Now that the election is over, the partying has begun for our next President’s enthusiastic supporters. Meanwhile, President-Elect Obama and the Democrats are getting ready to enjoy almost complete control of government policy, something no party has come close to having since 1965.
Change is in the air, so let’s review the changes Obama promised to deliver on the tax front. I gathered my information from the Tax Policy Center and the Kiplinger Letter.
• Those with adjusted gross incomes of $250,000 or less for married couples and $200,000 or less for individuals will get a tax cut on federal income taxes and will have no increase in the current capital gains tax. He gave no indication of how much of a tax cut people in this income bracket will receive.
• For couples with AGI of over $250,000, he will increase the top two income-tax rates to 36% and 39.5%, add a 2% payroll tax, and phase out itemized deductions. That will effectively increase the top bracket from today’s 35% to 45%. For couples with AGI of over $250,000 and individuals with AGI of over $200,000, he will also increase the maximum capital-gains rate from 15% to 20%.
• On Social Security taxes, he will maintain the current wage base of $106,800, indexed for inflation. He will impose an additional tax of 2% to 4% paid by employers and employees on earnings exceeding $250,000.
• There will be a new windfall profits tax on oil companies, and he will use the revenue generated by this tax to “spread the wealth around” by giving a $1,000 rebate to every taxpayer.
• Corporations will continue to pay the second highest corporate taxes in the world. There will be no decrease in tax rates, and a number of tax deductions and incentives will be eliminated, effectively raising taxes on corporations.
• He will exempt seniors who have adjusted gross incomes of less than $50,000 from paying any income taxes. Seniors with income of over $60,000 will have to pay their full tax liability.
• He will suspend the annual required minimum distributions from IRAs for Americans 70 and older. This is so folks over 70½ who don’t need to withdraw money from their IRAs won’t be required to, as they are under the current law. This won’t help seniors who need the money to live on.
• You will be able to withdraw up to $10,000 from an employer-sponsored retirement plan without any penalty in 2008 and 2009. You will still have to pay any state and federal income taxes on the withdrawal.
• Every employer will have to offer 401(k) plans and IRAs.
• We will see a tax credit of up to $500 per person ($1,000 per family) to offset payroll taxes on the first $8,100 of wages. That credit could be made retroactive to January 1, 2008.
• There will be a 10% mortgage-interest credit for homeowners who don’t itemize deductions.
• He will replace the current college tuition subsidies with a refundable tax credit.
• He will maintain the current alternative minimum tax exemption for middle-income Americans and index it to inflation. I assume this applies to taxpayers earning under $250,000.
• He will make permanent the estate tax exclusion of $3.5 million and tax rate of 45%, the same as 2009 levels.
Obviously, for now these are proposals, not policies. We won’t know until early next year how many of them will actually happen. It’s safe to assume, however, that there will be changes. Pay attention to those changes before you make tax-related plans for 2009 or even file 2008 returns.