High-Income Earners Targeted for Tax Hikes in 2010 Federal Budget by jhon o

As anticipated, the president’s proposed budget for 2010 presents substantial tax increases on upper-income individuals. The U.S. Department of the Treasury released details in the General Explanation of the Administration’s Fiscal Year 2010 Revenue Proposals, also referred to as the Green Book, on May 11, 2009.

The proposed tax increases are intended for single filers with more than $200,000 of taxable income and joint filers above $250,000. But according to Andy Biebl, tax principal with LarsonAllen, the fine print indicates these thresholds would be reduced by personal exemptions and standard deduction amounts. As a result, single filers above approximately $190,000 of income and joint filers above roughly $230,000 are those in the bull’s eye for the steep tax increases.

Proposed tax increases and impact on capital gains

In summary, the Green Book includes these proposed tax hikes aimed at high-income individuals:

• The previous top 1040 tax rates of 36 percent and 39.6 percent from the President Clinton era would be restored, effective in 2011. Currently, the top individual tax rates are 33 percent and 35 percent.
• Similarly, the top capital gain rate and tax rate applicable to dividends would move from 15 percent to 20 percent. This change would also be effective for tax years beginning in 2011.
• These upper-income filers would again face the full phaseout of personal exemptions and a 3 percent of excess adjusted gross income (AGI) phaseout of itemized deductions. The effect of each of these phaseouts is to add about 1 percent to the effective tax rate. As a result, high-bracket filers would face an actual top rate of about 42 percent rather than the publicized 39.6 percent.
• Itemized deductions, such as charitable contributions and home mortgage interest and taxes, would be limited to a 28 percent deduction rate, even though the income of upper-bracket filers is taxed at 36 percent or 39.6 percent.

	Current	Proposed
1040 tax rates	33% and 35%	36% and 39.6%
Capital gain rate and tax rate applicable to dividends	15%	20%
Personal exemptions and itemized deductions	Fully deductible as of 2010	Phaseouts brought back (upper-income filers lose deductions as income increases)
Itemized deductions (charity, taxes, interest, etc.)	Deductible at same rates as taxable income	Deducted at top rate of 28%, even if income at 36% or 39.6%

“The overall direction of the budget suggests that high-income earners should consider accelerating gain transactions and other income recognition into 2009 or 2010, ahead of these increases,” says Biebl. He considers the impact on long-term capital gains to be particularly compelling. “A capital gain taxed at 15 percent in 2009 or 2010 would avoid a one-third rate increase when capital gains move to 20 percent in 2011.”

Estate and gift taxes

Another significant provision concerns the estate and gift tax system. The present 2009 exemption of $3.5 million per estate, as well as the 45 percent tax rate on the excess, would be extended permanently. The Obama administration also proposes toughening rules with respect to valuation discounts.

Alternative minimum tax (AMT)

The president’s initial tax proposals included repeal of the AMT, which would be enacted as part of the ordinary rate increase aimed at upper-income filers. However, the latest proposal is to keep the AMT on the books but index the exemption for inflation. Thus, high-income filers in states with significant income taxes, as well as those with large real estate tax deductions, would continue to face pressure from the AMT.

How we can help

If you would like to explore income-acceleration tax strategies or have questions about these proposals, contact us. For more information on the proposed tax increases, access the Treasury’s Green Book.