Late last week, Congress passed and President Obama signed into law a sweeping bill to extend numerous tax provisions that were slated to expire at the end of 2010, or in some cases, that had expired at the end of 2009. In addition, several new tax law changes were added to the legislation to spur business investment and consumer spending in 2011.
A number of the tax provisions that are now scheduled to sunset Dec.31, 2012, impact college students and their families as well as institutions of higher education. These include the:
- American Opportunity Credit, a more generous version of the Hope Credit, allowing families to claim a refundable tax credit of up to $2,500 for certain college expenses (originally adopted as part of the American Recovery and Reinvestment Act).
- Income tax exclusion for certain employer-provided educational benefits (section 127), with up to $5,250 annually, for undergraduate- and graduate-level courses.
- IRA charitable rollover, which allows donors to exclude from income amounts donated directly from their IRA to charitable organizations.
- Above-the-line deduction for college tuition.
The agreement did not extend several bond-related provisions, including the Build America Bonds program from the Recovery Act. Under this program, state and local governments were authorized to issue taxable bonds and receive federal subsidies to offset the increased interest costs of the bonds. Issuing taxable bonds increased the number of potential investors during the credit crisis, but a number of influential legislators did not want to see the program extended now that the credit market has stabilized. More than $150 billion of the bonds have been issued to help finance projects, including some at public colleges and universities.
Also dropped was an extension of a Recovery Act provision that increased the bank-qualified debt limit from $10 million to $30 million. This change allowed local governments that issue less than $30 million of bonds a year to directly place their debt with banks and save the costs of having to issue the bonds in the open market. In addition, the rule change allowed colleges to borrow through this program at more favorable rates by applying the $30 million exemption at the borrower level (i.e., on a college-by-college basis).
The compromise tax legislation also included a temporary reduction in the Social Security payroll tax on individual wages, from 6.2 percent to 4.2 percent for wages paid in 2011. Like other employers, colleges and universities will need to adjust their withholding schedules to reflect this change.
At time of writing, legislators were negotiating the final contours of a bill to extend, on a short-term basis, funding for federal agencies, with total discretionary funding likely to be held steady at FY10 levels. However, negotiators were attempting to include in the spending bill some modest reallocation of resources among programs. For example, the Pell Grant program was being eyed for an additional allocation, above and beyond FY10 levels, to address the accrued shortfall in available funds, due to increased demand for grants. In the absence of additional funds in FY11, the Department of Education could be forced to reduce grants in the next academic year by as much as $1,000 per student. Final spending decisions for the fiscal year will, therefore, be made by the new Congress, with a different set of negotiators. The legislation developed in March may be a vehicle for other policy riders, as incoming leaders in the House have expressed concern with a number of Obama administration initiatives, including the proposed "gainful employment" rules proposed by the Department of Education.
Likely to be left out of the final legislation is any adjustment to the federal debt ceiling. It is expected that the Treasury Department will exhaust its ability to borrow by May 2011. This "must-pass" bill will pose an early leadership test in the next Congress, which must determine how to move the controversial legislation.