. Lynn Jenkins’ opening statement on the bill pointed out that the cost of childcare has increased at twice the rate of the average American family’s income, so that the tax relief for working parents has not kept pace with the costs of services allowing parents to work.
“The Child Tax Credit Improvement Act indexes the credit to inflation … to help parents keep more of their hard earned money to use for the mounting expenses of parenting,” Rep. Jenkins explained.
The Child Tax Credit is available to workers in Puerto Rico whose income comes from the territory but beginning only with their third child. In the States, benefits can be obtained for every child under 17.
Some tax credits can reduce tax liability to zero, but do not provide benefits beyond that. For example, if an individual is eligible for a Home Energy Credit of $1,000 and owes $300 in taxes before factoring the credit, the credit will reduce their tax bill to zero, but the individual will not receive the remaining $700.
$1,000 of the American Opportunity Tax Credit is refundable, meaning that an individual will get a payment from the Federal government to the extent the individual owes no Federal income taxes, and the Child Tax Credit is refundable.
Puerto Rico can be treated differently than the States in Federal programs because of the Commonwealth’s status as a territory. And it is excluded from or treated less well in several major tax and other programs that benefit low and middle income Americans. For example, Puerto Ricans are totally ineligible for the Federal Earned Income Tax Credit, which is refundable.
Although President Obama campaigned on a pledge of making low-income Puerto Rican workers fully eligible for the tax credit programs that are refundable — and his Task Force on Puerto Rico’s Status recommended equal treatment of Puerto Ricans in the refundable portion of the Child Tax Credit, his administration has not proposed any improved treatment of Puerto Ricans in the programs to Congress.
It is clear that equal benefits for Puerto Ricans will only come with the statehood that they voted for in a plebiscite on political status options held along with the November 2012 elections.
According to a recent study by the General Accounting Office, if Puerto Rico had been a State in 2010, Puerto Ricans would have received:
- $525 million in Earned Income Tax Credits, $473 million as cash payments;
- $137 million more in Child Tax Credits, $85 million as cash payments; and
- $56 million more in American Opportunity Tax Credits, $23 million as cash payments.
The Federal Treasury would have also gained money from Puerto Rico from newly applied Federal taxes to the islands.
Some claim that Puerto Ricans, who do not pay income taxes on income earned in Puerto Rico, do not deserve tax credits for that reason. However, just about half of Americans don’t pay income taxes. The EITC has been shown to encourage both education and employment.
In spite of efforts to extend EITC to Puerto Rico, Puerto Rico remains without one of the tools that does most to help Americans in poverty work their way out of that poverty.
For Puerto Rico, long in a state of great economic hardship that has reached crisis levels in recent years, being excluded from full participation in the family-focused tax credits – a function of its territory status is an obstacle to solving its economic challenges. As the 2011 President’s Task Force on Puerto Rico’s Status explained: “the status question and the economy are intimately linked … identifying the most effective means of assisting the Puerto Rican economy depends on resolving the ultimate question of status … In short, the long-term economic well-being of Puerto Rico would be dramatically improved by an early decision on the status question.”