President-elect Obama's Tax Plans
Most individuals following the moves of our leaders in Washington have concluded that the tax and spending commitments of the United States are not sustainable beyond the end of the next decade. Additionally, a significant economic downturn and extraordinary government spending associated with efforts to promote recovery, may have compounded the problem even more. However, the current economic climate will make tax increases and spending cuts in the near term more difficult and, perhaps, less advisable. The new administration and Congress may hesitate in taking any action that can be seen as further suppressing economic activity. In addition, they may wish to undertake new spending to stimulate the economy.
President-elect Obama's core tax plan follows the Democratic convention of increasing taxes on the wealthy to pay for tax cuts and other benefits for low- and middle-income taxpayers. For individuals, he has promised a return to tax policies more similar to those of the Clinton administration by:
- Making the tax cuts adopted in 2001 permanent for all but higher income taxpayers
- Restoring the Clinton-era top rates for individuals making more than $200,000 and couples earning more than $250,000
- Adding an array of targeted tax relief provisions for middle and lower-income individuals
- Providing an estate tax exemption of $3.5 million per person and an estate tax rate of up to 45 percent
- Raising taxes through eliminating "loopholes" and other largely unspecified special interest tax provisions
Obama's campaign did not focus extensively on business tax reform other than to identify targeted areas for raising revenue. He expressed support for lowering the top corporate tax rate from 35 percent to an as-yet unspecified rate, and offsetting the cost through specific revenue raisers and other unidentified "loophole" closers totaling an estimated $76 billion per year. Some possible offsets highlighted during the campaign include eliminating oil and gas tax incentives, codifying the economic substance doctrine, modifying Subpart F deferral to "end incentives for companies to ship jobs overseas," taxing certain publicly traded partnerships as C corporations, and taxing carried interests as ordinary income.
Obama's policies, according to the nonpartisan Tax Policy Center, would amount to an increase in business-related taxes of $770 billion over 10 years. Although these proposals are not limited to the corporate income tax, their sheer scale is illustrated by the fact that $770 billion would represent nearly 20 percent of projected corporate tax receipts for the 10-year period. The current U.S. corporate tax rate of 35 percent - approximately 39 percent when average state and local corporate income taxes are considered - is second only to Japan among the 30 members of the Organization for Economic Cooperation and Development (OECD). The average corporate income tax rate of OECD member nations is approximately 27 percent.
Compared to the revenue that would result from simply extending 2008 tax law indefinitely, Obama's campaign proposals, taken together, would reduce individual income taxes below present law levels while increasing total taxes by $617 billion over 10 years. In the aggregate, this would represent less than a 2 percent increase in total federal receipts. If President-elect Obama is to keep his campaign promise to balance the federal budget, it is apparent that significant reductions in federal spending will have to occur. Pursuing a significant reform of business and international tax rules may not be inviting as an early initiative. At the same time, the fiscal year 2008 budget deficit ballooned to over $450 billion and is widely expected to be substantially higher in the current fiscal year. This, in turn, may increase pressure to raise offsetting revenue for any new or extended business tax relief.
Tax Incentives and Revenue Raisers
The following is a list of some of the tax incentives and revenue raisers that President-elect Obama is considering:
Business Tax Incentives:
- Make research tax credit permanent
- Lower corporate tax rate for companies that expand or start operations in the U.S.
Business-related revenue raisers
- Raise $76 billion a year in largely unspecified revenue offsets
- Eliminate oil and gas tax incentives
- Require information reporting of securities transactions
- Codify the economic substance doctrine
- Reform international tax rules, including modifying Subpart F deferral to "end incentives for companies to ship jobs overseas" and closing the "offshore pension loophole
- Establish an international "tax havens watch list" of countries that do not share information returns with the U.S.
- Tax publicly traded partnerships as C corps
- Tax carried interest as ordinary income
- Close loopholes in "corporate tax deductibility of CEO pay
- Create an emergency energy rebate of $500 ($1,000 for families) to be funded by a windfall profit tax on oil companies
- Extend for five years the section 45 renewable production tax credit
- Impose windfall profits tax on oil and gas companies
Provide a $7,000 tax credit for purchase of advanced technology vehicles
- Provide $4 billion in retooling tax credits and loan guarantees for domestic auto plants and parts manufacturers to produce new fuel-efficient cars
- Provide a refundable tax credit to small businesses that provide health insurance to employees to claim up to 50 percent on premiums
- Provide true broadband to every community through new tax and loan incentives
- Retain existing payroll tax on first $102,000 of income (indexed for inflation). Exempt income from $102,000 to $250,000, then reinstate a 2-4 percent payroll tax (combined employee and employer) on income above $250,000. According to Obama, proposal would not take effect for at least 10 years
Capital gains and qualified dividends
- Raise capital gains and qualified dividend rates from the current 15 percent to 20 percent for families earning more than $250,000 ($200,000 for singles)
- Eliminate all capital gains taxes on start-ups and small businesses to encourage innovation
Ordinary income tax rates
- Reinstate pre-2001 top individual tax rates of 39.6 and 36 percent for families making over $250,000 ($200,000 for singles)
- Make permanent certain Bush tax cuts, including $1,000 child credit, marriage penalty relief, and 10, 15, 25, and 28 percent individual tax rates
- Restore PEP/Pease (personal exemption phase-out and itemized deduction limitation) phase-outs at an increased threshold of $250,000 for joint filers ($200,000 for singles). Index threshold amounts for inflation
New individual tax cut proposals
- 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 non-itemizers (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
Estate and gift tax
- Increase exemption level to $3.5 million per person ($7 million per couple) and maintaining the top rate at 45 percent
Individual alternative minimum tax
- Extend and index 2007 patch
Economic recovery: Obama's temporary tax stimulus proposals
Proposals affecting businesses
- Refundable tax credit for new hires
- Create a New American Jobs Tax Credit, available in 2009 and 2010, for existing businesses that hire additional full-time employees in the U.S. ($3,000 credit for each additional full-time employee)
- Section 179 expensing limit
- Extend section 179 small business expensing limit of $250,000 through December 31, 2009
After eight years of a Republican president and Congresses that were either Republican or narrowly Democratic, the Democrats may want to address an array of domestic issues including economic recovery, the financial markets, environmental regulation, the State Children's Health Insurance Program, health care more generally, and education. Many believe the following will happen:
- Some tax relief will be proposed early in the new administration as part of economic recovery legislation
- 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
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
The timing of major tax legislation will be in doubt until the economic situation and the President-elect's strategy for governing are defined. In the meantime, business owners can take advantage of this period to engage in appropriate planning under present law and to prepare for change, it can really have a positive impact on your bottom line!
If you would like more information on these tax planning ideas or any others please give us a call!
Note: The information contained in this material represents a general overview of tax regulations and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.
Paul J. Beckert MBA, CPA
Pinnacle Business Solutions
Key Points of Interest
President-elect Obama's core tax plan follows the Democratic convention of increasing taxes on the wealthy to pay for tax cuts and other benefits for low- and middle-income taxpayers.
If President-elect Obama is to keep his campaign promise to balance the federal budget, it is apparent that significant reductions in federal spending will have to occur
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