Hopefully you were not waiting until President Obama’s State of the Union address on January 20 to hear about his plans to shake up the tax laws. After all, the details of his tax plan had been leaked days earlier and the entire text of his speech was posted online before the event.
Apparently we have a new State of the Union address tradition. In each of his six previous State of the Union addresses he also proposed tax hikes.
Here are the more significant tax provisions that were proposed.
- Capital gains and dividends: President Obama proposes to raise the maximum tax rate on long-term capitals and qualified dividends to 28%, the same as it was during President Reagan’s administration. Currently, the maximum tax rate for upper-income investors is 20%, plus some individuals must add on a 3.8% surtax when their net investment income hits higher levels.
- Basis step-up: This refers to the tax benefit for a stepped-up basis for trust inheritances President Obama views as “perhaps the largest single loophole in the entire individual income tax code.” This proposed change would wind up treating bequests and gifts just like other transactions. Capital gains would be subject to the proposed maximum 28% tax rate. But no tax would be due for married couples until the second spouse dies and each individual could bequeath up to $100,000 tax-free. While this may seem as though it is for the “rich” I can tell you that almost any family member inheriting property will be stung by a bigger tax bill.
- Second-earner credit: A new credit of up to $500 would be available to married couples where both spouses work. The maximum credit could be claimed by families with an income of up to $120,000, with a partial credit available up to an income of $210,000. An estimated 24 million couples would benefit from this tax break. While a nice credit, it is certainly not going to change many financial lives in any real way.
- Higher education tax breaks: The president’s plan would consolidate six overlapping tax provisions for higher education into just two. According to the Whitehouse the plan would simplify and cut taxes for an estimated 8.5 million families. From a tax preparer and planner view, anything that simplifies this mess is okay with me, as long as some tax-reducing options still exist.
- Dependent care credit: Currently, a couple who pays child care expenses so they can work can claim a maximum credit of $1,050, or $2,100 for two or more children. But the maximum dependent care credit is restricted to $600, or $1,200 for two or more children, if income exceeds $43,000 (which is an awfully low threshold for high cost states like California or New York). The proposal would roughly triple the maximum credit amount to $3,000 and expand it to families with an income up to $120,000.
Now that Republicans control both chambers of Congress what are the chances that these tax proposals will sail through? Slim to none many say. But, maybe there will be some reaching across the aisle from both sides one of these days and some changes will stick. On the other hand, if recent history and rhetoric is deemed a better predictor then we may well never see any of these proposals come to life.
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