Key Components of the Obama Tax Framework

After months of political wrangling, President Obama and the Republicans came to an agreement on a “framework” that would have Republican support. As of yet there is no legislative language or even a comprehensive outline of the proposals, and there is significant objection by the Democrats so its passage by isn’t assured.  We still believe that a compromised Bill (some where between the Bush tax cuts and the Clinton era tax structure) will pass Congress.  Maybe even before the end of the year?

From a taxation perspective, the “framework” would significantly reduce (or at least not increase) taxes for individuals and business.  Here are the major components of the “Framework” as we understand it:

  • Individual tax rates would remain under the Bush-era tax rates for two years for all taxpayers. Current rates would remain in place, with a top rate of 35%.
  • Long-term capital gain rates would remain at its historic low of 15% for two years.
  • Dividend rates would remain at 15% for two years.
  • A 2% cut in the employee’sportion of payroll (FICA) taxes for 2011. The change would make the tax 4.2% instead of 6.2% on the first $106,800 of wages per worker. We assume this would also reduce the employer match portion, but we do not have clarification.
  • Alternative minimum tax will be “patched” for 2010 and 2011.  See prior Blog posts for an outline of the AMT issue.
  • Estate tax provision for 2011 and 2012 that has a top rate of 35% and an exemption of $5 million per individual. We expect a considerable opposition by the Democrats on this provision.  I think this is the “ask for everything and a kite” strategy and settle for everything. It is also unclear how or if the estates of those who died in 2010 would be affected by the agreement.
  • The framework doesn’t address several popular “extenders” that will expire this year, but White House officials said they were included in the agreement for 2010 and 2011. Among them: transfers of IRA assets to charities by those over age 70½; a state and local sales-tax deduction for itemizers; an additional standard deduction for real-estate taxes; and a deduction for teachers’ expenses.
  • Federal unemployment benefits would be extended at their current level for 13 months, through the end of 2011.
  • An extension of the $1,000 child credit and refund treatment for two years.
  • Expand the Earned Income Tax Credit for larger families and married couples
  • Maintain both the higher-education tax credit and its partial refundability for two years.

We will keep you posted as this develops and more concrete provisions become available.

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