On November 4, 2008, Barack Obama was elected the next President of the United States. Obama proposed several significant changes to the tax code during his campaign, but many changes were not discussed publicly with specificity. As a result, there is a great deal of uncertainty about Obama’s proposals. This article summarizes President-Elect Obama’s tax proposals, as well as some pertinent planning tips in light of these proposals.
Individual Income Taxes
- Child Tax Credit. Obama supports maintaining the current child credit of $1,000 per child (increased from $400 under President Bush).
- Individual Rates. The Bush administration decreased the previous income tax rates of approximately 15, 28, 31, 36, and 39.6% to 10, 15, 25, 28, 33 and 35%, respectively. Obama supports maintaining the 10, 15, 25 and 28% brackets, but has proposed to restore the upper rates of 36 and 39.6%. The top capital gains and dividend tax rates may be increased to 20%.
- Payroll Tax. Obama has indicated that he will seek an additional payroll tax between 2% and 4% for those earning greater than $250,000 with an effective date of ten years in the future.
- Mortgage Credit. For nonitemizers who own a home, the Obama administration supports an additional refundable credit for mortgage interest of up to $800, indexed for inflation. This is in addition to the up to $1,000 deduction for real estate taxes granted to nonitemizers under the Housing Assistance Tax Act of 2008.
- Exemptions and Itemized Deductions. Personal exemptions and itemized deductions would continue to be phased out for higher income taxpayers.
- Exemption For Seniors. Obama also supports exempting all individuals over age 65 from income tax if their earnings are less than $50,000, an amount which would not be indexed for inflation.
- Other Tax Credits. Obama would expand the child and dependent care credit (and make it refundable), the adoption credit and the earned income tax credit. In addition, Obama proposes a “Making Work Pay Credit” – a refundable tax credit equal to 6.2% of the first $8,100 in earnings. The maximum credit would be $500 per person with AGI of less than $75,000, indexed for inflation.
- Retirement Savings. The Obama administration would also require employers to offer 401(k) or IRA plans, require employees to opt out of the plans if they do not wish to participate, and mandate that IRA contributions be available via payroll deductions. The saver’s credit for retirement plans would be indexed for inflation, made refundable and equal to 50% of qualified retirement contributions of up to $500 for individuals and $1,000 for couples. The credit would phase out at AGI of $32,500 for individuals and $65,000 for couples.
- Compliance. Obama supports the institution of pre-completed tax forms allowing individuals to simply verify the return, sign it and mail it back to the IRS.
Estate and Gift Taxes
- Rates And Exemptions. Obama proposes maintaining the estate tax applicable exclusion amount at its 2009 level of $3.5 million. The top tax rate would be set at 45% and the present rules for determining the basis of property received at a decedent’s death would likely be preserved. In addition, Obama proposes to make the unused applicable exclusion amount of a deceased spouse available to the surviving spouse. Obama proposed no changes to the gift tax.
- Advanced Planning. Some members of Congress have advanced several proposals which would directly impact advanced estate and gift tax planning, including: (1) eliminating discounts for family limited partnerships (and family LLCs) that consist primarily of marketable securities; (2) eliminating “zeroed out” GRATs by requiring that the GRAT remainder interest equal at least 10% of the assets contributed to it; and (3) limiting dynasty trusts to 3 generations of tax-free transfers. An article by Jeff Pirruccello in the January/February 2008 Newsletter explained GRATs and how they can be used to give growing assets to your children without federal gift tax. A copy of this article is available at www.mcgrathnorth.com.
Corporate Income and Business Taxes
Obama favors the elimination of perceived oil and gas “loopholes” and would impose a windfall profits tax on oil and gas companies. The administration also favors requiring publicly-traded financial partnerships to pay corporate income tax and making it more difficult for corporations to deduct executive compensation. In addition, Obama supports making both the research and development credit and the renewable production credit permanent.
Obama’s administration has indicated that it would like to provide refundable tax credits to low-income families who lack access to employer-provided insurance and public health insurance. Small employers would receive a tax credit to provide insurance to employees and those employers who failed to provide insurance would be forced to contribute to the cost of a new national health plan.
Timing of Changes
Although these changes have been proposed and supported by the Obama administration, it is unclear, particularly given the current state of the U.S. Economy, when and to what extent these proposals will become law. Many commentators anticipate that most of the changes will be law no later than 2010, with the possibility that some will be made in 2009. Given the expiration of the estate tax in 2010, it is highly likely that the estate and gift tax laws will be changed in 2009.
PRACTICE POINTERS – TAX PLANNING STEPS TO TAKE NOW
In light of the likely Obama administration tax changes, you or your clients should consider tax planning today to potentially lock in current favorable tax treatment or to potentially take advantage of favorable changes in tax law.
- Those considering gift and estate tax planning via the use of family limited partnerships, family LLCs or GRATs should take advantage of this opportunity before year end. Locking in the discounted gift (or zeroed-out gift) now could save substantial gift and estate taxes in the future.
- Individuals and families with taxable income nearing the lower of the top two tax brackets ($200,300 for married couples, $164,550 for individuals, and $182,400 for head of household) should be exploring ways to reduce their taxable income, in light of a potential tax rate increase. Such options include increased investments in tax-exempt bonds or increases in IRA and 401(k) contributions.
- Lower income tax families that do not currently contribute to an IRA or 401(k) but currently qualify for the retirement saver’s credit, or will qualify under the Obama plan, should make whatever retirement savings they can make. This is especially true if, under Obama, the retirement savings credit becomes refundable.
- Now may be a good time to buy a home from both an economic and a tax perspective. Not only did the Housing Assistance Tax Act of 2008 provide first-time homebuyers with a tax credit of up to $7,500 and give to nonitemizers the ability to deduct up to $1,000 of real estate taxes, but the Obama administration supports an additional refundable credit for mortgage interest of up to $800 for nonitemizers.
- Employers without 401(k) plans or other qualified plans should begin to consider their options for retirement plan implementation. Employers should also begin evaluating the possibility of allowing employees to contribute to an IRA directly from their paychecks.
- Employee health insurance coverage should be examined as well as other employee benefit plans such as FSAs, HSAs and cafeteria plans in anticipation of stricter benefit rules under the Obama administration.
- Corporations should consider how they can take advantage of the research and development credit and the renewable production credit given the likelihood of permanency.
- Corporations may need to reconsider executive compensation in light of possible restrictions on the deductibility of such compensation.
The McGrath North Tax Group specializes in income tax planning, estate and gift tax planning, employee benefits, executive compensation and corporate tax planning. If you (or your clients) would like help in these areas, feel free to contact one of us.