The next Congress and the Obama administration are expected to make major changes in both individual and business taxes, said a panel of Ernst & Young tax experts.
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"On the individual side, I think it's fair to say that the campaign won the election on the basis of taxes," said Gary Gasper, a member of the firm's Washington council. "The question is how do they fulfill those campaign promises and put that into law?"
Some of those changes include indexing and extending the alternative minimum tax patch, eliminating income taxes for senior citizens who earn less than $50,000 annually, offering a $4,000 refundable tuition credit and health insurance credits, and eliminating capital gains taxes for investments in startup companies.
Obama has also talked extensively about his plans to allow the Bush tax cuts to expire. That would effectively raise taxes on upper-income taxpayers who earn more than $250,000 per year and return the top individual rate to 39.6 percent. The capital gains tax rate would also go back up to 20 percent. Obama has also called for ending "tax breaks for companies shipping jobs overseas."
Gasper (pictured) believes Congress will take up many of the Tax Code changes proposed last year by House Ways and Means Committee Chairman Charles Rangel, D-N.Y. Those would reduce the corporate income tax rate to 30.5 percent or below, perhaps to 28 percent, but would also eliminate many of the deductions that corporations have been using to cut their taxes.
Some of Rangel's proposals would eliminate the AMT, increase the standard deduction, and expand the Earned Income Tax Credit and Child Tax Credit. Revenue offsets would include a 4.6 percent surtax on income more than $500,000, which could put the top individual income tax rate at close to 45 percent when combined with Obama's proposals. Rangel also wants to eliminate the Section 199 deduction for major oil and gas producers.
"Rangel introduced the 'mother of all tax reform' bills," said Nick Giordano, another member of Ernst & Young's Washington council. "This is something he wants to do."
Obama has proposed keeping the estate tax rate at 45 percent, but Giordano believes that other members of Congress may push to raise it to 55 percent. "In the House of Representatives you just need a majority to get anything done," he said. "It puts great power in the hands of Speaker [Nancy] Pelosi and Chairman Rangel."
Another hotly debated topic will be transfer pricing, which allows multinational corporations to receive tax benefits by shifting taxable assets between different foreign operations. "We've seen announcements from the IRS about devoting additional resources in that area and [Senate Finance Committee Chairman Max] Baucus has often talked about it," said Giordano. "It wouldn't surprise me if there are some legislative proposals with respect to transfer pricing."