Thursday, November 20, 2008

Obama tax plan

The international accounting firm of Deloitte and Touche predicts what Obama will do in terms of taxes, among other things.

Obama campaigned on promises to keep some tax cuts for married couples earning less than $250,000 and singles earning less than $200,000 which under the present law are set to expire at the end of 2010.

He has said he will:

* Reinstate the top two individual income tax rates (currently 33 and 35 percent) to their pre-2001 levels of 36 and 39.6 percent while maintaining the existing 10, 15, 25, and 28 percent tax brackets;

* Increase the capital gains rate to 20 percent for taxpayers in the top two tax brackets;

* Continue to apply the same tax rates to qualified dividends as capital gains; and

* Reinstate for high-income taxpayers the personal exemption phase-out and itemized deduction limitation, which are scheduled to be fully phased out starting in 2010.

In effect, the Obama plan would raise the top income tax rate, considering these phase-outs, to 40.79 percent from its 2008 level of 35.35 percent.

Alternative Minimum Tax

President-elect Obama has proposed extending and indexing the temporary increase in the AMT exemption amount enacted for 2008. This would prevent a dramatic increase in the number of AMT taxpayers. His increases in ordinary tax rates also would remove some high-income taxpayers from AMT by increasing the amount of their regular tax liability.

Estate tax

The estate tax, which is set to drop to zero for 2010 only, will be reinstated in 2011 at the significantly higher rates and significantly lower exemption amounts that were in effect in 2000. This will mean an increase in the exemption level to $3.5 million per person ($7 million per couple) and will increase the top rate to 45 percent.

Other individual tax proposals

Many of Obama's individual income tax proposals already exist in draft form in legislation that has been vetted by Congress. But new proposals would:

* Eliminate all income taxes for seniors (age 65 and over) earning under $50,000 a year.

* Create a refundable Making Work Pay Credit equal to 6.2 percent of up to $8,100 in earnings for those making less than $75,000 a year (maximum $500 credit per spouse).

* Create a refundable 10 percent Universal Mortgage Credit for nonitemizers (up to a maximum of $800).

* Replace existing Hope credit with a refundable American Opportunity Tax Credit, providing up to $4,000 per year for qualifying higher education expenses.

* Expand the earned income tax credit program.

* Mandate automatic employee enrollment in 401(k) plans where employers offer retirement plans. Require employers that don't offer retirement plans to provide employees with access to automatic IRAs.

* Expand Savers Credit and make it refundable. For working families earning under $75,000, government would match $500 of first $1,000 saved and deposit into account.
* Increase child care dependent maximum credit rate to 50 percent and increase phase-out threshold to $30,000.

Long term payroll tax increase

To address long-term problems with Social Security and Medicare, Obama has said that he would propose an additional payroll tax to take effect 10 years or more in the future. This tax would be at a rate of between 2 and 4 percent (split between employer and employee) and would apply to income above $250,000.

Economic recovery and timing of tax legislation

The authors of Tax policy decisions ahead say that they expect the new administration will adopt new tax policies as events unfold:

* First, some tax relief will be proposed early in the new administration as part of economic recovery legislation.

* Second, later in the year as Congress and the White House confront the need to extend a variety of expiring individual and business tax provisions as well as another year of AMT relief, the ballooning deficit projections that have accompanied the current economic crisis and recovery efforts will make Obama and Democratic lawmakers much less sympathetic to pleas that these provisions be extended without offsetting tax increases.

* Third, by 2011, Obama and the Democratic Congress are very likely to have succeeded in their desire to raise ordinary income tax rates, as well as capital gains and dividend rates on the highest income individuals.

Taxpayers will have some time to prepare for changes, because the introduction of new tax rates on both business and individuals will be affected both by the economic situation and the President-elect's strategy for governing.