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Obama’s Final Budget Contains Far-Reaching Tax Proposals

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Feb 16th 2016
Senior Tax Analyst Thomson Reuters Checkpoint
Columnist
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On Feb. 9, President Obama released his federal budget proposals for the 2017 fiscal year. The US Treasury Department’s “General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals” (the so-called “Greenbook”) was released later that day. New proposals in the budget include dramatically altering the way capital gains are taxed, largely eliminating “stepped up” basis, modifying two key provisions in the Affordable Care Act, and providing a number of incentives to encourage retirement savings and expand access to savings programs.

Although many of these proposals are unlikely to become law, the budget nonetheless is a strong policy statement that may well influence the tone and direction of the coming tax debate in the presidential election, both in respect to politicians who generally align themselves with his objectives and those who vehemently disagree with them.

The process for passing a budget generally begins with the president submitting a comprehensive detailed budget request to Congress. Then, the House and Senate Budget committees typically hold hearings on the president’s budget request, inviting White House officials to testify (which the committees’ chairmen have decided not to do this year), then pass their own respective budgets, which are in turn negotiated by the full House and Senate before passage of a single congressional budget resolution. The budget resolution is then the basis of annual appropriation bills.

For the 2017 fiscal year (i.e., starting Oct. 1, 2016), spending levels have already been set by the Bipartisan Budget Act of 2015, and the president’s budget stuck to them. The president’s budget is essentially a suggested method of allocating the agreed-upon funds.

According to reports, some lawmakers oppose the agreed-to spending levels and might be unwilling to pass a budget of any sort based on those figures.

The proposals would generally apply for tax years beginning, property placed in service, and other triggering events occurring after Dec. 31, 2016.

Business Tax Proposals
In his budget, the president introduced the following business tax proposals:

  • Implement a new $5,000 per-student “Community College Partnership Tax Credit” for businesses that hire graduates from community and technical colleges, as an incentive to encourage employer engagement and investment in these education and training pathways.
  • Impose a new “financial fee” – i.e., a 7 percent basis-point fee on liabilities of large, highly-leveraged financial institutions.
  • Increase the maximum Code Section 179 expensing limit to $1 million, indexed for inflation.
  • Expand simplified accounting for small business and establish a uniform definition of “small business” for accounting methods.
  • Increase the limitations for deductible new business expenditures (to $20,000) and consolidate provisions for startup and organizational expenditures.
  • Expand and simplify the tax credit provided to qualified small employers for nonelective contributions to employee health insurance, by increasing the maximum number of employees a qualifying employer can have to 50 and increasing the threshold at which the credit begins to phase out to 20 employees.
  • Simplify and expand the research tax credit.
  • Permanently extend the Work Opportunity Tax Credit (WOTC), currently in effect through 2019, expand the definition of a “qualified veteran,” and provide that qualified first-year wages of up to $12,000 paid to such individuals would be eligible for the WOTC.
  • Raise the Federal Unemployment Tax Act (FUTA) wage base in 2018 to $40,000 per worker, index the wage base to wage growth for subsequent years, and reduce the net federal unemployment insurance tax from 0.8 percent (after the proposed permanent reenactment and extension of the FUTA surtax) to 0.167 percent.

Tax Changes for Individuals
The president’s plan calls for numerous changes to be made for individuals, including those that:

  • Increase the top tax rate on capital gains and dividends to 24.2 percent (plus the 3.8 percent net investment income tax, for a total top rate of 28 percent).
  • Consolidate the Lifetime Learning Credit into an expanded American Opportunity Tax Credit (AOTC), and make the AOTC available for five years and refundable up to $1,500. Index for inflation the refundable portion of the AOTC and the expense limits.
  • Increase and expand the Earned Income Tax Credit (EITC) for workers without qualifying children and noncustodial parents (i.e., such that taxpayers who are otherwise eligible for the EITC but who reside with qualifying children for whom they do not claim an EITC can now claim the EITC for themselves).
  • Create a “Second-Earner Tax Credit” for married couples where both spouses work.
  • End the loophole that allows some high-paid professionals to avoid paying Medicare and Social Security payroll taxes, and close gaps between the Self-Employment Contributions Act (SECA) tax and the net investment income tax (NIIT) to ensure that all high-income individuals fully contribute to Medicare, either through the NIIT or through payroll or SECA taxes.
  • Repeal dependent-care flexible spending accounts and increase the Child and Dependent Care Tax Credit, with a larger credit for families with children under age 5. The full credit would be available to working families with incomes up to $120,000.

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