President's Budget Proposal Includes Tax Increases
On February 26, President Obama released his 2010 federal budget proposal totaling a record $3.55 trillion. Entitled "The New Era of Responsibility," President Obama's budget contains a minimum of $1 trillion in tax increases over the next decade on higher earners, described as families making over $250,000 and individuals earning over $200,000. It also includes revenue-raising "loophole closers" (most of them aimed at businesses), some favorable tax changes for businesses, higher taxes for "higher-income individuals," and tax cuts for other individuals. Here is an overview of the tax elements of the proposed budget. Not all of the proposed changes were clear, so we had to read between the lines in some cases.
REMEMBER: These are proposals and not yet signed into law - they may or may not come about!
• Child Tax Credit – Make permanent the Recovery Act's liberalized child tax credit rules, which under current rules apply for 2009 and 2010 only - reduced the earned income threshold to $3,000 from the current $12,550 (2009), thus expanding the number of taxpayers who qualify for the refundable portion of the credit.
• High-Income Taxpayers - $250,000 (married) and $200,000 (single) – The following changes would be proposed to apply to married taxpayers earning over $250,000 and single taxpayers earning over $200,000:
o Personal Exemption Phase-Out Restored – Reinstate the personal exemption phase-out and limitation on itemized deductions (2011).
o Raise the Rates on the Two Top Tax Brackets – Raise the top two income tax rates starting in 2011 to 36% and 39.6% from 33% and 35%, respectively.
o Limit the Benefit of Itemized Deduction to 28% – Limit itemized deductions for those in the new 36% and 39.5% tax brackets to the same after-tax benefit as those individuals in the 28% bracket. Although no detailed information is available and no proposed starting date has been indicated, it would seem that this limitation would apply only to the itemized deductions in excess of the standard deduction for the year and the excess would be reduced by the percentage difference between the taxpayer’s actual tax bracket and 28%. Sounds a little complicated – so much for simplification.
o Increased Capital Gains Rate – Beginning in 2010, those in new 36% and 39.5% tax brackets would also be subject to an increased capital gains and dividends tax of 20%, up from 15%. Presumably, the computation would be similar to the current one and the increase would only be on gains in falling within the two new top brackets, 36% and 39.5%.
• Estate Tax Rates – For 2009, the estate tax rules have a $3.5 million exemption and a top rate of 45%. They were scheduled to be zero for 2010 and then revert to the 2001 rates. It is expected the President will push for an extension of the 2009 rates.
• Making Work Pay Tax Credit – The Making Work Pay Credit was part of the Recovery Act of 2009. It provides for a credit equal to 6.2% of a taxpayer’s earned income not to exceed $400 for individuals and $800 for joint filers with an AGI phase-out for higher-income taxpayers. The credit would become permanent in 2011.
• American Opportunity Tax Credit – Make permanent the 2009 Recovery Act's “new American Opportunity tax credit” for higher education expenses, which under current rules applies for 2009 and 2010 only. The American Opportunity credit is available for four years of college, and the maximum credit per student is $2,500. The credit is based on 100% of the first $2,000, and 25% of the next $2,000, of tuition, fees and course material (including books) expenses paid during the tax year. 40% of the credit is refundable, provided the taxpayer is: (1) not a child under the age of 18 or (2) under the age of 24, a full-time student and is not self-supporting.
• Earned Income Tax Credit - Eliminate the Advanced Earned Income Tax Credit beginning in 2010.
• Automatic Enrollment - Workplace Pensions – Beginning in 2011, the administration also proposes establishing “automatic workplace pensions, on top of and clearly outside Social Security. Employees would be automatically enrolled in workplace pension plans (unless they opt out). Those employers not offering retirement plans would be required to enroll their employees in a direct deposit IRA (but employees apparently would be given an opt-out option).
• Saver's Credit - The President’s proposal also allots $14 billion for an expanded Saver's Credit program beginning in 2011 and provides the groundwork for the establishment of an automatic direct deposit individual retirement accounts program to be developed by the Labor Department. The program would require employers to automatically enroll employees in a direct deposit plan unless they choose to opt out.
Proposed Business Changes
• Research Tax Credit - Make the research tax credit permanent beginning in 2010.
• NOL Carry Back - Expand the net operating loss carry back beginning in 2011.
• Qualified Small Business Stock - Eliminate capital gains taxation on small business beginning in 2014. The Recovery Act has already increased the exclusion from 50% to 75% for stock issued after February 17, 2009 and before January 1, 2011.
• LIFO - Repeal LIFO beginning in 2012.
• Economic Substance Doctrine - Codify the economic substance doctrine beginning in 2009. Generally, the economic substance doctrine is satisfied only if (1) the transaction changes in a meaningful way (apart from federal income tax consequences) the taxpayer's economic position, and (2) the taxpayer has a substantial non-federal tax purpose for entering into such transaction. There are substantial penalties for not meeting this requirement and failure to disclose it.
• Rental Income Tracked - Require information reporting for rental payments beginning in 2010.
• Carried Interest - Tax carried interest as ordinary income effective in 2011.
• Superfund Taxes - Reinstate Superfund Taxes in 2011.
• Repeal Oil & Gas Tax Breaks – Beginning in 2011, repeal all of the following oil and gas tax breaks:
o Expensing of intangible drilling costs;
o Percentage Depletion (2011);
o Passive Loss Exception for Working Interests in Oil and Gas Properties;
o Manufacturing Deduction for Oil and Gas Companies; and
o Deduction for Tertiary Injectants.