The first budget agreement of the new Congress reflects not only its ability to at least reach agreement on a budget framework, but also the priorities of that new Congress and the new administration for tax legislation for the current year. Very little in the tax portion of the budget agreement comes as a surprise, except perhaps for the period of time that some of the proposals cover.

The budget agreement calls for $861 billion in tax cuts over five years and $97 billion in revenue raisers, for a net cut of $764 billion. The key tax cuts are the extension of the 2001 and 2003 cuts for those earning less than $250,000, three years of Alternative Minimum Tax relief, estate tax reform, and a two-year extension of the ever-growing list of regularly expiring provisions.

2001/2003 TAX RELIEF

The extension of 2001 and 2003 tax relief for those with earnings under $250,000 can be looked at in two different ways. The Democrats prefer to think of it as a tax cut for those earning under $250,000. The Republicans prefer to think of it as a tax increase for those earning over $250,000. For the same reason, one can look at either the provisions being extended or the provisions not being extended.

Included in the 2001 and 2003 tax relief provisions being extended are the 10 percent tax bracket, marriage penalty relief (size of the standard deduction and 10 and 15 percent tax brackets), the current size of the child tax credit, the expanded education incentives (expanded 529 plans, increased Coverdell ESA contributions, and the above-the-line deduction for higher education expenses), and the reduced marginal rates and capital gain rates for those earning under $250,000.

Items not included in the list, and therefore being left to expire at the end of 2010, are reduced marginal rates and capital gain rates, including dividend rates, for those earning more than $250,000, and the phase-out of the phase-out of itemized deductions and exemptions. Since Congress and the administration have not yet defined the term "earnings" in the context of the $250,000 figure, and since the two top tax brackets irrespective of filing status do not correspond closely to a $250,000 earnings figure, some tinkering with the brackets or the definitions will be required to make the distinction in treatment of those taxpayers earning above or below $250,000.

Other tax provisions from the 2001 and 2003 legislation that would presumably also be extended for those earning less than $250,000, but not specifically highlighted in the budget agreement, would include the expanded Earned Income Tax Credit, the expanded dependent care credit, the expanded adoption credit, the increase in IRA contributions and the availability of catch-up contributions, and the use of deemed IRAs.

AMT RELIEF

Rather than the typical one-year extension and inflation adjustment of the AMT exemption, the budget blueprint provides for a three-year extension. Otherwise, however, the form of the relief appears to be the same that we have come expect - an annual inflation-adjusted increase in the AMT exemption amount and allowing nonrefundable credits for AMT purposes. The three-year extension probably puts off talk of more fundamental AMT reform, unless it is included in the tax reform panel recommendations expected at the end of 2009.

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