What Obama's Budget Means For Your Taxes

Lower-income Americans and small business would get a break under the proposal, while the better-off would take a hit.....YEAH RIGHT! WASHINGTON -- In recent weeks, the White House has trumpeted tax relief for the middle class, a freeze on much discretionary spending and a tax on the biggest players in the financial sector. However, the biggest surprise about President Barack Obama's fiscal year 2011 budget request, unveiled Monday, is how unsurprising it actually is. "It's largely a reiteration of the president's budget request from last year," along with some extensions of tax benefits built into the 2009 economic stimulus bill, says Clint Stretch, managing principal for tax policy at Deloitte Tax in Washington. Whether that's good news or bad depends on your perspective. For the better-off, the tax code will be more complex and more expensive under the president's proposals. For lower-income Americans, it's also more complex, but more generous as well. That same principle applies to businesses--small businesses would get a break, but many big concerns, particularly banks and oil, gas and coal companies--wouldn't see much benefit. For individuals making more than $200,000 annually ($250,000 for couples), the Obama administration is still calling for the reinstatement of the 36% and 39.6% marginal rates, rising from current levels of 33% and 35%, respectively. High earners would also get hit with other provisions, including limits on itemized deductions and a 20% tax rate on capital gains and dividends (up from 15% currently). In addition, carried interest would be taxed as ordinary income instead of capital gains, which is sure to draw the ire of the hedge fund and private-equity lobbies. However, those earning less than $200,000 would see an extension of the Bush-era tax cuts. For 95% of working Americans, the administration also wants to extend for one year the Making Work Pay tax credit. The signature individual tax benefit of last year's stimulus act, it's a maximum $400 credit on the first $6,452 of an individual's earned income, with a phase-out for those making more than $75,000 a year. Last week, the administration also detailed several tax breaks for the middle class, including an increase in the Child Tax Credit for families making up to $113,000 a year and a $2,500 annual college tax credit. In addition, the president wants to expand the Saver's Tax Credit and require employers who don't offer workers retirement plans to automatically enroll workers in Roth IRAs. The newest additions to the administration's budget ideas--and they're not all that new--come in the small-business realm. Many companies that aren't classified as corporations would receive a permanent elimination of the capital gains rate for investments. Sounds generous, but it doesn't apply to a broad range of industries, including health, architecture, accounting, financial services and farming; moreover, last year's stimulus bill already provides a 75% small- business tax exclusion on capital gains. Other proposed tax advantages for businesses include a $5,000 credit for each new employee a company adds in 2010, a one-year extension of the bonus depreciation tax incentive included in the stimulus bill and a permanent extension of the research and experimentation tax credit. From the high-earner provisions alone, the budget proposal would raise during the next decade about $400 billion more than is necessary to pay for $381 billion in tax cuts, giving the government headroom to pay down the deficit. But there are still many areas for dispute. For example, a fee on the largest banks, levied to cover losses from the Troubled Asset Relief Program, would raise $90 billion during the next decade--if the idea doesn’t first get killed by the financial services lobby. In addition, the National Association of Manufacturers, which has long favored a permanent research and experimentation tax credit, claims the administration has put forth nearly $500 billion in new taxes on business during the next decade, including a $39 billion burden on energy companies and a $122 billion tax hike on multinational firms.

"The president called his budget a 'blueprint for job creation and economic growth,' but it puts costly burdens on America's job creators," says NAM Executive Vice President Jay Timmons.

According to Deloitte's Stretch, proposed tax hikes on the coal industry "could really become a showstopper," because they would affect a broad swath of industry. In addition, he says, although the provisions affecting high-income individuals are likely to find favor in this Congress, there's also a race at the state level to poach tax revenue from the better-off, which could have implications for federal policy. Of course, the broader issue is that the spending and revenue raising is expected to reduce the deficit to 4.2% of U.S. gross domestic product by 2020--about one percentage point higher than what many economists believe is sustainable. In addition, the budget assumes that the wind-down of the wars in Iraq and Afghanistan will reduce the deficit by at least $84 billion beginning in 2012--a bold assumption. What to take away from it all? For the richest Americans, tax rates will almost certainly rise. The outlook for business is mixed. But with deficits running through the next decade--even with a proposed three-year freeze in certain discretionary spending--there's increasing pressure for higher taxes on the middle class, something the Obama administration is keen to avoid.(my view)-Yeah Sure.......lets see how long this will last!