President's FY 2010 budget
proposes many tax changes

On Feb. 26, 2009, the Administration released a document titled "A New Era of Responsibility: Renewing America's Promise." It is the Administra­tion's preview of its fiscal policies and planned major budgetary initiatives.

In effect, it's an overview of the full FY 2010 budget expected to be released this spring. The next day, the Senate Budget Committee Majority Staff released a "Brief Analysis of President Obama's FY 2010 Budget," providing additional details on critical elements of the President's plan, including his tax proposals.

The Administration's document, as supplemented and explained by the Senate Budget Committee Majority Staff Release (referred to as the Staff Release in this article), reveal the major tax initiatives that the Administration will push for. These are a combination of revenue-raising "loophole closers" (most of them aimed at businesses), some favorable tax changes for businesses, higher taxes for "higher income individuals," tax cuts for other individuals, and a continuation of key Bush-era tax cuts for non "high income" taxpayers.

The tax changes the Administra­tion's proposes to make include the following (in each case, the year in the parenthesis indicates when the change is proposed to begin):

Tax Changes For Business

... Make the research tax credit per­manent (2010).

... Expand the net operating loss car­ryback (2011).

... Eliminate capital gains taxation on small business stock if held for more than five years (2014).

... Repeal LIFO (2012).

... Codify the economic substance doctrine (2009).

... Require information reporting for rental payments (2010).

... Tax carried interest as ordinary income (2011). ... Reinstate Superfund Taxes (2011).

... Repeal all of the following oil and gas tax breaks: expensing of intangible drilling costs; deduction for tertiary injectants; passive loss exception for working interests in oil and gas properties; manufacturing deduction for oil and gas companies; and percentage depletion (2011).

The Staff Release adds that other business related changes will include improvements to international tax enforcement; and changes to the current policy that allows deferral of taxation of certain income earned overseas.

Tax Changes for Higher Income Individuals

These changes would be proposed to apply to high­er income individuals, i.e., those earning over $250,000 (married) and $200,000 (single):

... Reinstate the 36% and 39.6% top tax rates (2011).

... Reinstate the personal exemption phaseout and lim­itation on itemized deductions (2011).

... Impose a 20% tax rate on capital gains and divi­dends (2010). The Staff Release adds that at lower income levels, the current treatment of capital gains and dividends would be continued, with a top rate of 15%.

The Administration's document separately discusses a proposal to limit the tax rate at which higher-income individuals (as defined above) can take itemized deduc­tions to 28%, with no indication of when this change would take effect. The Staff Release explains that the additional revenue from this provision, in addition to savings from reducing Medicare and Medicaid spend­ing, would help cover the cost of health care reform. Because these proposals are part of a deficit-neutral reserve fund, and the Administration has yet to provide details on how the offsets will be used to finance reforms in health care, the Staff Release says the impact of this change was not included in the budget totals by the Administration.

The Staff Release adds that the President's FY 2010 budget will assume that the estate tax, as it is in effect in 2009, would be permanently extended, and indexed to inflation. In 2009, the estate tax exemption is $3.5 million ($7 million for a couple), and the top rate is 45% percent.

Other Tax Changes for Individuals

Make permanent the Recovery Act's refundable $400/$800 "making work pay" tax credit for 2009 and 2010. The Staff Release says that extension of this tax relief would be contingent on the enactment of climate change legislation, which would raise more than $646 billion through a cap-and-trade policy.

... Make permanent the Recovery Act's liberalized child tax credit and earned income tax credit rules, which under current law apply for 2009 and 2010 only.

... Make permanent the Recovery Act's "new American opportunity tax credit" for higher education expenses, which under current rules applies for 2009 and 2010 only.

... Eliminate the Advanced Earned Income Tax Credit (2010).

... Expand the saver's credit and automatic enrollment in IRAs and 401(k)s (2011).

The Staff Release says that the Administration's budget would permanently extend the following Bush­era 2001 and 2003 tax cuts slated under current law to expire at the end of 2010: the 10% bracket, marriage penalty relief, and the child tax credit. Other provisions enacted in 2001 that would be extended in the budget include the 25% and 28% brackets, the adoption tax credit, and the dependent care tax credit.

As for AMT relief, the Staff Release says that the Administration's budget assumes that the current AMT relief in 2009 would be continued with inflation adjust­ments (but there's no indication of whether the relief would apply to all taxpayers).

The Administration's document also separately discusses a proposal to establish "automatic workplace pensions, on top of and clearly outside Social Security...." Employees would be automatically enrolled in workplace pension plans (unless they opt out). Those employers not offering retirement plans would be required to enroll their employees in a direct­deposit IRA (but employees apparently would be given an opt-out option).