Tax Advisor - 2011 Proposed Budget Includes Many Tax Changes for Individuals and Businesses
On Feb. 1, President Barack Obama issued his 2011 budget, revealing a robust agenda of tax proposals. Below we highlight a few of these proposals that we believe are of special interest to our clients and friends. It is important to note that these are merely proposals that still need to go through Congress before they become law.
For Individuals
- Taxes on high-income earners would rise by nearly $1 trillion over the next 10 years; the bulk of that coming from expiring tax cuts at the end of 2010 that were enacted by President George W. Bush.
- The top two income tax rates, affecting people earning more than $200,000 a year, or $250,000 for married couples, will return to 36 percent (currently 33 percent) and 39.6 percent (currently 35 percent).
- Capital gains and dividends would be taxed at 20 percent (currently 15 percent) for those at the above income levels.
- Missing from the budget is Alternative Minimum Tax (AMT) relief in the form of a “patch,” meaning more families will be subject to the AMT as the exemption drops from $70,950 to $45,000. This will result in at least $6,700 in new AMT taxes for families and $3,300 for individuals and heads of households per year.
- Also included in the budget is a reinstatement of the estate tax, which was repealed for one year on Jan. 1, 2010. Levels will stay at same rate as last year (45 percent with an exemption for estate wealth under $3.5 million) and will be extended permanently.
- There were also several individual tax proposals directed to the middle and lower classes:
- Extending the Making Work Pay Credit for one year. This is a tax cut of up to $400 per person/$800 per family.
- Making permanent the American Opportunity Tax Credit which would equal $10,000 for a four-year college education
- Nearly doubling the tax credit for middle class families to pay for child care expenses
- Increasing matching credits to encourage retirement saving and providing for Auto-IRAs
For Businesses
- Repealing the LIFO accounting method for inventories. Those currently using the LIFO method would be required to write up their beginning LIFO inventory to its FIFO value in the first tax year beginning after 2011. However, this one-time increase in gross income would be taken into account ratably over10 years, beginning with the first tax year beginning after 2011.
- A tax credit of up to $5,000 for new workers added in 2010, plus a reimbursement for payroll taxes on wage increases.
- For 2010, permitting a maximum of $250,000 to be expensed under §179, with the investment-based phase-out level set at $800,000.
- Extending bonus first-year depreciation to apply to property placed in service in 2010.
- A zero percent capital gains tax on qualified small business stock held for at least five years, effective for stock acquired after Feb. 17, 2009.
- Making permanent the research tax credit (which under current rules went off the books at the end of 2009).
- Removing company provided cell phones from the listed property category, effective for tax years ending after the enactment date.
- Repealing the lower-of-cost-or-market inventory accounting method, effective for tax years beginning after 12 months from the enactment date.
- Making permanent the 0.2 percent unemployment insurance surtax.
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