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Election 2012: Where are taxes headed?

How Obama, Romney differ on tax reform

by on
in Small Business Tax,Small Business Tax Deduction Strategies

Compare the two sides on tax issuesAs the presidential election draws closer, tax reform is definitely on the table. President Obama and Mitt Romney have offered different tax proposals.

Strategy: Compare the two sides on tax issues. This could help determine your choice when you cast your ballot on Nov. 6.

A lot can change between now and Election Day, but here’s a capsule summary of the latest points of view:

Individual income taxes

Tax rates are scheduled to be automatically adjusted upward in 2013 with the two top brackets moving to 36% and 39.6%, up from the current top two rates of 33% and 35%.

Obama: Make the “Bush tax cuts” permanent for all taxpayers except single filers with income above $200,000; $250,000 for joint filers. Specifically, Obama would preserve the current Bush tax rates for the lowest three existing brackets (10%, 15% and 25%) but raise the top two rates to 36% and 39.6%.

Romney: Reduce the current rates by 20% each. Thus, the bottom rate would be only 8%; the top rate would fall to 28%.

Capital gains and dividends

This is another part of the Bush tax cuts. Net long-term capital gains and qualified dividends are taxed at a maximum 15% rate in 2012 (0% for lower-income investors). The maximum tax rate for long-term gain will automatically increase to 20% in 2013 (10% and 15% for lower-income investors), while dividends will be taxed at ordinary income rates of up to 39.6%.

Obama: Increase the maximum long-term capital gain rate to 20% and tax dividends at ordinary income rates for single filers with income above $200,000; $250,000 for joint filers.

Romney: Extend the current capital gain and dividend rates, but exempt from tax all capital gains, dividends and interest for single filers with adjusted gross income (AGI) up to $100,000; $200,000 of AGI for joint filers.

Alternative minimum tax

Unless Congress patches the alternative minimum tax (AMT) again, this “stealth tax” will affect millions of additional middle-class taxpayers in 2012. The tax impact will be even greater in the future.   

Obama: Make annual AMT inflation adjustments permanent instead of relying on Congress to pass legislation to do this year after year.

Romney: Repeal the AMT.

Tax breaks

To help reduce the deficit and offset lower income tax rates, many current tax loopholes would have to be closed or tightened.

Obama: Limit the amount of itemized deductions and other tax breaks to taxpayers with an AGI above $200,000. Currently, most high-income earners claim itemized deductions without any phaseout rules, which results in reducing taxes by 33% or 35% of the itemized write-offs. Obama would reduce the tax-saving benefit to 28% of affected itemized deductions. He has also proposed a permanent extension of some expanded tax breaks for the middle class, like the tax credits for higher education.

Romney: Has not yet specified which tax breaks could be eliminated or reduced to help pay for proposed tax cuts, but he has indicated certain tax benefits could be limited for high-income earners.

Estate and gift taxes

Among other expiring provisions, an estate may benefit from an inflation-indexed estate tax exemption of $5.12 million and a top estate tax rate of 35% in 2012. The exemption is scheduled to drop to $1 million in 2013, while the top rate will rise to 55%.

Obama: Restore the estate tax exemption to $3.5 million and a top 45% estate tax rate (i.e., use 2009 levels).

Romney: Repeal the estate tax completely, but preserve the gift tax with a top rate of 35%.

Corporate income tax rates

For 2012, the top income tax rate for corporations is 35%. According to estimates in a Congressional study, eliminating all corporate tax breaks would, without any loss of tax revenue, effectively reduce the top rate by 5.6% to 29.4%.

Obama: Reduce the top rate to 28% and pay for it by eliminating corporate tax breaks.

Romney: Reduce the top rate to 25% and pay for it by reducing corporate tax breaks.

Tip: Taxes are one of the hot political topics of 2012. Expect more to come.

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