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On February 26, 2009, President Obama submitted the administration’s proposed $3.5 trillion fiscal year (FY) 2010 federal budget to Congress, which includes some significant tax cuts as well as increases. However, most of the proposals will not be effective until 2011.
Following the budget release, the Obama administration provided further clarification of its tax proposals on May 11, 2009. Below is a summary of the tax proposals.
The FY 2010 budget recommendations are still proposals. Congress must enact them into law. The budget process is a very long one and the president's proposals will be fine-tuned by Congress. The President's budget does, however, provide a direction of possible future tax policy.
High Income Earners A proposed marginal income tax rate increase for higher income individuals accomplished by reinstating the 36% and 39.6% (currently 33% and 35%) rates beginning in 2011. The 36% tax bracket would begin at taxable income of $250,000 (married) and $200,000 (single). The FY 2010 budget does not specifically indicate the taxable income thresholds at which the 39.6% rate would apply; however the 2009 current highest bracket starts at $373,000 for single filers and married filers.
Reinstating the personal exemption phase-out for higher-income individuals and limitation of itemized deductions (including mortgage interest and charitable deductions) to 28% (previously 35%) for taxpayers in the 36% and 39.6% tax brackets.
Increasing the capital gains and dividends rate to 20% for higher-income individuals beginning in 2011 (lower and moderate income individuals would be taxed at 15 percent on capital gains and dividends).
Other Tax Credits and Relief
A proposal to make the Making Work Pay credit permanent (currently a temporary credit that expires after 2010): The credit would permanently offset payroll taxes on the first $6,450 of wages, with an adjusted gross income phase-out starting at $75,000 for individuals and $150,000 for married couples filing jointly. They phase out completely above the $95,000 and $190,000 levels, respectively.
Child tax credit – The budget proposes to make this credit permanent and limit the scheduled future increases in the earnings threshold after 2010. Currently eligibility for this $1,000 credit is based on earned income.
Earned Income Tax Credit – The budget proposes to make this temporary credit permanent.
American Opportunity Tax Credit – The budget proposes to make this temporary credit permanent. The credit provides a benefit of up to $2,500 per student, per year and is applicable to the first four years of post secondary study.
The budget proposes a marriage penalty relief extension of temporary measure past 2010 - a "marriage penalty" exists when the combined tax liability of a married couple filing jointly is greater than the tax liability of each individual computed as if they were not married. Marriage penalty relief is provided by gradually raising the standard deduction for married couples filing jointly and increasing the size of the 15 percent tax bracket for married couples.
Alternative Minimum Tax (AMT) – The budget proposes to index to inflation the individual AMT at the 2009 level.
Estate tax: President Obama and House Democrats have endorsed a permanent federal estate tax exemption of $3.5 million and a top rate of 45 percent. The Senate countered with a $5 million exemption and a top rate of 35 percent.
The budget includes a number of business tax relief proposals:
The budget proposes a temporary extended net operating loss (NOL) carryback – qualified small businesses can elect to carry back NOL’s from two to five years. This election applies only to NOLs for any tax year beginning or ending in 2008. President Obama proposes to extend this provision, however, it is still unclear if the enhanced NOL carryback would continue to apply only to small businesses or be expanded to more businesses.
Small business capital gains – proposal to eliminate all capital gains taxes on small business stock and elimination of the AMT preference item for the gain excluded under this provision.
The budget proposes a permanent extension of the research and experimentation credit.
For more information on Canadian and U.S. taxations services, please feel free to contact me or your
local MNP advisor.
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