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Obama’s State of the Union Proposes Major Tax Changes

January 22, 2015

Andrew S. Lattimer, CPA

During the January 20th State of the Union message, President Obama addressed a series of significant tax measures. The president proposed a number of tax increases that would generate revenue of approximately $320 billion over the next decade. He also suggested new and revised tax credits as well as a program to promote retirement savings. Among the president's tax-related proposals are the

Revenue Raisers:

  • Long-term capital gains and dividend tax rates would be increased to 28% for high-income households defined as taxpayers filing a married joint tax return whose income is greater than $500,000 annually.
  • Closing of the so-called "trust fund loophole" by requiring payment of capital gains tax on the increase in value of securities at the time they are inherited. This would eliminate the “stepped-up” basis loophole that lets wealthy taxpayers pass appreciated assets onto their heirs tax free, although the proposal would allow couples to defer the tax until the death of the second spouse. In addition, no tax would be due on inherited small, family owned and operated businesses unless and until the business was sold, and any closely held business would have the option to pay tax on gains over 15 years. Capital gains of up to $200,000 per couple ($100,000 per individual) could be bequeathed free of tax, with this exemption automatically portable between spouses. Couples would have an additional $500,000 exemption for personal residences ($250,000 per individual), with this exemption also automatically portable between spouses. Tangible personal property—other than expensive art and similar collectibles (e.g., bequests or gifts of clothing, furniture and small family heirlooms)—would be tax exempt.
  • A fee would be charged on large highly leveraged financial institutions in order to discourage excessive borrowing. This would apply to financial institutions with assets greater than $50 billion. 

Tax Credits:

  • Two-Wage Earner Tax Credit:  A credit up to $500 for households with two wage earners with combined income of up to $210,000. Families could claim a maximum credit equal to 5% of the first $10,000 of earnings for the lower-earning spouse in a married couple. The maximum credit would be available to families with incomes up to $120,000, with a partial credit available to couples with income up to $210,000.
  • Child Tax Credit:  The child tax credit could be increased to as much as $3,000 for each child under the age of five. Families could claim a 50% credit for up to $6,000 of expenses per child under five. The maximum credit for young children, older children and elderly or disabled dependents would be available to families with incomes up to $120,000.
  • Earned Income Tax Credit:  This credit would be doubled for workers without qualifying children, increasing the income level at which the credit phases out, and making it available to workers age 21 and older.
  • Education Tax Credits:  The six education-related tax incentives would be combined into just two, while improving the American Opportunity Tax Credit (AOTC) to provide students up to $2,500 each year over five years as they work toward a college degree. The refundable portion of the AOTC would be increased to $1,500. Part-time students would be eligible for a $1,250 AOTC (up to $750 refundable). 

In addition, many of the tax credits that are scheduled to expire after 2017 would be made permanent. 

Retirement Savings:

  • The proposal would require employers with more than ten employees that don't have a 401(k) retirement plan to automatically enroll full- and part-time employees in an individual retirement account. The employers, in turn, would receive tax credits to cover the costs involved. 

There is currently no timeframe proposed for these tax changes, and we expect the proposals to face much scrutiny by the current Republican-controlled congress. Our office will be closely monitoring the situation and keep you apprised as decisions are made.

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein.  Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities.  This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.


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