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Looking Ahead to 2009: Obama's Plan
– December 1, 2008
Now that the dust has settled on the “Election of a Lifetime,” it’s time to take a closer look at how President-elect Obama’s tax proposals will affect your personal situation. It is likely that the current economic crisis, budget constraints, and congressional influence will morph the final product into something quite different than what is proposed. However, a brief study of the plan as it relates to current tax law can be used to make an educated prediction of what the future holds.
Current Tax Law
Under President Bush, tax rates for all Americans were gradually lowered. However, because of the “Sunset Rules,” Congress must take action before the end of 2010 or all of President Bush’s tax cuts will expire and rates will increase on all taxpayers. The following is a summary of the Bush tax cuts:
- Personal income tax rates reduced to 10, 15, 25, 28, 33, and 35%.
- Capital gains and dividend rates cut to 15% for higher income earners and completely eliminated for taxpayers in 10% or 15% brackets.
- Estate tax exemption to increase to $3.5 million for 2009 with top rate of 45% and completely repealed in 2010.
- Limitations on itemized deductions and personal exemptions completely eliminated in 2009.
Obama’s Plan
President-elect Obama has proposed a series of tax credits for lower and middle income families that would be offset by increasing taxes on higher income earners. The following is a summary of Obama’s proposed tax increases and credits:
- Raise 33% and 35% percent personal income tax rates to 36% and 39.6% respectively.
- Increase capital gains and dividend rates to 20% for families with income over $250,000.
- Impose 4% social security tax on income over $250,000.
- Stop repeal of the estate tax and maintain $3.5 million exemption and rate of 45%.
- Restore itemized deduction and personal exemption phase-outs.
- Maintain 35% corporate tax rate (2nd highest in industrialized world).
- Institute $1,000 refund of payroll taxes under “Making Work Pay” program.
- Allow $800 “Universal Mortgage Interest Tax Credit” for non-itemizers.
- Implement various other tax credits for lower to middle income wage earners.
Economic Environment
Historically, the economy has been a high priority for any President. However, President-elect Obama has emphatically stated that it will be his number one concern upon taking office. The challenges he faces are numerous and include the following: record budget deficit, growing national debt, frozen credit markets, record home foreclosures, declining home values, increasing unemployment, volatile energy prices, skyrocketing health care costs, and the waging of two wars. Each of these factors has contributed to a plummeting stock market that has seen major averages down as much as 40 percent.
The banking industry and companies such as AIG have been “bailed out” using taxpayer dollars to prevent them from failing. Currently, the automakers are asking for their own “bail out.” The only question left to answer is who is next. The chart below illustrates the impact that certain economic factors have had on tax rates.
| Budget Deficit |
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| War Spending |
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| National Debt |  |
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| Sagging Economy |  |
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| Rising Unemployment | |
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| Health Care Spending | |
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| Social Security Shortfall | |
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| Financial Bailouts | |
Congressional Influence
Congress will ultimately determine the substance and form of the tax plan that reaches Obama’s desk. Based on the overwhelming majority Democrats hold in the House and Senate, the tax legislation is likely to resemble the current proposal introduced by Rep. Charlie Rangel - D, Chairman of the House Ways and Means Committee. Rangel’s plan includes the following:
- Introduction of 4% “replacement” tax on higher income individuals.
- Restoring limitations on deductions and exemptions.
- Subjecting S Corp distributions to shareholder-employees to self-employment taxes
- Reducing corporate tax rate to 30.5%.
- Repealing domestic production activities deduction.
- Permanently extending Section 179 expensing for small businesses.
Final Thoughts
Only time will tell if President-elect Obama’s plan is implemented in its current form and how it will affect individuals, businesses, and the economy. Widespread uncertainty about what the future holds can make financial decisions extremely difficult.
Individuals should try to get back to basic financial fundamentals like controlling spending, staying liquid, diversifying portfolios, using debt sparingly, and continuing to remain flexible. Also, with the risk of a tax increase almost certain, now may not be the best time to defer the recognition of income. Conversely, the deferral of deductions to later years may be optimal.
Michael Fulco
318-429-2107
mfulco@hmvcpa.com
Michael is currently serving a fall internship with the firm while working on the completion of his MBA from Louisiana State University in Shreveport. Michael has accepted a position in our tax department and will be joining the firm full time in January.