The plan for Economic Growth and Deficit Reduction recently released by President Obama offers a view into specific tax provisions that Congress may be asked to enact before the end of the year.
The President’s proposals include, for individuals, changes to personal income tax rates, itemized deductions, long-term capital gains, qualified dividends, the estate tax and carried interest. Business proposals would hit payroll taxes, expensing for capital expenditures, worker classification and accounting for inventory.
“Some of the provisions have already been talked about before and not gone very far,” said Patricia Thompson, chair of the AICPA’s Tax Executive Committee.
Thompson, a tax partner at Providence, R.I.-based Piccerelli, Gilstein & Company LLP, noted the Bush tax cuts of 2001 and 2003. While the Administration supported their extension last December, the President’s proposal now says they were unfair and unaffordable at the time they were enacted and remain so today.
”If the increase is put into place for those making over $250,000, their rate could be as high as 39.6 percent, but they would get the benefit of itemized deductions in that tax bracket,” Thompson said. “But the plan includes a proposal to limit the value of their itemized deductions to 28 percent. [The President’s proposal] makes reference to the Reagan years, but at that time income as well as deductions were taxed at 28 percent.”
The effect of the proposal would be that higher-income taxpayers would lose 11.6 percent of the benefit of their itemized deduction, according to Thompson. “You can’t calculate the tax someone pays by looking at the brackets because they’ve lost the benefit of 11.6 percent of their itemized deductions,” she said. “If they have itemized deductions of $100,000, you multiply that by 11.6 percent and that’s the additional tax they have to pay.”
Consequently, it will be more difficult for those taxpayers to understand what their maximum tax rate is, she observed. “And with the additional Medicare contribution on unearned income in 2013, a wealthy individual with primarily dividend or interest income could be subject to an additional 3.8 percent added to their rate of 39.6 percent.”
The Buffet Rule in the President’s plan states that no household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. This rule will be achieved as part of an overall reform that increases the progressivity of the Tax Code, according to the plan.
The importance of the Buffett Rule fades if the Bush tax cuts lapse, Thompson noted. “The Buffett Rule is significant when dividend and capital gains are taxed at 15 percent rather than at ordinary income rates,” she said. “But if the Bush tax cuts lapse, dividends will be taxed at ordinary income rates, and capital gains are projected to be at a 20 percent rate.”
One of the President’s proposals would reverse the worker classification provision in the Revenue Act of 1978, which prohibits the IRS from reclassifying workers as employees if they meet certain requirements. It would permit the IRS to issue generally applicable guidance about the proper classification of workers and let the IRS require prospective reclassification of workers who are currently misclassified and whose reclassification is prohibited under the special provision.
Whether by coincidence or design, it should be a plus that the IRS has already announced a new voluntary worker classification settlement program that would enable employers to resolve past worker classification issues and achieve certainty by voluntarily reclassifying their workers.
“It’s always helpful if the IRS allows people to come under a voluntary program,” Thompson said. “Otherwise, businesses might be afraid to switch because of potential exposure to back employment taxes.”
