The $4 trillion budget plan for 2015 that President Obama presented on March 4 follows a recurring tax theme of his administration: bigger and better tax breaks for low-to-middle income families and reduced benefits for high-income taxpayers. Although few expect Congress to approve the budget, it does draw up the battle lines for a fight in Congress.
According to a CNNMoney article, the White House Budget Office estimates the plan would reduce the annual deficit to 1.6 percent of the size of the economy by 2024, or less than half of where it's projected to be that year by the Congressional Budget Office (CBO). Not surprisingly, much of the revenue the budget requires will have to come from higher taxes.
Here’s a list of several key proposals that will hit upper-income families in the wallet.
Buffett rule: Reiterating his prior position, the president called for the imposition of the Buffett rule, named after Warren Buffett, who first proposed it. The provision requires individuals with taxable income of more than $1 million to pay at least 30 percent of their income, after charitable donations, in federal income tax. The White House Budget Office estimates the Buffett rule will raise $53 billion over the next decade.
Limits on itemized deductions: The value of itemized deductions, as well as certain tax exclusions, would be limited to 28 percent of the amount claimed by high-income taxpayers. For instance, taxpayers with itemized deductions of $25,000 in the top 39.6 percent bracket would effectively reduce their tax liability by only $7,000 (28 percent of $25,000) instead of $9,900 (39.6 percent of $25,000). It is expected that this provision would apply mostly to single filers with taxable income above $200,000 and joint filers above $250,000. The White House estimates a $600 billion windfall over 10 years.
Retirement plan limits: The budget plan would prohibit contributions to tax-favored retirement plans, including 401(k)s and IRAs, once a combined balance exceeds a certain level. The cap would be based on various factors, such as the taxpayer’s age, inflation, and interest rates, and a calculation of a maximum benefit annuity at age 62. According a Tax Policy Center report, the cap would have been $3.4 million in 2013 for someone age 62, but just $1 million for a 40-year-old, CNNMoney reported. The Employee Benefit Research Institute (EBRI) estimates that the prohibition will initially affect a miniscule percentage of 401(k) participants, but the number would grow significantly over time.
Estate tax increases: Remember those “permanent” estate tax provisions that were enacted at the end of 2012? The president wants to restore the federal estate tax exemption and estate tax rate that were in effect in 2009. Thus, the estate tax exemption would be limited to $3.5 million, while the top tax rate would increase to 45 percent. The exemption can shelter up to $5.34 million from estate tax in 2014 with a top 40 percent rate in effect this year.
On the flip side, the president’s budget would expand the Earned Income Tax Credit (EITC) for workers without qualifying children. Currently, workers can claim the credit only if they are between the ages 25 to 65 and make less than $14,790 a year. The proposals would broaden the scope to an age range of 21 to 67 and increase the income limit to $18,070, according to a USA Todayarticle. Specific financial details are outlined in a Washington Postarticle.
In addition, the plan would exclude college Pell grants from income tax and enhance higher education credits for some families by excluding Pell grants from income. It would also permanently extend the American Opportunity Tax Credit (AOTC) for higher education expenses. Technically, the AOTC expired after 2013, although it could be revived retroactively again.
Moreover, the president would enhance the dependent care credit. Currently, the credit is equal to a maximum 35 percent credit (gradually phased down to 20 percent) for the first $3,000 of qualified expenses for one child of any age and $6,000 for two or more children. Under the proposed budget, the credit would increase to 65 percent of the first $3,000 in child care expenses for one child under age five and $6,000 for two children under age five. Taxpayers could also claim a credit of up to 30 percent on the next $1,000 for up to two of those children.
Finally, tax preparers will be interested to note that the budget calls for an increase in funding for the IRS. The increase would reportedly go to supporting tax compliance, tax enforcement, and customer service.
The new budget released by Obama follows close on the heels of a “first draft” of tax reform legislation released by Dave Camp (R-MI), the chairman of the House Ways and Means Committee. Camp’s plan targets some of the same tax loopholes but also differs dramatically in other respects. Neither plan appears likely to be approved by a divisive Congress – in fact, it would be shocking - but perhaps common ground can be reached before the end of the year.
About Ken Berry
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a wide variety of newsletters, magazines, and other periodicals.