Along with setting general spending limits for federal agencies, the budget includes a variety of proposals that could have a significant impact on taxes and the investment climate. Although it is unlikely that many may become law exactly as proposed, they reflect key economic issues and could indicate the potential direction of fiscal policy.
Tax Changes
The most pressing tax issue could be the scheduled expiration of the Bush-era tax cuts enacted in 2001 and 2003. These affect federal income tax rates, the estate tax, and taxes on capital gains and dividends. The budget proposes that the estate tax revert to 2009 levels ($3.5 million exemption and top tax rate of 45%), that other reductions become permanent for taxpayers with modified adjusted gross incomes of $200,000 or less ($250,000 for joint filers), and that reductions expire as scheduled for those with higher incomes.1
Congressional action — or lack of action — on taxes could affect Americans across the income spectrum. However, a major focus of debate may be on investment income for high-income taxpayers. If the cuts are allowed to expire at the end of 2012, the maximum tax rate on long-term capital gains would revert to 20% from the current 15%, and dividends would be taxed as ordinary income.2 This change could make dividend–paying stocks less attractive for high–income taxpayers.
The budget also contains a new proposal that would cap the value of certain itemized deductions (including tax-free interest) at 28% for taxpayers in the 36% and 39.6% brackets (which would be in effect if income tax rates return to pre-2001 levels).3 Beyond the direct impact on individual taxpayers, this provision might affect borrowing costs for local governments.4
AMT Alternative
The president wants the alternative minimum tax (AMT) to be replaced with a minimum tax on incomes exceeding $1 million, but there is no specific provision for this in the FY 2013 budget.5 Because the AMT is not indexed to inflation, the income level subject to the tax has been progressively raised by Congress in a series of “patches.” So far there has been no patch for 2012, which could subject more than 31 million taxpayers to the AMT.6 It seems likely that Congress may enact another patch for this year, but the budget could spur debate regarding a more permanent solution to the AMT.
RMD Relief
Under current law, required minimum distributions (RMDs) from tax-deferred retirement accounts must begin at age 70½. The proposed budget would eliminate RMDs if an account holder™s total balance in such accounts does not exceed $75,000. This would allow retirees with low balances to make withdrawals on their own timetables.7
Business Stimulus
The budget contains a number of proposals aimed at stimulating American business activity. If these proposals are enacted, the potential impact on the economy is uncertain, but they bear watching. Among the key provisions are:8
- Tax credits to support investment in communities that have experienced major job losses.
- A temporary 10% tax credit for new jobs and eligible wage increases.
- Tax incentives to encourage moving jobs back to the United States and to discourage outsourcing.
Spending Cuts
As required by the 2011 Budget Control Act (BCA), the budget proposes significant spending cuts, including a $32 billion decrease in military spending, which is the beginning of a $487 billion reduction over the next decade that could affect both the military and the defense industry.9
The budget also includes wide-ranging cuts to social service programs. However, Social Security is exempt from the BCA, and Medicare spending — which would be reduced by more than $300 billion over the next decade — would be temporarily increased as a result of repealing the formula for setting physician rates.10
Although many budget issues may not be addressed until after the November elections, they are likely to be the focus of substantial political discussion. For now, it would be wise to keep an eye on continuing developments.
1–3, 7–8) CCH, 2012
4) InvestmentNews, February 13, 2012
5) The New York Times, February 16, 2012
6) Tax Policy Center, 2011
9) thehill.com, February 13, 2012
10) businessweek.com, February 17, 2012
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Tax Advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2012 Emerald Connect, Inc.
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Good Article About Breaking Down the Proposed FY 2013 Budget.
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