Tax Deduction for Postsecondary Tuition, Joint Filers at Phase End

The tax deduction in tuition and fees (DTF) was implemented in 2001 as part of the Economic Growth and Tax Relief Reconciliation Act. Under this program, households could deduct tuition and fees paid for undergraduate or graduate education from gross income without needing to itemize deductions. Households are eligible to use the DTF based on adjusted gross income (AGI) net of all other above-the-line deductions. Beginning in 2004, the maximum deductions followed a tier system in which joint (single) filers with eligible income of less than $130,000 ($65,000) were eligible for a $4,000 maximum deduction, while households with eligible incomes of $130,000-$160,000 ($65,000-$80,000) were eligible for a $2,000 maximum deduction. Households above $160,000 ($80,000) were ineligible for the deduction. The change in tax liability is based on whether the household claimed DTF scaled by the marginal tax rate at their income level.

Hoxby and Bulman (2016) exploit income eligibility thresholds to estimate the impact of the above-the-line deduction of tuition and fees on enrollment. They use a regression discontinuity design but leave out observations right around the threshold to account for the possibility of manipulation in the running variable. This MVPF estimate considers the MVPF implied by the discontinuity faced by joint filers with incomes near $160,000.

Hendren and Sprung-Keyser (2020) take the causal estimates from Hoxby and Bulman (2016) and project the impact of the tuition deduction on lifetime earnings and tax revenue. They utilize estimates from Zimmerman (2014) on the impact attendance of college on earnings and assume that the returns to college are constant in percentage terms over the lifecycle.