November 14, 2008
Now that Barack Obama has been elected as our next President, the conventional wisdom is that there will be significant changes to the federal tax law next year.
Of course history tells us that any tax plan proposed by a presidential candidate during the campaign will undergo substantial changes when presented to the Congress. Making predictions about tax law changes this time around is even more difficult in light of our volatile economic climate.
Prior to the election there was quite a bit of email and internet rumor floating about concerning what Mr. Obama was proposing regarding taxes. For now all we have to go on is the "official tax plan" published by the Obama campaign (which as of the date of this writing is still available on the campaign website) and statements by Mr. Obama reported in the mainstream media. So with the foregoing caveats the following is a summary of some federal tax law changes that may be proposed by the new Obama administration in 2009. Any changes enacted next year would not apply for 2008 but could be effective retroactively as of January 1, 2009.
Individual Income Tax
- The top two marginal rate brackets would be changed. Currently (for 2008) the marginal rate for a married couple filing jointly is 33% on taxable income between $200,300 and $357,700 and 35% for taxable income above $357,700. For single filers in 2008 the 33% bracket applies to taxable income between $164,550 and $357,700 and the 35% bracket applies to taxable income above $357,700. A new 36% bracket would be substituted for the current 33% bracket and a new 39.6% bracket would be substituted for the current 35% bracket. The dollar thresholds for these two new brackets would be changed so that the higher rates would only apply to couples filing jointly with taxable income above $250,000 and to single filers with taxable income above $200,000. All rate brackets below these top two would remain the same. In the official tax plan this is explained as a "reversion" to the rate brackets in effect in the 1990s (during the Clinton administration) and before the Bush administration tax cuts enacted in 2001.
- The personal exemption phase-out and itemized deduction limitation in effect prior to 2006 would also be restored for joint filers making over $250,000 and single filers making over $200,000. The effect of this would be that the effective top income tax rate for individuals could be in excess of 40%.
- In the official tax plan Mr. Obama proposes a new payroll "surtax" on wages and self employment income above $250,000. Currently a social security tax (OASDI) of 12.4% is imposed on wages and self-employment income up to a cap ($106,800 for 2009) and a Medicare tax (HI) of 2.9% is imposed on all wages and self employment income without any cap. While no specific rate is proposed in the official tax plan it is stated that the new surtax would not be as high as the full OASDI rate but rather in the 2% to 4% range.
- There have been rumors on the internet that Mr. Obama proposed to tax all gains on the sale of personal residences at 28% without any deduction or exclusion. This is not in the official tax plan and according to the economic policy director of the campaign has never been proposed by Mr. Obama. Currently a married couple filing jointly can exclude up to $500,000 of gain on the sale of a personal residence and a single filer can exclude up to $250,000 of gain.
- There are several other so-called "middle-class tax cuts" proposed in the official tax plan.
Alternative Minimum Tax (AMT)
- An AMT "patch" was enacted in October 2008, which prevented the AMT from applying to a much broader number of taxpayers. Mr. Obama has expressed support for continuing and possibly making the patch permanent. There seems to be little chance of any permanent repeal of the AMT.
Capital Gains/Dividends
- The long-term capital gains rate would be increased from its current 15% level to 20% for joint filers making over $250,000 and single filers making over $200,000. As with the changes to the top income tax brackets this is explained in the official tax plan as a reversion back to the rates applicable in the 1990s, before the Bush administration tax cuts of 2001.
- The tax rate on dividends would also be increased from its current level of 15% to 20% for joint filers making over $250,000 and single filers making over $200,000. While this would be an increase over the current tax rate, it would not be a return to rates applicable in the 1990s, when dividends were taxed at regular income tax rates (up to 39.6%).
Estate Taxes
- In 2001 a law was passed to phase out the federal estate tax. Under this law there is an increasing per person exclusion from the federal estate tax--$2,000,000 for persons dying in 2008 ($4,000,000 for a couple), $3,500,000 for persons dying in 2009 ($7,000,000 per couple), and a total repeal of the federal estate tax for persons dying in 2010--but the federal estate tax returns for persons dying in 2011 and thereafter with a $1,000,000 per person exclusion ($2,000,000 per couple). The official tax plan proposes to establish the exclusion at $3,500,000 per person or $7,000,000 per couple (effectively freezing at the 2009 level) with a top rate of 45%.
Retirement Plans
- Although not contained in the official tax plan Mr. Obama has expressed some support for a limited relaxation of the 10% penalty tax on early withdrawals from IRAs (that is, withdrawals before age 59½). Mr. Obama has also expressed some support for temporarily suspending the required minimum distribution rules (RMD) starting at age 70½ for IRAs and qualified retirement plans. Both of these proposals are in response to the recent stock market crash.
Business Taxes
- The official tax plan mentions the elimination of all capital gains taxes on certain investments in small and start-up firms, but no specifics have been provided. Under current law the capital gains rate is reduced by 50% on the sale by an investor of stock in a "qualified small business" provided that the stock is held more than 5 years.
- Corporate tax rates would generally remain the same, with some unspecified cut in rates to "reward" corporations that expand or start operations in the United States. Conversely certain tax breaks and loopholes that are perceived to encourage U.S. corporations to move jobs and investments abroad would be repealed. No specifics on this are given in the official tax plan.
- The current tax law provision that allows immediate expensing of capital expenditures up to $250,000 per year would be extended.
- The R&D tax credit would be made permanent.
- During the campaign Mr. Obama expressed some support for a windfall profits tax on oil companies-possibly similar to the windfall profits tax in effect in the early 1980s. However with the steady decline in oil prices since the summer, there may not be as much political pressure for this type of tax.
- The official tax plan calls for the taxation at regular income tax rates rather than at lower capital gains rates on the profits earned by hedge fund promoters and managers from their "carried interests" in the hedge funds. This was a hot topic several months ago when the perception was that hedge fund managers were paying taxes at the15% capital gains rate on huge amounts of income that in reality was earned on account of management services to these funds.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal, tax or investment advice with respect to any specific matter and should not be acted upon without professional counsel who is familiar with all relevant facts. Because of the changes that typically occur with proposed legislation, the potential changes of policy which may be made prior to the introduction of any tax bill, and the potential that some tax bills may not be approved, the information contained herein cannot be expected to be complete and accurate statement of changes to occur with the tax laws. If you have any questions or require any further information regarding these or other related matters, please contact Robert W. Van Amburgh at (972) 701-7046 or at rvanamburgh@hhdulaw.com.
