Administration Outlines Fiscal 2011 Tax Proposals*
By Larry Cohen, and Kevin Anderson, BDO
On February 1, 2010, the Treasury Department released General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals (“Green Book”), which provides a description of the Obama Administration’s budget proposals affecting revenues. These proposals are an outline of the Administration’s policy initiatives, and will serve as the blueprint for future discussions with Congress. The legislative process may take significant time as the proposed changes affect a multitude of Internal Revenue Code provisions, and members of Congress may not support the precise proposals made by the Administration. Thus, whether these proposals are ultimately enacted into law, how they may be modified, and when they will be effective, cannot be known.
Set forth below is a summary of many of the proposed changes affecting domestic taxation, or general administrative provisions. A separate summary of the international provisions may be found at http://www.bdo.com/download/1272
INDIVIDUAL TAX PROVISIONS
- Tax Rates. In 2001, the tax rates applicable to individuals were reduced through December 31, 2010. The top tax bracket was reduced from 39.6 percent to 35 percent, and the second highest tax bracket was reduced from 36 percent to 33 percent. The proposal would reinstate the 36-percent and 39.6-percent taxbrackets, but would permanently extend the other tax rates. The 36 percent rate would apply at $250,000 for married taxpayers filing jointly and $200,000 for single taxpayers. The 39.6-percent rate would apply to incomes above $373,650. These amounts would be adjusted for inflation and would be effective January 1, 2011.
- Reinstate the Limitation on Itemized Deductions. Prior to 2001, certain otherwise allowable itemized deductions were reduced by three percent of the amount by which adjusted gross income (“AGI”) exceeded a statutory floor that was indexed annually for inflation, but not by more than 80 percent of the otherwise allowable deductions. As part of the 2001 tax legislation, this limitation on itemized deductions has been reduced in stages. For 2009, itemized deductions were reduced by one percent of AGI over the threshold of $166,800, but not by more than 26⅔ percent. For 2010, the reduction was to be completely eliminated.
However, beginning in 2011, the full itemized deduction reduction of three percent of AGI exceeding the floor is scheduled to be reinstated. The proposal would allow the reinstatement of the limitation to become effective in 2011.
For 2011, the threshold would be adjusted for inflation starting with a value of $250,000 in 2009 for married taxpayers filing jointly ($125,000 if filing separately) and $200,000 in 2009 for single taxpayers. After 2011, the thresholds will be indexed for inflation.
- Reinstate the Personal Exemption Phase-Out. Individual taxpayers generally are entitled to a personal exemption for the taxpayer and for each dependent. Prior to 2001, the personal exemptions were reduced or completely phased out for higher-income taxpayers. For a taxpayer with AGI in excess of the threshold amount, the amount of each personal exemption was reduced by two percent of the exemption amount for that year for each $2,500 ($1,250 if married filing separately) or fraction thereof by which AGI exceeded that threshold. The 2001 act reduced the otherwise-applicable reduction of personal exemptions by two thirds for 2008 and 2009, and eliminated it completely for 2010. However, beginning in 2011, the full personal exemption phase-out is scheduled to be reinstated. The proposal would permanently repeal the personal exemption phase-out, except for higher income taxpayers.
The AGI levels at which the phase-out begins would be adjusted. For 2011, the AGI floors would be adjusted for inflation starting with a value of $250,000 in 2009 for married taxpayers filing jointly ($125,000 if filing separately) and $200,000 in 2009 for single taxpayers.
- Limit the Tax Rate at which Itemized Deductions Reduce Tax Liability to 28 Percent. Under current law, itemized deductions reduce a taxpayer’s income subject to tax, subject to the limitation on itemized deductions discussed above. The benefit of the itemized deduction is effectively the product of the marginal rate applicable to the taxpayer times the itemized deduction. The proposal would limit the benefit of itemized deductions to 28 percent, rather than the 36 or 39.6 percent rates that would otherwise be applicable. The proposal would be effective for taxable years beginning after December 31, 2010.
- Impose a 20-Percent Maximum Rate on Dividends and Capital Gains. Under current law, the maximum rate of tax on the adjusted net capital gain of an individual is 15 percent. In addition, any adjusted net capital gain otherwise taxed at a 10- or 15-percent rate is taxed at a zero-percent rate. These rates apply for purposes of both the regular tax and the AMT. Qualified dividends generally are taxed at the same rate as capital gains. The zero- and 15-percent rates for dividends and capital gains are scheduled to sunset for taxable years beginning after December 31, 2010. The proposal would permanently extend the zero- and 15-percent rates, and would create a 20-percent rate on long-term capital gains and qualified dividends. The higher rate would apply at the same levels as the 36-percent rate for taxpayers generally (see above).
- Extend the “Making Work Pay” Credit. In 2010, individual taxpayers are eligible for a refundable tax credit of 6.2 percent of earned income up to a maximum credit of $400 ($800 for joint filers). Thus, workers receive a credit on the first $6,452 of earned income ($12,903 for joint filers). The credit phases out at a rate of two percent for taxpayers with modified AGI in excess of $75,000 ($150,000 for joint filers). The credit expires at the end of 2010. The proposal would extend the credit for one year.
- Permanently Extend the American Opportunity Tax Credit. The credit equals 100 percent of the first $2,000 plus 25 percent of the next $2,000 of qualified tuition and related expenses (including textbooks), for a maximum credit of $2,500. Forty percent of the otherwise allowable credit is refundable (for a maximum refundable credit of $1,000). The credit is available for the first four years of post-secondary education, and phases out for taxpayers with AGI between $80,000 and $90,000 ($160,000 and $180,000 if married filing jointly). The proposal would make the credit permanent, and would index the $2,000 tuition and expense amounts, as well as the phase-out thresholds, for inflation. The proposal would be effective for taxable years beginning after December 31, 2010.
- Expand the Saver’s Credit and Provide for Automatic Enrollment in IRAs. A nonrefundable tax credit is available for eligible individuals who make voluntary contributions to 401(k) plans and other retirement plans, including individual retirement accounts (“IRAs”). The maximum annual contribution eligible for the credit is $4,000 for married couples filing jointly and $2,000 for single taxpayers or married individuals filing separately, resulting in maximum credits of $2,000 and $1,000, respectively. The credit rate is 10 percent, 20 percent, or 50 percent, depending on the taxpayer’s AGI. The proposal would make the saver’s credit fully refundable and would replace the current three rates with a refundable credit of 50 percent of the first $500 of contributions, indexed for inflation beginning in 2012. The provisions related to the saver’s credit would be effective December 31, 2010. In addition, employers in business for at least two years that have ten or more employees would be required to offer an automatic IRA option to employees on a payroll-deduction basis, under which regular payroll-deduction contributions would be made to an IRA. Employers could claim a temporary tax credit for making automatic payroll-deposit IRAs available to employees. The amount of the credit would be $25 per enrolled employee up to $250 each year for two years. These proposals would be effective January 1, 2012.
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