This month, history is being made as Sen. Barack Obama (D-Ill.) becomes the next president of the United States. The incoming administration faces challenging policy and tax issues, and it’s important to take a look at the senator’s tax policy proposals based on his campaign and voting record.
Income Taxes Obama’s tax policy focuses on reform for low- to middle-income families through the extension of certain provisions of the 2001 and 2003 tax cuts. Conversely, his plan also repeals tax cuts in the top two marginal income tax brackets, thereby increasing taxes on families whose income exceeds $250,000 annually.
The basics include:
- Reversing the top two income-tax brackets to pre-2001 tax rates of 39.6 percent and 36 percent for families making more than $250,000. All other income-tax brackets would remain untouched.
- Increasing the capital gains tax and dividend rates to 20 percent for families whose annual joint income exceeds $250,000 ($200,000 for individuals).
- Reinstating personal exemption phase-out and itemized deduction limitation rules. The restored phase-outs would be increased to $250,000 for joint filers.
- Creating a refundable tax credit equal to 6.2 percent of the first $8,100 in wages for taxpayers whose annual income is less than $75,000.
- Creating a transferable workplace pension plan. For families that earned less than $75,000, the government would match $500 of the first $1,000 deposited.
- Eliminating all income taxes for seniors earning under $50,000 a year.
- Creating a workplace mortgage credit for taxpayers who do not take itemized deductions. On average, this credit is equivalent to $500 per person (maximum is $800).
- Extending and indexing the Alternative Minimum Tax (AMT) "patch" that eliminated an estimated 25 million taxpayers from facing AMT last year.
Estate Tax
As a result of the 2001 Tax Act, estate tax rates were reduced from 55 percent to 45 percent for the years 2007 through 2009, and the estate exemption increased from $2 million (for 2007 through 2008) to $3.5 million in 2009. If no further action is taken, the estate tax is eliminated in 2010. However, the “elimination” is slated to sunset in 2011with tax rates reverting back to pre-2001 amounts.
Obama’s proposed tax plan would freeze the current top estate tax rate of 45 percent for estates and maintain the current exemption level of $3.5 million per individual.
Social Security
Obama opposes privatizing Social Security; his plan attempts to bolster Social Security while shielding middle-class families from tax increases or benefit cuts.
The Obama tax proposal seeks to strengthen solvency through a tax increase of 2 percent to 4 percent in total (combined employer and employee) targeted at people whose gross salary exceeds $250,000 annually. This mandated tax increase on wealthier individuals would be phased in over a 10-year time frame.
Small Business Obama proposes business tax incentives including:
- Refundable tax credits for small businesses that provide health insurance to their employees.
- Elimination of certain capital gains taxes for small businesses and start-up companies.
- Excise tax credit for cellulosic biomass ethanol producers.
- Extension for five-year tax credit producing electricity from renewable sources.
- Making research and development tax credits permanent.
Impact on ContractorsThe credits and incentives are mostly politically agreeable, such as zero tax for seniors making under $50,000 a year. However, estate taxes must be addressed before that tax disappears in 2010 and then magically reappears in 2011 with a low exemption. Obama’s estate tax proposal is probably not far from what could be negotiated in Congress, and the increase in income tax rates was already slated to happen in 2010 unless Congress acted.
According to Robin Word, CPA, CCIFP, president of Word CPA Group, Jackson, Miss., "It’s interesting that the new administration feels the best response to the current economic crisis is to extend major components of the Bush administration."
The underlying issue is a fundamental policy and philosophical change. Those individuals (and S Corporation shareholders) making more than $250,000 will fund most of the new tax breaks. These entrepreneurs also take on significant risk, thereby keeping the economy moving. That risk-taking will now be further taxed if the Obama tax plan is fully implemented.
Regardless of tax policy, the industry’s key concern is the stagnant economy. At press time, the banking situation is still clogged, and lenders are not extending sufficient credit. For some contractors, earning more than $250,000 may not even be a worry if the economy doesn’t get moving. But those who earn more than the proposed thresholds should brace themselves and plan their tax positions accordingly.