Do all or part of the grants awarded to those students enrolled in Education Freedom Account Program represent taxable income under the federal tax code? Earlier this week, the House Ways and Means Committee grappled with this thorny question for more than an hour during a hearing on HB 402.
A clause in the EFA statute — RSA 194-F2: VI — reads, “Funds deposited in an EFA shall not constitute taxable income to the parent or the EFA student.” Rep. David Luneau (D-Hopkinton), the sponsor of HB 402, claimed this statement is “misleading and deceptive.” Since New Hampshire levies no income tax, the wording can refer only to federal tax law.
The State, Luneau said, has no authority to determine what does and does not qualify as taxable income under federal law. He added that the State is not qualified and should not be in the business of providing tax advice, particularly if it proves mistaken.
The EFA program is administered by the Children’s Scholarship Fund, headquartered in New York, which distributes funds to eligible families to defray the cost of qualified educational expenses, including school tuition, remedial services, learning materials, computer hardware and software, and other purchases.
HB 402 would repeal the language sparing parents and students from tax liability and add the following provision: “The scholarship organization shall produce and assure timely delivery of the appropriate Internal Revenue Service Form 1099 to parties responsible for any federal tax liability incurred from payments made from a student’s EFA.” Luneau told the committee the State should not be providing families with information, which if incorrect, could run them afoul of the Internal Revenue Service.
Stephen Matthews, who operates a tax preparation service in Concord, dismissed the bill as “in search of a problem that doesn’t exist” and urged the committee ”to let sleeping dogs lie.”
However, Bill Ardinger, who heads the Tax Practice Group at the law firm of Rath, Young and Pignatelli, told the committee that the treatment of scholarships by the federal tax code is extremely complex. While tuition and fees are exempt, other educational expenses are not. He said there is no assurance that all the expenses eligible under the EFA program qualify for tax exemptions under federal tax law.
Ardinger submitted a list of “qualified expenses” under the EFA program, distinguishing between those “probably” and “likely” taxable. Among the likely taxable expenses are: tutoring fees, computer hardware and software, internet connectivity, school uniforms, standardized assessment, college admission exams, preparatory courses and fees for transportation to education providers. Among the probably taxable expenses are tuition and fees for private online learning programs, tuition and fees for summer and specialized educational programs, tuition and fees for a career or technical school, and educational therapies.
Ardinger calculated that the Children’s Scholarship Fund takes 10 cents of every state dollar deposited in an EFA account in administrative fees, while the tax liability could claim another 20 cents, leaving 70 cents for educational services.
To limit the risk to families participating the EFA program, Ardinger recommended that the eligible expenses for goods and services allowed under the program should be reviewed and confined to those that qualify for a tax exemption under federal law. He also suggested the HB 402 should be amended to read that the funds deposited in EFA accounts “shall not constitute taxable income in New Hampshire.”
