On May 11, the Obama administration outlined its budget and tax proposals for the coming fiscal year. The federal deficit is currently estimated at over $1.8 trillion for fiscal year 2010. Obviously the federal government can not sustain these kinds of deficits. As such, tax increases are on the horizon.
The tax proposals look to increase taxes by approximately $1.1 trillion over the next ten years. The following is a list of some of the more significant tax increases that will hit individuals and businesses if these proposals are enacted:
Increased ordinary income tax rates - Married couples making over $231,000 will see an increase in their marginal tax rate from 33 percent to 35 percent. Furthermore, the current 36 percent tax rate will increase to 39.6 percent.
Limit the benefit of itemized deductions – For those in upper tax brackets, itemized deductions effectively reduce their taxes by up to 39.6 cents for every dollar of itemized deductions. Under President Obama’s proposal, itemized deductions will only save upper income taxpayers 28 cents.
Increase in the capital gains tax – The current capital gains rate of 15 percent is set to expire and increase to 20 percent. The administration is not looking to extend these lower tax rates.
Repeal LIFO – Many businesses that produce or acquire inventory account for it using the last in first out (LIFO) method of accounting. This method of accounting allows for greater deductions for inventory than other accounting methods. Under the proposal, this form of accounting will be eliminated in 2012 and will raise $61 billion for the US Treasury over the subsequent eight years. Not very good news for manufacturers and retailers that benefit from this form of accounting
Carried Interest – Many managers at venture funds and private equity firms are compensated based on the investment return of assets under management. This compensation is then taxed a capital gains rates. Under the new proposal, this would be treated as ordinary income to the managers. Ordinary income is taxed at significantly higher levels and is subject to Social Security taxes. This is estimated to generate $24 billion in the next ten years.
Estate taxes –Estate and gift taxes are based on the valuation of assets at a point in time. Many assets are difficult to value, i.e. privately held businesses. It is preferable for the tax payer in these situations to have a lower value placed on the assets to minimize tax payments. The budget proposal would change valuation rules, typically resulting in an increased value placed on the asset. This would generate $24 billion for the US Treasury.
Tax enforcement – Expect new policies to increase tax enforcement. Businesses are required to issue a 1099 informational return to businesses and individuals for certain transactions. This ensures that the counterparty reports the necessary income to the government. Expect to see more of this, including reporting of rental payments, which will impact landlords.
Changes to international tax laws – The new proposals will increase international enforcement, prevent current deferral laws and provide other tax reform. This is estimated to generate $210 billion in new taxes in the next ten years.
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