Obama’s tax plan for individuals

President-elect Barack Obama’s campaign promises, selection of economic advisers and recent statements provide insight into the likely tax changes to come and the timing of any such changes. In a nutshell, the changes can be described as a return to about the same tax regime that existed for most of the 1990s, but with increased relief — in the form of new credits and expansion of existing credits — for couples earning less than $110,000. Income tax Under Mr. Obama’s tax plan, married couples filing jointly who have adjusted gross income in excess of $250,000, will face a higher tax bill. So will other taxpayers (single, head of household) that have AGI in excess of $200,000. First, they will be subject to a top marginal tax rate of 39.6%. Currently, married couples are subject to a marginal tax rate of 35% on taxable income only in excess of $357,000. Second, these taxpayers will also face a continued phase-out of personal exemptions and itemized deductions. The phase-out of these deductions was gradually lowered under President Bush, and would have been completely eliminated by 2010. The other tax brackets (10%, 15%, 25% and 28%) — put in place by the Economic Growth and Tax Relief and Reconciliation Act of 2001 — will stay in place. In addition, senior citizens (over 65) who are earning less than $50,000 will not be subject to any income tax. With regard to the timing of the changes, Obama’s comments on Nov. 24, during the unveiling of his economic team, suggested that the above tax increases may not be quickly implemented. He stated that although the taxes were needed to help pay for proposed public spending, his economic team was still evaluating whether to push quickly for tax hikes or whether to allow rates to rise of their own after Mr. Bush’s tax policies expire at the close of 2010. AMT Any repeal or large-scale reform of the alternative minimum tax is unlikely under an Obama administration. The revenues from this tax are large and probably needed to fund many of the other changes. The most likely change is an increase in the AMT exemption amount, perhaps by indexing the exemption for inflation, for example. Capital gains/dividends tax Under an Obama administration, the 15% tax rate on qualified dividends and long-term capital gains will stay in place for couples with AGI of less than $250,000. For other taxpayers, the rate will increase to 20%. Although no specifics were provided, one of the campaign promises was to “eliminate capital gains on investments in small and startup firms.” Payroll tax Although the campaign has been largely silent on payroll taxes in the last few months, earlier statements have indicated that Mr. Obama favors a 2% to 4% increase in payroll taxes for couples with AGI in excess of $250,000, with an enactment date 10 years into the future. Tax credits A slew of new tax credits (mainly for taxpayers earning less than $75,000) and an expansion of current tax credits — like the child tax credit and the saver’s credit — has been proposed by Mr. Obama. The child tax credit currently allows a credit of up to $1,000 per qualifying child under 17 for married couples who file jointly (with adjusted gross income of $110,000 or less). The saver’s credit currently allows married couples who file jointly with income of less than $53,000 a credit of up to $2,000 for contributions to eligible retirement plans. Estate/gift tax Mr. Obama plans to retain the current top estate tax rate of 45%. The amount excluded from taxation will be $7 million per couple. He has not proposed any change to the gift tax. Family limited partnerships