Proposed Budget Provides Many Tax Changes For Individuals and Businesses

Proposed Budget Provides Many Tax Changes for Individuals and Businesses

By William L. "Larry" Houff, CPA, ABV, CVA

The Obama Administration recently released its proposed budget for our nation's 2011 fiscal year. Included are many income taxation proposals that--if enacted by Congress this year--will greatly impact both individual and business taxpayers. Some of the proposals are new; others are leftover proposals that weren't passed by Congress last year. Below are some of the proposals that will likely affect individuals and small businesses--for the better and worse.

Tax Proposals for Individual Taxpayers

Reinstate the 39.6% and 36% income tax rates. Congress, under the Bush Administration, lowered the top individual tax rates to 33% and 35% with the provision that they would revert back to the higher rates in 2011. Absent any Congressional action, the 36% tax rate for individuals with taxable incomes exceeding $200,000 ($250,000 for joint filers) and the 39.6% rate for taxable incomes exceeding $373,650 will be reinstated in 2011. If one is fortunate enough to be in these higher income brackets, it may be well worth your consideration to shift income from 2011 to 2010 and shift deductions from 2010 to 2011. With all else being the same, these moves will save you an additional 3% to 4.6% income tax bite from Uncle Sam.
Increase the top tax rate on capital gains and qualified dividends from 15% to 20%. The tax rate on these income sources was lowered from 20% to 15% in the Bush era. This rate will revert back to 20% for taxpayers with income exceeding $200,000 ($250,000 for joint filers). So, if you are thinking about selling real estate or stocks and bonds that have appreciated in value, you should consider selling them in 2010 to save 5% tax on their gain.
Extend the Make Work Pay credit through 2011. The President's proposal calls for a one-year extension of the stimulus-created tax credit equal to 6.2% of earned income to a maximum credit of $400 ($800 for joint filers). This credit begins to phase out once a taxpayer's income exceeds $75,000 ($150,000 for joint filers). This will directly reduce income taxes for most of our country's salaried or self-employed taxpayers.
Extend the optional itemized deduction for state and local general sales taxes paid through December 31, 2010. If you itemize your deductions, you have the option to deduct sales taxes paid instead of state income taxes paid to lower your 2009 taxable income. But, this optional deduction expired as of December 31, 2009. Extending this provision would be particularly beneficial for Florida taxpayers since Floridians don't pay a state income tax.
Reinstate itemized deductions and personal exemption phase outs to limit the tax benefits of itemized deductions to 28%. This proposal would adjust the income phase out level for personal exemptions and itemized deductions to begin at $200,000 ($250,000 for joint filers). This would make itemized deductions less beneficial for high income individuals.

Tax Proposals for Business Taxpayers

Extend the maximum Section 179 deduction of $250,000 for 2010 purchases of qualifying property. This provision, which allows businesses to immediately expense equipment, computers and furniture purchases rather than depreciating them over their useful lives, is only available for purchases totaling $134,000 in 2010. Increasing this deduction would benefit the U.S. economy and business owners alike by lowering taxable income along with providing an incentive to expand business operations.
Extend the 50% first-year bonus depreciation deduction to qualifying property acquired in 2010. This benefit, which allows business owners to immediately expense 50% of their fixed asset purchases over and above the Section 179 deduction, expired on December 31, 2009. Extending it into 2010 would also provide immediate income tax savings to businesses that spend money and expand operations this year.
Make the Research and Experimentation Tax Credit permanent as of January 1, 2010. This credit has expired and been reinstated repeatedly in the past, making it difficult for the business community to plan research project investments. By making the credit permanent, business owners considering research and development activities would be encouraged to plan these undertakings, thereby spurring economic growth.

The Obama Administration's income tax proposals are numerous and varied. Some are designed to raise income for the federal government while others have the opposite effect. The overriding theme is to increase tax on incomes greater than $200,000 ($250,000 for joint filers) and to provide tax breaks at the lower income levels. The business provisions are generally designed to stimulate the economy by encouraging small business owners to spend money, expand operations and hire employees. The actual outcome of these policy suggestions will depend on Congress's actions in Washington, making business and tax planning interesting, challenging and more beneficial than ever this year.