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Obama’s ‘Green Book’ proposals could put you in the red

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in Leaders & Managers,Management Training,Small Business Tax,Small Business Tax Deduction Strategies

The Department of the Treasury has formally released its explanations of President Obama’s tax proposals for the 2010 fiscal year. The long-awaited “Green Book” (named for the color of the cover) provides vital in-depth information for both individual and business taxpayers.

Alert: The proposed tax changes hit hard. Revenue-raisers aimed at individuals total more than $736 billion over 10 years while business tax cuts amount to $71 billion over the same period.  

Here are the highlights of the Green Book proposals:

Income tax rates:
The two top individual tax rates would revert to 36% and 39.6% after 2010. The administration has proposed these rates for single filers with income above $200,000 and joint filers with income above $250,000. The 28% bracket would be expanded to insulate middle-income taxpayers from a tax increase.

Tip:
It’s not yet clear if the dollar thresholds would apply to adjusted gross income (AGI) or taxable income. Rates based on AGI would hit more taxpayers.

To add insult to injury, itemized deductions for individuals with income above the stated dollar thresholds would be allowed only against a 28% rate.

Several temporary individual incentives would become permanent, including the following:

  • The Making Work Pay credit (with income phaseouts indexed for inflation)
  • The American Opportunity Education Tax credit
  • The expanded earned income tax credit
  • The enhanced child tax credit.

Capital gains: The tax rate for long-term capital gains and qualified dividends would increase to 20% for single filers with income above $200,000 and joint filers with income above $250,000. The current zero and 15% rates would be extended permanently for other taxpayers.

Tip:
This scenario creates tax incentive to sell appreciated capital assets in 2009 and 2010.

Retirement plans:
The Obama administration would require employers without retirement plans to offer automatic enrollment for IRAs through payroll deductions. Small employers (i.e., those with fewer than 10 employees) would be exempt. Employers could claim a temporary tax credit ($25 per employee up to $250 each year for two years). Also, more individuals would become eligible for the retirement savings tax credit.

Estate and gift taxes:
This area is already in flux, but the administration would further modify the rules for valuation discounts. Generally, the basis of assets given or bequeathed would be limited to the value of the asset for estate- or gift-tax purposes. Additional reporting requirements would also be imposed. Finally, minimum terms would be required for grantor-retained annuity trusts (GRATs).

Tip:
It’s unlikely the one-year repeal of the federal estate tax in 2010 will ever come to pass.

Small business provisions: The Green Book is a mixed bag for business owners. The tax breaks include permanent adoption of the research credit and elimination of capital gains tax on investments in qualified small business stock (QSBS). Also, the administration wants to allow a five-year carryback rule for net operating losses (NOLs) for more businesses (see Have an NOL for '08? Apply for a fast refund).

But these benefits would be partially offset by the repeal of the last-in, first-out (LIFO) accounting method for inventory, expanded information reporting, bigger penalties for failing to file information returns and a new penalty for failing to comply with electronic filing requirements. Other technical modifications would create tax revenue.

Tip: The proposed LIFO repeal is the big item on the agenda. LIFO reserves would have to be recaptured as taxable income spread over an eight-year period.

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