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Tax cuts will be part of the stimulus act

Posted by Jamie Downey  January 12, 2009 09:50 AM

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President-elect Obama has been meeting with Congress to put together a stimulus package. It appears that President-elect Obama is prepared to sign one of the largest pieces of legislation in his first days as President. The size of the stimulus would be enormous, probably between $775 billion and $1 trillion over two years. Furthermore, it would include a combination of governmental spending and tax cuts. Tax cuts would likely comprise some 40 percent of the total cost of the package, and benefit both individuals and businesses alike. Here are some of the tax breaks being proposed:

Payroll tax credit – Obama proposed a tax cut of $500 a year for individuals and $1,000 a year for couples. This would come as a payroll tax credit to the taxpayer. Obama wants this to be a permanent feature of the tax code in hopes that individuals will go out and spend. This credit will likely only be available to individuals earning less than $100,000, or couples earning less than $200,000.

Job creation credit – Businesses that hire new employees in the next two years would receive a credit of $3,000 per employee under the proposal. There has been some resistance to this provision in the Senate. Some have argued that businesses won't change their hiring needs just because of a small government credit, an argument that has some merit. Others have argued for expanding this provision and allowing businesses that don't layoff existing employees to be rewarded with a credit. Expect some combination of the two to be included in the final bill.

Tax break for losses – Under Obama's proposal, businesses that incur a loss for the tax year could offset that loss with income earned in the previous two years. This generates a refund for the business if they had income in those prior two years. The president-elect wants to extend the so-called "lookback" period, in which losses can be offset, to five years. This would put more money in the hands of struggling businesses.

Equipment deduction – Smaller businesses are allowed to deduct up to $125,000 in a single year for purchases of long-term capital assets, such as equipment and machinery. The incoming administration has proposed increasing this deduction to $250,000 in 2009 and 2010 to encourage companies to make large purchases.

There is no doubt that government intervention is on the way to help the economy. The size and details are still being worked out, but expect tax cuts to play a significant role. Senate Finance Committee Chairman Max Baucus told reporters: “No one expressed any significant opposition to moving ahead because of the cost.” Hopefully, this means more tax cuts for all.

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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit
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