The fiscal cliff com-promise, passed by Congress on New Year’s Day, extends numerous tax provisions that had been set to expire, including a number that are NACUBO priorities. The success in protecting these important programs is due in no small part to the NACUBO members who weighed in with Washington policy makers over the past year to bring attention to higher education–related tax and budgetary concerns.
Key Provisions Preserved
The compromise bill, the American Taxpayer Relief Act of 2012 (H.R. 8), includes the following key higher education provisions:
- The American Opportunity Tax Credit (AOTC), which had been scheduled to revert to the less-generous Hope Scholarship at the end of 2012, has been extended for five years. The AOTC provides a 100 percent tax credit for the first $2,000 of certain higher education expenses and a 25 percent tax credit for the next $2,000 of such expenses. The tax credit is partially refundable and is available for up to four years of college. It is phased out beginning at $80,000 for single filers and $160,000 for joint filers. According to the Joint Committee on Taxation, this provision would reduce revenues by $53.1 billion and increase outlays by $14.1 billion over 10 years.
- Employer-Provided Educational Assistance (Sec. 127) benefits, which were set to expire on Dec. 31, 2012, have been made a permanent part of the U.S. tax code. Section 127 allows an employer to offer an employee up to $5,250 per year in tax-free educational assistance for undergraduate or graduate-level courses. This benefit covers tuition, fees, books, supplies, and equipment; the provision is estimated to cost $11.5 billion over 10 years.
- The expanded student loan interest deduction (SLID) has also been made permanent. Certain individuals who have paid interest on qualified education loans may claim an above-the-line deduction of up to $2,500 for such interest expenses. Prior to 2001, this benefit was allowed for only 60 months and had lower income thresholds. The bill makes permanent the income phaseout at $70,000 ($110,000 for single filers and $140,000 for joint filers). This provision is estimated to cost $9.7 billion over 10 years.
- The bill permanently extends expanded Coverdell Education Savings Accounts (ESAs).
A Coverdell ESA is an account that allows parents and students to save for education expenses. While the contributions to a Coverdell account are not deductible, the amounts deposited grow tax free until distributed. The student will not owe taxes on the distributions if they are less than the student’s qualified educational expenses. If the provision had not been extended, on January 1, Coverdell ESAs would have reverted from allowing annual contributions of up to $2,000 to allowing only $500. This provision is estimated to cost $271 million over 10 years.
- The above-the-line tuition deduction for qualified tuition and related expenses has been extended for one year, to the end of 2013. This deduction enables taxpayers with a modified adjusted gross income of $65,000 a year or less ($130,000 for married couples filing jointly) to deduct up to $4,000 annually in tuition and related expenses. Individuals with a modified adjusted gross income of more than $65,000 but not more than $80,000 (or more than $130,000 but not more than $160,000 for married couples filing jointly) are eligible for an annual deduction of up to $2,000. This provision is estimated to cost $1.7 billion over 10 years.
- The Individual Retirement Account (IRA) charitable rollover has been extended through Dec. 31, 2013. Individuals are also allowed to make a rollover during January 2013 for retroactive 2012 tax purposes. The IRA charitable rollover allows individuals 70½ and older to donate up to $100,000 from their IRAs and Roth IRAs to public charities, including colleges and universities, without having to count the distributions as taxable income. The IRA rollover provision had expired on Dec. 31, 2011. This provision is estimated to cost $1.3 billion over 10 years.
Limitations on Deductions
Lawmakers did not include any new limitations on personal deductions or exemptions, but in the same measure they did reinstate two previously existing limitations: (1) the Pease limitation on itemized deductions (named after former Congressman Don Pease, who originated this concept); and (2) the personal exemption phaseout (PEP). These limitations affect taxpayers with adjusted gross incomes over $250,000 for individuals and $300,000 for joint filers.
As budget talks continue in Washington, NACUBO remains concerned about the possibility of further limitations, particularly to the charitable deduction. Given the federal deficit situation, legislators are likely to consider various spending cuts as well as new revenue sources. Among the ideas that have been offered is a proposal to limit itemized deductions, including the tax deduction for charitable donations. Some have proposed eliminating or limiting tax-exempt interest for municipal bonds. Lawmakers are likely to seek alternative sources of revenue in the budget battles ahead and they may seek further limitations on the amount that can be claimed in deductions.