NAICU Washington Update

Fiscal Cliff Notes for Higher Education

January 04, 2013

President Obama has signed the fiscal cliff agreement approved by the Senate and House earlier this week. There are some extraordinary tax victories for higher education in this deal, as well as some overall limits on deductions that NAICU will be studying more closely.  Regarding the broader federal budget cuts which were set to go into effect January 3 (from the August 2011 Budget Control Act), the fiscal cliff deal didn't eliminate the cuts, but rather reduced and delayed them until March.

Here are the specifics:

The bill makes permanent tax code Sec. 127 - employer provided education assistance - for both graduate and undergraduate course work.  Sec. 127 allows up to $5,250 annually of tax-free employer-provided tuition assistance for working students.  The Sec. 127 benefit has been a temporary provision since 1978.  NAICU co-chairs the 127 coalition, made up of business, labor, and higher education, that has sought to make this provision permanent for decades.  The coalition has issued a news release applauding this tax code change, which is of major importance to all students whose employers provide tuition assistance.

The bill also makes permanent the improvements to the Student Loan Interest Deduction (SLID) and Coverdell ESA's.  For SLID, the 5-year limit on claiming the deduction is now permanently removed, and the income caps are permanently increased.  Also, the annual tax-free contribution limit for Coverdell Savings Accounts is now permanently at $2,000.

The items that were made permanent listed above appear to be subject to annual income caps of $400,000 single and $450,000 married or joint.  It appears that the following items maintain their lower income caps since the higher tax rates were applied only to the “Bush-era” tax cuts:

  • The American Opportunity Tax Credit (AOTC), created in the 2008-09 stimulus package that is an expansion of the HOPE tax credit and is partially refundable, was extended for five years.
  • The tuition deduction that expired at the end of 2011 was retroactively extended for two years.  This means it will cover all of 2012 and 2013, and is now set to again expire on December 31, 2013.

The charitable giving provisions are more of a mixed bag. 

The IRA charitable rollover was retroactively extended for two years.  Like the tuition deduction, it will now cover 2012 and all of 2013.  Of concern to the charitable sector, however, is the reinstatement of what's known as the "Pease limitation.” 

The Pease limitation (named after Rep. Don Pease) reduces the value of itemized deductions for high-income ($250,000 single/$300,000 married or joint) taxpayers by 3% of that amount of adjusted gross income (AGI) above the income threshold.  The limitation, however, cannot reduce an individual's deductions below 80% of the original (i.e., pre-Pease) value.  

The Pease limits were created during the Clinton administration, but were gradually phased out in President Bush's 2001 tax bill, and have not been in effect since 2010.  Now the limits have been reinstated as a revenue raiser in the fiscal cliff deal.  NAICU is working with CASE and others in the charitable giving sector to determine the potential impact on giving - including possible interaction of the limits on the IRA rollover, now that it's back in place.  (Since rollover gifts are not counted towards a donor’s income, this should lead to a lower AGI and, depending on how many itemized deductions a donor takes, less of a hit from the Pease limitation.)


The bill delays the date of the FY 2013 sequestration order by two months to March 1, 2013.  This delay reduces the total amount of the sequester by $24 billion (from $1.2 trillion to $1.176 trillion) over 10 years.  This change is paid for by lowering the FY 2013 and 2014 spending caps, and increased revenues from a Roth IRA provision.

The delay means that Congress has two more months to find $85 billion in cuts from FY 2013.  While the total has lowered from $109 billion, the remainder of the current sequestration process remains unchanged:  if Congress doesn't find savings of $85 billion by March 1, half of the automatic across-the-board cuts will come from defense spending, and the other half from non-defense spending.

During this same period, the federal government is expected to hit its borrowing limit. Conservatives, unhappy with the fiscal cliff deal, have threatened to shut down the government if spending cuts are not made to balance an increase in the debt ceiling. These cuts would be in addition to the scheduled FY 2013 cuts.

Current funding for FY 2013 is being provided through a continuing resolution, which will expire March 27.  NAICU will continue to monitor how the Appropriations Committees and congressional leadership work towards this new deadline, and the implications for research and student aid funding.

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