As President Obama and the Republican leadership head into “fiscal cliff” negotiations, we need to strongly consider the Obama Campaign Promises and how they may play into the future tax landscape. Although, there is no guarantee that these proposals will be enacted into law, we need to at least consider them during our year end tax planning.
Here are some of the Obama Proposals and how we view them playing out in the current tax negotiations.
- The current corporate tax rate is 35 percent, which could be lowered to 28 percent, with an even lower 25 percent rate for manufacturers.
- Manufacturers currently receive a 9 percent deduction on qualified domestic production income. The deduction for most taxpayers could be increased to 10.7 percent and the deduction for high-technology manufacturing companies could be increased to 18 percent. Fossil fuel production would no longer be eligible for the deduction.
- Research and development tax credit being made permanent.
- Companies may currently use the last in, first out (LIFO) inventory method. The President’s tax plan would repeal LIFO.
- The current Tax Code contains targeted deductions for taxpayers in specific industries. President Obama’s proposed changes would eliminate many targeted provisions available to fossil fuel industries (oil, gas and coal) while renewable energy incentives might be extended or increased.
- The current top tax rate of 35 percent, reduced by the Bush-era tax cuts, is set to expire at the end of the year and revert to 39.6 percent. President Obama has proposed extending the tax cuts for married taxpayers with less than $250,000 in annual income or single filers with less than $200,000 in annual income, but not for taxpayers above that income level.
- If no action is taken before the Bush-era tax cuts expire, the tax rate on dividend income will rise from 15 percent to the top individual tax rate (39.6 percent), and the tax rate on long-term capital gains will rise from 15 percent to 20 percent. President Obama has proposed maintaining the 15 percent long-term capital gain rate for taxpayers with income less than $250,000. He has also proposed retaining the 15 percent dividend rate for taxpayers with income less than $250,000.
- Taxpayers currently must pay the greater of regular income tax or the alternative minimum tax, which has a top tax rate of 28 percent. President Obama’s proposed tax plan would permanently extend the AMT and indexes AMT exemption for inflation. It also creates the “Buffet rule,” which states that households earning more than $1 million per year would pay a minimum 30 percent income tax rate.
- Individuals may claim certain itemized deductions and personal exemptions without limit. President Obama made two proposals during the campaign: eliminate itemized deductions for housing, health care, retirement and childcare for individuals with more than $1 million in annual income, and limit the benefit of itemized deductions to 28 percent for taxpayers in higher rate brackets.
We believe President Obama will have huge gains in this area. We believe that a majority of the “anti-rich” taxing policies will find their way into future tax law. This will move us and most of our business clients into more corporate structures. We anticipated this in 2010 before President Obama extended the “Bush Era Tax Cuts”, but based on hs recent victory we do not anticipate him backing down from this position.
- U.S. tax on income from foreign subsidies generally is deferred until the earnings are repatriated into the United States. Foreign taxes paid generally are available as a credit against the U.S. tax liability on foreign income. President Obama proposed continuing the current system with some modifications: impose a minimum tax on income earned from foreign operations whether repatriated or not; close loopholes related to leveraged foreign distributions, covered asset acquisitions and earnings stripping; and impose an excess returns tax on inappropriate income shifting to overseas subsidiaries.
- Currently, U.S. corporations generally are allowed to deduct interest expense occurred to acquire foreign subsidiaries. The President’s proposal limits interest expense deductions related to foreign profits not repatriated.
- President Obama proposed offering a credit to companies moving jobs back to the United States and disallowing deductions related to moving jobs out of the country.
This sounds like good “pro-American” tax policy but it is much harder to have passed into law. We do not anticipate a significant change in this area. However, we are optimistic that some of the repatriation rules are eased to bring foreign earned income to the US for job creation and capital investment.
As these negotiations play out, we think that the President’s proposals regarding individual tax policy will be prevalent. However, we expect the Republicans to pick up major gains in pro-business policy regarding corporate law and international law (particularly repatriation incentives).
We will keep you posted as these negotiations progress and the potential planning opportunities. If you have any questions or need any additional information regarding these proposed changes, please do not hesitate to contact us.