Obama’s budget: Impact on your taxes
President Obama, in his proposed 2011 budget, is calling on Congress to make a number of tax changes for individuals.
Some ideas are new. Many others were made last year, but not enacted by Congress. So the estimates of the revenue that may be raised by his proposals may be overly optimistic.
Across the universe of individual and corporate taxes, “what’s most striking is how little new ground [the president's budget] ploughs,” said Clint Stretch, managing principal of tax policy at Deloitte Tax LLC.
Here’s a breakdown of some of Obama’s key proposals for 2011 and beyond that would affect individuals:
High-income households
Let tax cuts expire: The 2001 and 2003 Bush tax cuts are scheduled to expire by 2011. Obama is sticking to his call to let those tax cuts expire for high-income households ($200,000 for individuals; $250,000 for families). The White House estimates close to $700 billion would be raised over 10 years.
This provision would raise the top two individual income tax rates to where they were in 2001, before passage of the Bush tax cuts. The 33% bracket would become 36%. And the 35% bracket would rise to 39.6%.
In addition, the long-term capital gains tax rate would increase to 20%, up from 15% currently.
The provision would also reinstate so-called phaseouts for high-income households, which would essentially reduce their eligibility for a host of personal exemptions.
The House may be amenable to letting the tax cuts expire in 2011 for wealthier Americans. But Stretch said it may be a tougher vote in the Senate, where there may be more of an inclination to wait until 2012 when the economy is expected to be on firmer footing.
Limit itemized deductions: The president proposes to cap at 28% the rate at which high-income households can itemize their deductions. Currently the value of a deduction is equal to the deductible amount multipled by one’s top income tax rate, which can range well above 28%. So deductions will be worth less to a high-income tax filer under the president’s proposal.
Capping itemized deductions is a proposal he made last year and it went nowhere. That’s in part because many in Congress said it would seriously curb charitable giving, even though that is not a foregone conclusion. If the measure gains any traction this year, it’s likely Congress would limit the cap to only certain types of deductions, thereby muting its revenue-raising effect.
The White House estimates that capping the rate on deductions could raise $291 billion over 10 years.
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