President Obama’s 2011 Budget Proposal

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On February 1, the President released his 10-year, $3.8 trillion budget proposal that expands the tax principles he has espoused since the 2008 presidential campaign: tax increases for upper-income individuals and corporations, tax breaks for working families and small businesses, reform of international tax rules, an end to tax preferences for large oil and gas companies, and closing of perceived corporate loopholes.

In all, the budget provides for an estimated $381 billion in tax relief and $2.2 trillion in revenue-raising provisions (tax increases). Below is a brief description of some of the proposals contained in the budget:

Provisions Affecting High-Income Individuals

President Obama’s budget continues to call for shifting the tax burden more towards high-income individuals. The budget proposals include:

  • Reinstating after 2010 the 36% tax rate for those with taxable income above $250,000 for married taxpayers and $200,000 for single filers.
  • Reinstating the 39.6% tax rate beginning in 2011 for taxpayers with taxable income over $373,650 (before an inflation adjustment).
  • Increasing the capital gains and dividend rate to 20% for taxpayers in the 36% or 39.6% tax brackets beginning in 2011. All other individuals would continue to be taxed at the 0% or 15% tax rates for long-term capital gains and qualified dividends.
  • Reinstating in 2011 the personal exemption phase-out and itemized deduction limitation (both are fully phased out for 2010 under current law).
  • Limiting the tax rate at which itemized deductions reduce tax liability. Under the proposal, taxpayers in the highest two tax brackets would deduct itemized expenses at the 28% level. A similar limitation would apply under the AMT rules.

Although the proposal to cap the benefit of itemized deductions at 28% remains uncertain, the increases to the tax rates seem virtually certain to take place. In anticipation of the higher rates, your White, Nelson & Co. tax professional can assist you with planning ahead for the changes.

Extension of Individual Tax Credits

The budget proposes to eliminate barriers to working or pursuing further schooling and expands or makes permanent several existing middle-class tax cut initiatives. The budget:

  • Expands the child and dependent care credit available for persons working or looking for work who incur childcare expenses permanently to families earning up to $113,000 per year.
  • Makes the American Opportunity Tax Credit for higher education expenses permanent. The proposal provides for inflation indexing of the expense amounts and phase-out limits beginning after December 31, 2010.
  • Extends for 2011 the Making Work Pay Credit (essentially a refund of a portion of payroll taxes) as enacted for 2009 and 2010. The credit provides for up to $400 for individuals and $800 for couples, and begins to phase out when modified adjusted gross income exceeds $75,000 for singles and $150,000 for married couples.
  • Modifies the Saver’s Credit to provide a 50% match on the first $500 of retirement savings for qualifying individuals ($1,000 for married couples) for families earning up to $65,000. The credit is subject to phase-out provisions and is indexed for inflation beginning in 2012.
  • Makes the Earned Income Credit permanent for families with three or more qualifying children and increases the income thresholds for the phase-out for married couples.

The Congress will be working on a tax act that includes the administration’s low- and middle-income tax breaks. Your White, Nelson & Co. tax professional can help you sort through the rules and help determine if you qualify for these or other tax breaks in the final tax bill.

Tax Proposals for Businesses

The budget contains several provisions intended to encourage new investment and promote economic recovery. Some of the more important provisions include:

  • Extending the first-year bonus depreciation deduction equal to 50% of the cost of qualified property placed in service in calendar year 2010.
  • Providing for an election to claim research or AMT credits in lieu of first-year bonus depreciation.
  • Permitting taxpayers (other than corporations) to exclude 100% of the gain from certain small business stock acquired at original issue after February 17, 2009, and held for at least five years.
  • Extending for 2010 the $250,000 expensing and $800,000 annual investment limit for qualified property under section 179.
  • Making the research and experimentation credit permanent (under current law the credit expired at the end of 2009).
  • Providing a $5,000 tax credit to businesses for every new hire in 2010 (limited to $500,000 per company). Small businesses that increase wages or extend hours for current employees would be reimbursed for the Social Security payroll taxes associated with the increases.

The Congressional response to the President’s initiatives indicates that the administration may be in for a battle for some of the tax increases contained in the budget. Your White, Nelson & Co. tax professional is here to help with forward planning and analysis to determine the consequences of these proposals on your tax situation.

There are several other provisions of the budget that may have consequences on you or your business, including several major changes to international tax rules and increased reporting. If you want more information or want to start planning now, your White, Nelson & Co. tax professional is here to help you. Email our office or call your White, Nelson & Co. tax professional at 714.978.1300.

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