Barack Obama's election as the next President of the United States of America may bring changes to the federal tax system. President-elect Obama had many proposals covering nearly every important area of the tax code, including income tax rates, the estate tax, social security and payroll taxes, and capital gains and dividends taxes. Here is a summary of some of the important proposals he has made.
American Opportunity Tax Credit
The Obama tax plan modifies the current Hope credit for higher educational expenses. The plan includes a fully refundable 100 percent credit for education expenses up to $4,000. When a student enrolls, the credit is delivered directly to the higher education institution. Each student is required to perform 100 hours of community service to receive the tax credit.
Capital Gains Tax
Currently, the capital gains tax is 15 percent for filers in the top two income tax brackets (those who file jointly and have income over $250,000 or those who file individually and have income over $200,000). Approximately 2.5 million tax filers are in the top two income tax brackets. Under the Obama tax plan, the tax rate for capital gains for filers in the top two income tax brackets increases from 15 percent to 20 percent. The tax rate on capital gains for tax filers not in the top two income tax brackets is lowered by the plan.
Corporate Income Tax
The Obama tax plan taxes those businesses in the top tier of corporate income at 35 percent, the same rate at which those businesses at the top corporate income tier are currently taxed. Businesses in the lower tiers of corporate income are taxed at a rate similar to the current rates.
The current dividends tax rate is 15 percent for filers in the top two income tax brackets. Under the Obama tax plan, the current rate increases to 20 percent for those filers in the top two income tax brackets. The tax rate on dividends for filers with income under $250,000 is lowered.
The Obama tax plan makes estate taxes permanent, keeping the top estate tax rate at its current 45 percent with a $3.5 million exemption. Currently, a one-year repeal of the estate tax is scheduled for 2010 but the Obama tax plan eliminates this repeal. The current deductions available for state estate taxes retain their current status rather than reverting to a tax credit. The state of Michigan currently has no separate estate taxes. The gift tax also remains in its current form.
Exemption for Seniors
Under the Obama tax plan, seniors earning less than $50,000 are exempt from income taxation. A primary taxpayer (and spouse, if applicable) age 65 or older is not required to pay income tax if the total of the taxpayer's untaxed Social Security benefits, tax-exempt interest and adjusted gross income is less than $50,000.
The Obama tax plan increases tax rates for filers in the high income tax brackets while reducing or keeping the rate the same for those in the middle and lower income tax brackets. The plan keeps the tax rates the same for those in the 10 percent, 15 percent, 25 percent and 28 percent tax brackets. For those currently in the 33 percent and 35 percent tax brackets, the tax rates increase to 36 percent and 39.6 percent.
Income Tax Exemptions
Fewer exemptions and reductions are available to those filers in the top two income tax brackets under Obama's proposed plan. The plan phases out personal exemptions and itemized deductions for filers in the top two income tax brackets.
Social Security Tax
President-elect Obama plans to solidify Social Security by adding an additional tax increase on high-income taxpayers of 2 to 4 percent. He has suggested that there may be some delay in pursuing legislation on this part of the tax proposal. However, this potential tax increase may include an additional 2 percent income tax surtax on adjusted gross incomes over $250,000, and a 2 percent payroll tax that employers would have to pay on employees' earnings for employees with adjusted gross incomes over $250,000.
Only time will tell if every part of President-elect Obama's tax plan becomes law, but this brief synopsis is designed to give taxpayers an idea of what they can expect in the coming years. If you have any questions or need assistance with future tax planning, please call any member of the Tax Law Group at Warner Norcross & Judd LLP.