Financial Resource

The Obama Administration has proposed a 2011 federal budget intended to steer the economy toward recovery and create new sources of revenue to reduce our country’s deficit. If enacted, the tax proposals in the budget would affect individuals, businesses, and estates.

Individual Provisions

Perhaps the most wide-reaching provision in the budget proposal allows the maximum personal income tax rate to increase from the present 35% to 39.6%, as had been in effect prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 (the Bush Administration tax cuts). The 39.6% rate would apply to taxable income in excess of 3,650 and would be adjusted annually for inflation.

The president also proposes raising the maximum tax rate on qualified dividends and long-term capital gains to 20% (from the current 15%) for single individuals with income over 0,000 and for married taxpayers filing a joint return with income over 0,000.

The budget proposes to benefit individuals by extending numerous tax breaks that are scheduled to expire. One provision to be extended is the Alternative Minimum Tax (AMT) patch, which increases the exemption from the AMT to prevent 20 million taxpayers from being subject to this tax.

Other provisions to be extended could include the state and local sales tax deduction and the tax-free charitable distribution from IRAs for individuals required to take IRA distributions. The state and local sales tax deduction is primarily beneficial for individuals who live in low- or zero-income tax states but can also be beneficial for those who made large purchases in 2010.

Individuals aged 70 1/2 and over would be eligible for tax-free IRA distributions of up to 0,000 to qualified charities. These taxpayers would avoid paying taxes on these distributions in exchange for not claiming a charitable deduction on their tax return.

Business Provisions

For businesses, the budget proposes extending the bonus depreciation deduction and the 0,000 ceiling on Section 179 expensing to 2010. Both provisions expired December 31, 2009.

The Section 179 deduction allows qualified property to be expensed in the year that it is placed in service, as opposed to being depreciated over a number of years. The maximum Section 179 deduction would remain 0,000 under this proposed extension. (The maximum had reverted to 5,000 for 2010 under current law.) The bonus depreciation deduction, which allows businesses to expense 50% of the cost of qualified property, also would be extended to 2010 under the budget proposal.

The budget proposes a hiring tax credit of up to ,000 for each newly-hired employee. This tax credit may not exceed 0,000 per employer.

The budget also proposes to extend and make permanent the research tax credit. This credit, which expired December 31, 2009, provides for a tax credit equal to 20% of qualified research expenses above a base amount.

President Obama also revived a prior proposal to tax income from carried interests as ordinary income. Carried interests refer to profit interests an individual receives in entities (often hedge funds), in exchange for services performed. Currently, carried interests are taxed at the 15% long term capital gains rates. Under the proposal, the individual receiving the carried interest would be taxed at ordinary income tax rates and subject to self-employment tax as well as income tax.

Estate Provision

The estate tax expired December 31, 2009. The budget proposal would reinstate and make permanent the tax at the 2009 rates, providing for an exemption of .5 million per estate and imposing the tax at a maximum rate of 45%.

Although the specifics of any new tax legislation to be passed in 2010 are uncertain, taxpayers should anticipate tax increases to address the substantial government deficits.

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