Obama's Final Budget Proposal Includes Sweeping Tax Changes
It’s unlikely that a sharply divided Congress will send President Obama off with parting gifts, but that didn’t stop the nation’s leader from including a “wish list” in the proposed budget for his final year in office. The proposals released on February 9 by the Obama administration include numerous tax provisions intended to increase tax savings for Americans of low-to-moderate means and stimulate business growth. Following is a summary of several key points gleaned from various media sources that may interest your clients.
Individual Tax Provisions
Higher education credits: The Lifetime Learning Credit (LLC) would be merged with the American Opportunity Tax Credit (AOTC) and made refundable for up to $1,500 for five years of study. Currently, the AOTC is refundable for up to only $1,000 for four years of study. Other changes would exempt Pell grants and student loan forgiveness from tax. There’s seems to be movement towards consolidating higher education tax breaks for taxpayers, but many high-income clients will still be shut out.
Community college credit: A new $5,000 credit would be created for employers that hire community college graduates. Also, a new program called “America’s College Promise” would provide two years of community college for free. While not as lofty as Democratic presidential challenger Bernie Sanders’ ambitions to provide free tuition at public colleges, you can let clients know that this proposal has a puncher’s chance.
Retirement plans: Reiterating proposals from past budgets, the president wants to increase retirement plan portability and open up such plans to more taxpayers, including a provision that would mandate employers with more than ten employers to offer IRAs. Obama would also facilitate multi-employer 401(k) plans and provide employers with fewer than 100 employees with tax credits of up to $4,500 for automatic IRA enrollment. As evidenced by the president’s recent success in initiating the MyRA, a common ground for retirement reforms may be reached.
Dependent care credit: Currently, the maximum credit is 20% of the first $3,000 of qualified expenses for a child under age 13 ($6,000 for two or more children), but phases down to 20% for taxpayers with an adjusted gross income (AGI) above $43,000. The proposal would provide a credit of $3,000 for children under age 5 with an AGI threshold of $120,000. But alert clients to this potential downside: Flexible Spending Accounts (FSAs) for dependent care expenses would be eliminated.
High-income taxpayers: The president would limit the tax benefit of itemized deductions to 28% for high-income taxpayers, while expanding the surtax on “net investment income” (NII) to include businesses not otherwise subject to payroll tax. Finally, Obama would impose a version of the Buffet rule requiring taxpayers to pay at least a 30% tax rate after charitable contributions. These proposals have been kicking around for several years without gaining much traction. The one your clients may have to worry about the most is the curb on itemized deductions. Read more on CPA Practice Advisor.