The New Tax Bill:
Summarizing the Impacts
On July 31, Congress approved the conference report on H.R. 2014, The Taxpayer Relief Act of 1997. President Clinton signed the bill into law on August 5th. This legislation will help students and families as they save for college education, pay tuition bills, and repay student loans. The agreement included many of the elements the higher education community had been supporting.
Importantly, the new law does not change the current tax treatment of tuition remission benefits given to employees of colleges and universities and to graduate teaching and research assistants (Section 117(d)). An early version of the bill would have deleted this benefit and subjected any tuition remission benefit to federal income tax. Another significant provision in the law is the repeal the $150 million bond cap for private colleges and universities.
The law establishes the Hope Scholarship, a $1,500 tax credit for the first two years of college, similar to the proposal outlined by President Clinton. The HOPE credit is available for tuition and fees paid, less all grants and scholarships, for classes starting on or after January 1, 1998.
Also included in the law is an extension of Section 127 (tax exemption for employer provided educational assistance) for three years for undergraduates. However, the exclusion will not be extended to graduate or professional students, and this is a major loss that we will try to correct in future tax legislation.
Deductions of up to $2,500 a year for five years in interest paid on student loans are also allowed in the new law. The maximum deduction will be $1,000 in 1998, $1,500 in 1999, $2,000 in 2000, and $2,500 in 2001 and thereafter. The deduction will be available for interest paid in the first 60 months on any loan used to pay college expenses.
Additionally, the law allows penalty free withdrawls from IRAs for undergraduate and graduate education. It also establishes "Education IRAs" that can be funded with annual, nondeductible contributions of up to $500 per child. Contributions to these accounts can be made beginning January 1, 1998. The earnings on these accounts are tax-free if the funds are used to pay college expenses.
Under the new law, TIAA-CREF loses its tax exemption on its contingency reserve. Officials at TIAA-CREF had predicted that revoking the company's non-profit status could cut its payouts, however, there is no evidence as of yet that this will affect the premiums of enrollees.
Lawmakers also came to an agreement on a separate bill to cut spending, which included the following provisions that will impact the University of Pennsylvania Health System:
A change in the formula by which teaching hospitals are reimbursed for the indirect costs of training physicians. The new law cuts that reimbursement rate gradually to 5.5 per cent by 2001, as the Senate had proposed (the language preferred by teaching hospitals over the House proposal).
An adjustment in payments that Medicare makes to health-maintenance organizations (HMOs) to pay for the cost of treating their members at hospitals. Penn had advocated for lawmakers to carve out of those payments the monies that are meant to cover the cost incurred by a hospital for training doctors and for treating patients who frequently are more severely ill or have more complicated problems. The compromise legislation earmarks the funds for training doctors, providing compensation directly to the hospitals, but not money for treating seriously ill patients.
Please call either me (8-1388) or the Office of Federal Relations (8-1532) if you have any questions.
- Carol R. Scheman, Vice President for Government, Community, and Public Affairs
Return to:Almanac, University of Pennsylvania, September 23, 1997, Volume 44, Number 5