President Obama's budget proposal for the
federal government's 2015 fiscal year is more than 1,500 pages long, with $3.9
trillion in spending proposals. But even though most political experts have
already declared the Obama budget dead on arrival, the initiatives that the
president chose to stress in his budget still carry valuable insight into what
the administration will see as its priorities for the rest of this election
year. Smart taxpayers will want to use that insight to predict coming tax changes that could get through Congress and past the
president's desk. Let's take a look at some of the major tax provisions of the
Obama budget and how they would affect you.
Raising
tax revenue
The Obama budget includes several provisions
that would increase taxes dramatically on upper-income earners. The largest is
a proposal to put a 28% limit on the value of itemized deductions and certain
items that are excluded from taxable income, including contributions to
traditional IRA, 401(k), and other qualified retirement plan accounts. Although
those in the 28% tax bracket and below would still get the full value of such
tax breaks, those in the 33%, 35%, and 39.6% brackets would see the value of
their deductions drop substantially. The White House Budget Office projects
that such a move could raise $600 billion over the next 10 years.
Other tax-raising items include the
implementation of what has become known as the "Buffett Rule," which
would ensure that those making $1 million or more pay an effective tax rate of
at least 30%, regardless of deductions other than charitable contributions. The
impact of the provision is relatively small, with estimates of about $53
billion in revenue over the next decade, but the tax is squarely targeted at
the highest levels of income.
Also, the president would limit the maximum
balance in tax-favored retirement accounts so as to prevent wealthy individuals
from establishing tax-deferred assets above certain levels. The exact limits
are determined by complex actuarial calculations geared toward establishing the
maximum annuity allowed under pension law, but according to estimates from the
Tax Policy Center, the limits last year for a 62-year-old would have been $3.4
million, but a 40-year-old's limit would have been only $1 million.
The budget also aims to cut certain loopholes.
Private-equity firms Carlyle Group, Apollo Global Management and Blackstone
Group won't like provisions ending the tax preference for carried interest.
Even though Carlyle, Apollo, and Blackstone won't necessarily see their
corporate profits affected, the ripple effect could have negative effects in
the industry and have implications for compensation costs and other expenses.
In addition, S corporation shareholders and other professional services firms will no longer be
able to shelter income from payroll taxes by splitting it into salary versus
business profits.
Finally, the budget would raise estate taxes
back to their levels from several years ago. The rate on taxable estate would
rise to 45%, and the exemption amount would drop from its current $5.34 million
to $3.5 million. Continue reading…
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