Is Tax Reform on the HorizonMay 17, 2013
Andrew S. Lattimer, CPA
Tax Reform Proposals
There are several tax reform proposals being bantered about. All of the proposals have one common goal: reduce the federal government's approximate $16 trillion federal budget deficit. To reduce the budget deficit, many of the plans propose to cut spending and raise revenues.
President Obama recently indicated that by August he wants a tax reform/deficit reduction package completed, and lawmakers have many proposals to consider. The president has introduced a $3.77 trillion budget for fiscal year (FY) 2014 with a host of tax reform proposals, the House and Senate Budget Committees have approved competing deficit reduction and tax reform blueprints, other committees are exploring ideas for tax reform and private groups, most notably authors of the Simpson-Bowles Plan, are also making proposals. Whichever proposals are adopted, the outcome is sure to impact your tax strategy and planning.
Tax Reform that Might Affect Individuals
The American Taxpayer Relief Act of 2012 (ATRA), signed into law on January 2, 2013, set the individual tax rates at 10, 15, 25, 28, 33, 35 and 39.6 percent for 2013 and beyond. The House GOP budget blueprint would consolidate the current seven individual income tax rate brackets into two rates. The lower rate would be 10% with the goal of a top rate of 25%. The Simpson-Bowles plan also calls for lower rates but does not specify the amounts; however, lower rates would be contingent on eliminating certain tax credits and deductions, possibly some popular ones such as the home mortgage interest deduction. President Obama has not proposed any changes to the current individual income tax rates.
President Obama has proposed a minimum 30% tax on individuals with incomes over $1 million (full phase in at $2 million). This was known as the "Buffett Rule" (now called the Fair Share Tax). President Obama would also limit the tax rate at which higher income individuals can reduce their tax liability to a maximum of 28%. This limit would apply to all itemized deductions; foreign-excluded income, tax-exempt interest, employer-sponsored health insurance, retirement contributions and selected above-the-line deductions. Another proposal would limit contributions and accruals on tax-favored retirement accounts, including IRAs, qualified plans, tax-sheltered annuities and deferred compensation plans.
The proposal made by Senate Democrats is similar. The Senate plan would impose across-the-board limits on itemized deductions claimed by the top two percent of income earners, by capping the rate at which itemized deductions and other tax preferences reduce tax liability, a percentage of income cap or a specific dollar cap. The Senate plan also proposes to change, without giving details, unspecified itemized deductions into tax credits.
Not surprisingly, the House plan, written by the GOP, does not include these proposals. Along with consolidating the individual tax rates, the House would repeal the 3.8% net investment income (NII) surtax and the 0.9% Additional Medicare Tax, both of which took effect in 2013. The House plan also calls for repealing the alternative minimum tax (AMT) and for tax simplification but does not give details.
Another proposal endorsed by the president but which will be a difficult sale in Congress is to increase the federal estate tax. ATRA "permanently" extended the estate tax at a maximum rate of 35% with a $5 million exclusion (indexed for inflation). President Obama wants to raise the maximum rate to 45% with a $3.5 million exclusion (not indexed for inflation) after 2017.
Tax Reform that Might Affect Businesses
A common goal for tax reform affecting businesses is reducing the U.S. corporate tax rate. Although the proposals take different approaches, President Obama has said he would support lowering the corporate tax rate in exchange for businesses giving up unspecified tax preferences. These could include tax incentives for fossil fuels, the Code Sec. 199 deduction and more. The House has proposed reducing the top corporate tax rate to 25%, which would largely be paid for by tax savings elsewhere. The Simpson-Bowles plan also calls for a reduction in the corporate tax rate, contingent on businesses relinquishing unspecific tax preferences.
President Obama and the House and Senate budgets also propose a number of incentives to encourage business spending and job creation. These include:
- Enhanced small business expensing (Obama and House but at different amounts);
- Permanent research tax credit (Obama, House and Senate);
- Temporary tax credit for increasing payrolls (Obama); and
- Special incentives for manufacturing in the U.S. (Obama).
Another key difference among the competing proposals: the House budget plan would repeal the Patient Protection and Affordable Care Act, including all of its business tax-related provisions, such as employer-shared responsibility provisions, the medical device excise tax and more. The Senate approved a non-binding resolution to repeal the medical device tax but is not expected to go along with repeal of the entire Affordable Care Act.
Tax reform coupled with deficit reduction is starting to gain momentum. Whether this will lead to legislation this summer or before year-end is unclear. As long as the key players continue their discussions, there is the chance of tax reform.
Andrew S. Lattimer, CPA, is a partner with BlumShapiro, the largest regional accounting, tax and business consulting firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with 340 professionals and staff, offers a diversity of services which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plan audits, litigation support and valuation and financial staffing. The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.
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