Obama Budget Proposal Affects Taxes

On Feb. 26, 2009, the Obama Administration released a document titled “A New Era of Responsibility: Renewing America’s Promise.” It is the Administration’s preview of its fiscal policies and planned major budgetary initiatives. In effect, it’s an overview of the full FY 2010 budget expected to be released this spring.

The document reveals the major tax initiatives that the Administration will push for. These are a combination of 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.

The tax changes the Administration’s proposes to push for include the following (in each case, the year in parenthesis indicate when the change is proposed to begin):

Tax Changes For Business

Make the research tax credit permanent (2010).
Expand the net operating loss carryback (2011).
Eliminate capital gains taxation on small business (2014).
Repeal LIFO (2012).
Codify the economic substance doctrine (2009).
Require information reporting for rental payments (2010).
Tax carried interest as ordinary income (2011).
Reinstate Superfund Taxes (2011).
Repeal all of the following oil and gas tax breaks: expensing of intangible drilling costs; deduction for tertiary injectants; passive loss exception for working interests in oil and gas properties; manufacturing deduction for oil and gas companies; and percentage depletion (2011).

Tax Changes for Higher Income Individuals
These changes would be proposed to apply to taxpayers earning over $250,000 (married) and $200,000 (single):

Reinstate the 36% and 39.6% top tax rates (2011).
Reinstate the personal exemption phaseout and limitation on itemized deductions (2011).
Impose a 20% tax rate on capital gains and dividends (2010).
The Administration’s document separately discusses a proposal to limit the tax rate at which higher-income individuals can take itemized deductions to 28%, with no indication of when this change would take effect.

Other Tax Changes for Individuals

Make permanent the Recovery Act’s refundable $400/$800 “making work pay” tax credit for 2009 and 2010.
Make permanent the Recovery Act’s liberalized child tax credit rules, which under current rules apply for 2009 and 2010 only.
Make permanent the Recovery Act’s “new American opportunity tax credit” for higher education expenses, which under current rules applies for 2009 and 2010 only.
Eliminate the Advanced Earned Income Tax Credit (2010).
Expand the saver’s credit and automatic enrollment in IRAs and 401(k)s (2011).
The Administration’s document also separately discusses a proposal to establish “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).

Posted in Status of Tax Legislation, WillPlan Blog.

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