Driving Change in Higher Education.

The “Fiscal Cliff” explained

By Michael Doyle

MSCSA Treasurer

Early this year, the federal government passed the American Taxpayer Relief Act, which addressed a small portion of the “fiscal cliff” issues. The fiscal cliff is a media term referring to the problems that could occur if the federal government were to let the spending cuts expire from various legislation in the past without adjusting spending or taxes appropriately. The difference between the two scenarios is demonstrated in the graph to the right. 

In order to avoid problems like the government shutting down again in February, or your education’s financial aid decreasing, the federal government has to either increase taxes, cut parts of the national budget, or a little of both. Medicare and the defense budget are two of the biggest sections of the national budget that are likely to be cut when the federal government takes action on the fiscal cliff issue. The scheduled cuts were warded off by a last-minute deal between the administration of President Barack Obama and Congress.

There are several reasons the American Taxpayer Relief Act may affect you. Bush-era tax cuts expire in certain instances, like income, investments, married couples and families with children and inheritances. One example is that the Child tax credit will drop from $1,000 to $500. Obama’s 2% cut in payroll taxes expires, which takes out 6.2% in your paycheck instead of 4.2% for Social Security. You could owe more than $5,000 in taxes and Supplemental Security Income if you’re middle class with one of three children in college and a combined income and investments above the unpatched Alternative Minimum Tax threshold. The Pell Grant still faces a $56 billion dollar deficit, and student loan interest rates are going to double in July 2013 if no action is taken. 

At least the bill extends the student loan interest deduction and the American Opportunity Tax Credit up to $2,500 for the time being. It also provides tax-exemptions with school construction bonds. Federal work-study, the Supplemental Educational Opportunity Grant, and funding for scientific research were all spared the 8.2 percent cuts they would have taken under sequestration. We will keep you updated with the educational implications of any spending compromises in future editions of the Students’ View.

Further reading on the fiscal cliff is available at: 

BizJournal. http://www.bizjournals.com/buffalo/blog/miner-business/2013/01/higher-education-and-the-fiscal-cliff.html

HewinsFinancial. http://www.hewinsfinancial.com/blog/college-costs-and-the-fiscal-cliff/

WBA. http://www.whiteboardadvisors.com/news/first-look-fiscal-cliff-and-education

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