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Education Deduction Phaseouts Don’t Make Sense!

Education is a good thing right? So why is student loan interest deductibility phased out when your modified adjusted gross income [3] reaches $65,000? Why are the Hope Credit and the Lifetime Learning Credit phased out if you make more than $57,000? And if your MAGI is greater than $80,000, you can’t deduct tuition and fees from your income. I think there’s a conspiracy by the government to keep rich people as ignorant as possible! Okay okay, I’m being facetious of course with the outlandish conclusion but I think it’s unfair that the phaseouts exist and I’ll explain.

I think higher income workers should be taxed more even though they don’t use more services. While “unfair,” I also think it’s totally acceptable, and preferable, that the government does a little income redistribution through income taxes. There’s no reason why people should go cold, hungry, or sick because they can’t afford heat, food, or medicine while other people are living in million dollar homes and driving hundred thousand dollar cars. We, as a society, should strive for better. While some wealthy people scoff at the thought of their hard work subsidizing someone else, I think there are fewer of those types of people than you would think. At some point in the last 200+ years, the vast majority of families showed up in the United States with nothing and needed a hand from someone.

That being said, I think that many of the income related phase outs make sense because they restrict a high income earner’s ability to take advantage of accounts designed to improve their financial situation. A single filer with a MAGI greater than $116,000 cannot contribute to a Roth IRA, which seems fair (unless you live in Manhattan, then $116k feels like it should qualify you for welfare!), and they are less affected by the loss of this great retirement savings vehicle.

What doesn’t make sense is that education is and should be different. I can understand not extending tax advantaged accounts to the wealthy because they don’t need any additional financial advantage, but why remove the incentive to educate? College is expensive! The Princeton Review estimates that the annual cost of a year’s tuition, room and board, and fees [4] at a private school will be $33,303 in 2008 and at a public school it will be $12,514 in 2008. These aren’t $4,000 Roth IRA accounts here, we’re talking practically a minimum of $50,000 to send your child to an institution of higher learning.

If you see your life as a business, which is a good way of managing it, education is an expense and should be deductible against your income for everyone. If a company can deduct education expenses from its income, why can’t every single person?

Can someone explain why these phaseouts exist?

(For more information about the Tax Benefits for Education, refer to IRS Publication 970 [5])