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.
ESTATE TAX REFORM
Perhaps the most unique tax proposal in the new budget outline would be the estate tax provisions, which would make the 2009 exemption amount and tax rates permanent, avoiding a situation in which the estate tax would be eliminated in 2010, along with the introduction of carryover basis, and then be followed in 2011 with the return of the estate tax and step-up basis, with only the pre-2001 exemption amount.
A new concept included as part of the estate tax reform would be to double the exemption amount for a married couple to $7 million, eliminating the need for multiple trusts to insure that the exemption amount of the first-to-die is fully utilized. This provision should greatly simplify estate planning for those individuals who could still be potentially subject to the estate tax in future years.
EXTENDERS
The growing group of regularly expiring provisions, last extended for two years by the Emergency Economic Stabilization Act of 2008, would be extended for an additional two years - through 2011. These extenders include, for individuals, the sales tax deduction, the tuition and fees deduction, and the deduction for out-of-pocket expenses of educators. For businesses, they include the recovery period for leasehold improvements and other, more-targeted depreciation and expensing provisions, business provisions with respect to charitable contributions, and several tax credits, including the new markets tax credit and the research credit.
Although the research credit is included in the proposal for a two-year extension, President Obama has included a permanent extension of the research credit as compensation to business as part of his proposals to curtail international tax abuse.
REVENUE RAISERS
The $861 billion cost of these tax cuts is partially offset by loophole-closers with an estimated five-year revenue-raising potential of $97 billion. The outline of the budget agreement only speaks generally of a focus on tax havens and abusive tax shelters, such as the sale-in, lease-out (SILO) and lease-in, lease-out (LILO) transactions.
Although not specifically identified, these provisions are likely to be similar to President Obama's proposals with respect to international tax reform, which carry a ten-year projected revenue-raising potential of $210 billion. These include delaying expense deductions until the related deferred overseas income is subject to tax, reform of the foreign tax credit, tightening of the qualified intermediary system for financial institutions, tightening reporting of foreign bank and financial accounts, curtailing disregarded entities in the international context, increased penalties and reporting, and extending the statute of limitations on international tax enforcement.
SUMMARY
The projected $861 billion five-year cost of the tax cuts included in the budget agreement includes $512 billion for extending the 2001 and 2003 tax cuts for individuals with earnings under $250,000, $214 billion for three years of AMT relief, $72 billion for estate tax reform, and $63 billion for a two-year extension of expiring provisions. To hold onto the support of the anti-deficit Blue Dogs in Congress, the budget agreement also incorporates the pay-go rules that had been in effect through much of the 1990s, but which often seemed to fall by the wayside during the 2000s.
It is still not clear whether these provisions will be taken up in one omnibus bill or considered in several different parts. That will probably depend on whether any particular item is considered controversial enough that its inclusion in an omnibus bill might slow or even endanger its passage.
Either way, the agreement reflects the priorities of the current Democratic leadership in Congress for 2009. More details should emerge as legislative language is drafted and the Treasury continues to refine the proposals as expanded in its Green Book for the year.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD. LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.
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