Policy Update: January 2, 2013
Over the break, we have been monitoring the "Fiscal Cliff" negotiations closely and been in contact with leaders in Washington. Last night, by a vote of 257-167, the U.S. House of Representatives gave final approval to "The American Tax Relief Act of 2012," which the Senate passed on Monday and President Obama is expected to sign into law today. The compromise legislation negotiated by White House and Senate leaders temporarily averts the fiscal cliff by extending several expiring tax rates and credits, while delaying across-the-board federal spending cuts that were set to take effect until March 1, 2013.
The $1.2 trillion federal budget "sequester" that would immediately reduce agency budgets that Northeastern relies on by 8.4 percent was postponed until March 1st. The timing for the delay coincides with the date by which Congress will need to authorize an increase in the federal debt limit to avert default. Protracted negotiations are likely to continue over the next several weeks. With research agencies operating at last year's funding levels under a Continuing Resolution until March 30th, current awards could still be reduced or impacted and new funding announcements are likely to be delayed. The long term funding outlook for many science agencies remains highly uncertain. It is also likely that funding agencies will delay some funding decisions until the Sequester is sorted out.
The compromise agreement included extension of several education-related tax provisions that benefit Northeastern students, alumni, and their families, including the:
American Opportunity Tax Credit (AOTC) - provides up to $2,500 refundable tax credit for tuition and expenses for up to 4 years (extended 2 years);
Student Loan Interest Deduction – provides up to $2,500 deduction for interest payments on federal student loans (permanently extended);
Employer-provided Tuition Assistance – allows employees to exclude up to $5,250 annually for tuition benefits provided by employers (permanently extended);
Coverdell Education Savings Accounts – allows taxpayers up to $2,000 of annual tax-free savings for education expenses (permanently extended).
While the measure allowed the 2-year temporary payroll tax cut to expire, it permanently extends current marginal tax rates for most taxpayers, but raises rates for those with incomes above $400,000 or couples above $450,000.
The compromise measure also made no change to current law as it relates to charitable giving. President Obama had proposed "capping" or phasing out the charitable deduction for high-income earners (above the 28% bracket), but the bill preserved the current charitable deduction in tact. The compromise measure also extends for 2 years the IRA rollover for charitable contributions and permits a taxpayer to elect a January 2013 rollover and count it retroactively for 2012.
While leaders in both parties are on record that across-the-board cuts to both defense and non-security priorities (such as research) would be disastrous for the country, the upcoming debate over the debt ceiling, especially in the wake of yesterday's tax-increase, will be very contentious. It is possible that a historic deficit reduction accord may be reached, particularly if it addresses entitlement spending and tax reform in exchange for "turning off" the sequester. But such an agreement will be very difficult for Congress to achieve.