Obama tax prognostications
Joseph W. Walloch
Situation: President Obama is formulating and finalizing his tax proposals as part of an overall economic recovery stimulus package and your clients have been asking how the new plan will affect them.
Taxpayers will be affected by his new stimulus proposals. Positive stimulation comes in the form of new tax credits and payments to a number of taxpayers. Negative stimulation involves increased taxes for many, including increased estate taxes.
Solution: Mr. Obama continues to advocate retaining the federal estate tax after 2009. For 2010 and beyond, he wants to retain the 2009 unified credit exemption of $3.5 million, as well as retaining the current maximum estate tax rate of 45%. The estate tax was scheduled to disappear in 2010. It is hoped that the $3.5 million exemption will be inflation-indexed for future years.
The proposed American Recovery and Reinvestment Tax Act of 2009 is a large part of the Obama tax package. The act includes a broad range of economic, revenue, tax, compensation and health proposals reported in a 328-page House bill introduced by Rep. Charles Rangel, D-N.Y. Title I of the act enumerates tax provisions of the proposed legislation in eight major categories.
”Making work pay” credit: The opening salvo of the act is a proposed tax credit called “making work pay.” This refundable credit is equal to the lesser of 6.2% of a taxpayer’s earned income, or $500 for a single person or $1,000 in the case of a joint return. The credit is limited when modified adjusted gross income exceeds $75,000 for a single person or $150,000 for a married couple filing jointly. The credit would be available for 2009 and 2010. The 6.2% rate is the same rate as the
Social Security tax withholding rate.
Additional tax relief for families: The act would temporarily increase the earned-income tax credit for families with three or more children and the refundable portion of the child tax credit. It would apply to tax years 2009 and 2010.
American Opportunity credit: This provision is essentially a modification and renaming of the existing Hope Scholarship credit. A credit of up to $2,500 for the first four years of higher education would be available. The credit would be calculated based on 100% of the first $2,000 of qualified tuition and related expenses, plus 25% of the next $2,000 of such expenses. The credit would begin to phase out at $80,000 of modified AGI for a single taxpayer and $160,000 for a married couple. Up to 40% of the credit would be refundable. The AOT credit would also be allowed for the alternative minimum tax.
Housing incentives: The major housing proposal is a waiver of the requirement to repay the first-time home buyer’s credit for qualifying homes purchased from Jan. 1 through June 30. Another housing incentive is the coordination of the low-income housing credit with low-income housing grants.
Tax incentives for businesses: Bonus depreciation of up to 50% of new equipment costs would be extended for 2009. The increased immediate expensing of up to $250,000 of new and used equipment would also be extended for 2009. Another business incentive is the proposal to allow a five-year carry-back of net operating losses for any tax year ending in or beginning in 2008 or 2009.
The work opportunity tax credit would be expanded to include unemployed veterans and disconnected youths. According to a February Government Accountability Office report, disconnected youths are those “ages 14 to 24 who are not in school and not working, or who lack family and other support networks.”
Fiscal relief for state and local governments: Tax provisions include a temporary proposal to exclude all interest income from private activity bonds issued during 2009 and 2010 as a tax preference item for the AMT.
Energy incentives: The incentives include increased research credit for energy research. The rules for non-business energy credits and residential energy-efficient property have also been modified. For 2009 and 2010, the bill would increase the amount of the tax credit to 30% for all qualified residential energy-efficient properties and replace the existing property-by-property dollar caps on the tax credit with an aggregate $1,500 cap for all qualifying properties. For tax years beginning after Dec. 31, 2008, the bill would remove the present cap on the credit for residential solar hot water, geothermal and wind property under Section 25D of the Internal Revenue Code.
The final tax incentives category discusses federal grants in lieu of tax credits in limited circumstances.
