On February 9, President Obama is expected to release the final budget request of his administration. The budget blueprint will kick off the budget cycle and the debate over spending policy on both defense and domestic programs for FY17. The supplemental materials, which traditionally accompany the budget documents, will likely include policy positions on numerous issues, including White House priorities for reauthorization of the Higher Education Act.
However, the dust is still settling on the sweeping budget and tax deal passed by Congress and signed into law by President Obama on Dec. 18, 2015. The $1.1 trillion FY16 Omnibus Appropriations Act provides funding for the federal government through Sept. 30, 2016, and includes a $622 billion tax extenders package. The massive deal contains numerous provisions important to the higher education community, with implications for students, families, and institutions.
The budget request affects a number of financial aid and research programs.
- The maximum Pell Grant award will increase by $140, to $5,915 for the 2016–17 school year.
- Funding will remain level for the Supplemental Educational Opportunity Grant program and the Federal Work-Study program, but will increase for federal TRIO (7.1 percent) and GEAR UP (7 percent) programs.
- There is good news for the so-called “ability-to-benefit” (ATB) students, as the bill also makes positive changes for students attending community colleges without a high school diploma or GED credential. Limitations have been lifted for ATB students enrolled in career pathway programs eligible for Pell grants. These students are once again eligible for the full Pell Grant maximum award. The omnibus also broadens the definition of a “career pathway program,” which may simplify the administration of this provision and possibly make more ATB students Pell-eligible.
- The accompanying report to the budget bill references an October 2015 GAO report that identified more than $400 million in Post–9/11 GI Bill overpayments. It states: “VA is urged to adopt the recommendations that GAO identified, particularly updating the methods by which VA notifies students and institutions of debts owed (to include e-mail notification) and developing a system to identify students’ enrollment status each month.” Lawmakers also encouraged the use of dual certification and requested that VA “post on its website all of its policy directives, guidance, and training on processing student Post–9/11 GI Bill benefits.”
- Funding for the National Institutes of Health will increase by $2 billion (6.6 percent) to total $32 billion.
- The National Science Foundation is funded at $7.46 billion, up by $119 million (1.6 percent).
- The Department of Energy’s Office of Science budget will rise by 5.6 percent, to $5.35 billion.
- Spending on science programs at the National Aeronautics and Space Administration will grow by 6.6 percent, to $5.6 billion.
- The Department of Agriculture’s competitive grant program, the Agriculture and Food Research Initiative, will see an increase of 7.7 percent, to $350 million.
Tax Requirements and Provisions
Following are highlights of the many tax-related changes included in the year-end bill.
- Two-year delay of the Affordable Care Act “Cadillac tax.” The excise tax on high-cost, employer-sponsored health plans enacted as part of the ACA will be effective in 2020, rather than in 2018 as originally scheduled.
- Mandated Box 1 reporting on Form 1098-T. Beginning with the 2016 tax year, institutions will be required to report payments for qualified tuition and related expenses in Box 1 of IRS Form 1098-T. There will no longer be an option to report in Box 2 amounts billed for qualified expenses.
NACUBO recognizes the challenges ahead due to this change. We have already notified policymakers that an educational institution’s calculation of amounts paid for qualified tuition and related expenses on Form 1098-T may not correspond with amounts taxpayers claim on their tax returns for a number of reasons related to timing of payments and application of funds. The IRS will need to use its regulatory authority under U.S. Code §6050S to provide guidance to educational institutions on implementing this change.
Acceleration of IRS filing dates for forms W-2 and 1099-MISC. Employers will now need to file these information returns with the IRS by the same date as they are required to furnish them to employees and other payees: January 31. There is no longer an extended filing deadline for electronically filed forms. The due date for employee and payee statements remains the same. This provision is effective for 2016 forms to be filed by Jan. 31, 2017.
- Permanent extension of tax-free distributions from individual retirement accounts (IRAs) for charitable purposes. The provision permanently enables individuals at least 70½ years of age to make tax-free donations from IRAs to charities, including colleges and universities. The IRA charitable rollover distribution may not exceed $100,000 per taxpayer in any tax year.
- Permanent extension of the modification of tax treatment of payments to controlling exempt organizations. Also known as §512(b)13(E), this provision permanently counts as taxable unrelated business income only the portion of payments to the controlling exempt organization—from interest, annuities, rents, and royalties by a controlled organization—that exceed fair market value.
- Safe harbor for de minimis errors on information returns and payee statements. The provision establishes a safe harbor from penalties for the failure to file correct information returns and for failure to furnish correct payee statements by providing that, if the error is $100 or less (or $25 or less in the case of errors involving tax withholding), the issuer of the information return is not required to file a corrected return and no penalty is imposed. A recipient of such a return (for example, an employee who receives a Form W-2) can elect to have a corrected return issued to him or her and filed with the IRS. The provision is effective for returns and statements required to be filed after Dec. 31, 2016.
- Permanent extension of mass transit commuter tax parity. The provision permanently extends the maximum monthly exclusion amount for transit passes and van pool benefits, so that these transportation benefits match the exclusion for qualified parking benefits. These fringe benefits are excluded from an employee’s wages for payroll tax purposes and from gross income for income tax purposes.
- Permanent extension of tax credit for research and experimentation. This credit allows corporations to claim a business tax credit for research and development activities conducted at universities or other qualifying organizations, including research consortia that may include universities.
- Two-year extension of Section 179D. This energy conservation incentive was not made permanent, but rather extended for 2015 and 2016; and, despite significant efforts, it was not expanded to include participation by 501(c)(3) nonprofit organizations.
Changes to American Opportunity Tax Credit
- Permanent extension of the expanded American Opportunity Tax Credit. The AOTC provides up to $2,500 for four years of postsecondary education. Phase-out amounts for the limitations on adjusted gross income (AGI) were raised to $80,000 (for single filers) and $160,000 (for those married filing jointly) for 2009 to 2017. Currently scheduled to expire in 2017, the provision makes AOTC permanent.
- Prevention of retroactive claims of AOTC. Taxpayers are prohibited from retroactively claiming the AOTC by amending a return (or filing an original return, if he or she failed to file) for any year, if the taxpayer identification number of the student for whom the credit is claimed was issued after the due date of the return. The provision applies to returns, and any amendment or supplement to a return, filed after the date of enactment. This primarily impacts nonresident alien students who do not have taxpayer identification numbers prior to the tax filing deadline.
- Inclusion of institution’s Employer Identification Number on Form 8863. Beginning for tax year 2016, taxpayers claiming the AOTC are required to report the EIN of the educational institution to which the taxpayer made qualified payments.
Other Student/Taxpayer Provisions
- Extension of the above-the-line tuition deduction. The provision extends through 2016 the above-the-line deduction for tuition and related expenses for higher education. The deduction is capped at $4,000 for an individual whose AGI does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers).
- Improvements to Section 529 tuition savings accounts. The definition of “qualified higher education expenses,” for which tax-preferred distributions from 529 accounts are eligible, is expanded to include computer equipment and technology. The provision treats a refund of tuition paid with amounts distributed from a 529 account as a qualified expense if such amounts are re-contributed into a 529 account within 60 days.