President Obama has put forward several tax proposals in his 2010 budget
for Congress to consider. These proposals are explained in the Greenbook (PDF, 135 pages) released by
the Treasury Department's Office of Tax Policy on May 11, 2009. These
proposals have not yet made it into law. If all of the Administration's
proposals are enacted, they would generate an additional $61.7 billion
in tax revenue for the federal government.
What follows is a summary of proposed tax changes for individuals and
small business owners. A more extensive summary is found in the Tax Briefing (PDF, 10 pages) from CCH.
Currently Americans workers are eligible for a refundable $400 tax
credit for 2009 and 2010. The full credit is available for unmarried
filers with income of $75,000 or less, and for married filers with
income of $150,000 or less. Obama proposes to make this tax credit
The EIC was changed for 2009 and 2010 to provide a higher tax credit for
families with three or more children, and the credit is made available
over a wider range of income levels. In 2008 and earlier, the earned
income credit maxed out at two children and had narrower income ranges
for married filers compared to unmarried filers. President Obama
proposes to make these changes permanent.
For 2009 and 2010, the child tax credit may be partially refundable
(meaning that taxpayers could, potentially, receive a tax refund higher
than the amount they paid in) based on a threshold amount of 15% of
earned income in excess of $3,000. This $3,000 threshold will revert
back to a threshold of $12,700 (indexed for inflation) in 2011. Obama
proposes to make the $3,000 threshold permanent, and the amount would
not be indexed for inflation. The Greenbook comments that if the law is
allowed to revert to the higher threshold amount, as many as "11 million
low-income families would have a tax increase as a result."
Currently, some taxpayers are eligible for a tax credit of up to $1,000
for saving money in a retirement plan such as a 401(k) or IRA. The tax
credit is non-refundable (meaning once the person's tax liability is
reduced to zero, any additional credits won't increase a person's
refunds). Obama proposes to replace the $1,000 non-refundable credit
with a refundable credit equal to 50% of retirement savings up to a
maximum of $500. (The credit amounts would be indexed for inflation.)
Additionally, the income range that qualifies for the credit would be
expanded. Taxpayers could ask the IRS to deposit the portion of their
refund that represents the Savings Credit directly into their retirement
Currently, taxpayers must set up and fund an Individual Retirement
Account (IRA) themselves. The Obama administration proposes that
employers automatically enroll employees in an IRA and deduct 3% of an
employee's pay to be deposited directly into the IRA, unless the
employee decides to opt out of the IRA program or decides on a different
funding amount. The administration would also provide guidance to
employers for choosing default investment options for how the IRA funds
are invested, and would provide employers with a tax credit of up tp
$250 for complying with the automatic IRA provisions. Employers that
provide 401(k) or other group retirement plans would not have to provide
automatic IRA enrollment.
Obama proposes to make the American Opportunity Tax Credit a permanent
replacement for the Hope Credit. Currently, the American Opportunity
credit is available for 2009 and 2010, and provides for a credit of up
to $2,500, of which $1,000 could be refundable. The credit is available
for tuition, books and course materials for the first four years of
Currently, taxpayers can chose to deduct either state and local income
taxes or state and local sales taxes as an itemized deduction. The sales
tax deduction is scheduled to expire in 2009. The Obama administration
proposes to extend the optional sales tax deduction to 2010.
President Obama has proposed many changes to the tax laws. What follows
is a summary of tax hikes, expanded information reporting requirements,
and higher penalties.
Currently there are six tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%.
Those tax brackets were implemented in 2001 and are scheduled to expire
at the end of 2010. Obama proposes to continue using the 10% through 28%
tax rates and to replace the top two rates with 36% and 39.6% rates.
How income is measured in determining the tax bracket would change. The
36% bracket would begin at $200,000 minus the standard deduction and one
personal exemption for single filers, and at $250,000 minus the
standard deduction and two personal exemptions for married filers. How
tax rates are determined remains unchanged for the other tax brackets.
The beginning of the 39.6% bracket was not explained in the Greenbook;
for 2009, the highest tax rate begins at $372,950 for married filers.
The new tax rates would begin in 2011.
Itemized deductions are reduced for filers with adjusted gross income of
$166,800 (for 2009) or higher. The amount of the reduction have been
gradually minimized from 2006 to 2009, and in 2010 there will be no
reduction in the amount of itemized deductions for higher-income filers.
In 2011, the reduction amount is scheduled to revert back to a level 3%
of AGI in excess of the AGI exceeding the certain threshold amount. The
Obama administration proposes to allow the law to revert back. Some
deductions are not subject to reduction: medical expenses, investment
interest, casualty and theft losses, and gambling losses. The threshold
amount would be $200,000 for single filers and $250,000 for married
filers, and those thresholds would be indexed for inflation.
The tax value of itemized deductions would be further limited for
higher-income filers. "The proposal would limit the value of all
itemized deductions by limiting the tax value of those deductions to 28
percent whenever they would otherwise reduce taxable income in the 36 or
39.6 percent tax brackets," according to the Greenbook. This limitation
to the 28% bracket would apply even after deductions have been reduced.
Personal exemptions are reduced for higher-income filers. This reduction
is eliminated in 2010. President Obama would reinstate the reduction
beginning in 2011 for single filers with income over $200,000 and
married filers with income over $250,000.
Currently qualified dividends and long-term capital gains are taxed at
rate of 15% or zero percent for the taxpayers in the two lowest tax
brackets. These rates are scheduled to expire at the end of 2010, at
which time capital gains would be taxed at 20% and dividends would be
taxed at ordinary income taxes rates. Obama proposes that capital gains
and qualified dividends be taxed at 20% for taxpayers in the top two tax
brackets of 36% and 39.6%, at 15% in the middle two tax brackets, and
at zero percent in the lowest two tax brackets. The new rates would take
effect in 2011.
Reporting on non-employee compensation is required only for payments of
$600 or more paid to individuals and to other non-corporate recipients.
The Obama administration proposes that information reporting be expanded
to include corporate recipients. Additionally, Obama proposes to
increase reporting requirements for certain types of life insurance
policies, requires contractors to provide businesses with their correct
name and taxpayer identification number, and would allow business to
withhold tax on non-employee payments at a rate of 15%, 25%, 30%, or
35%, with the rate of tax selected by the contractor. Obama would also
double the fines for failing to submit the required documents to the
Currently, American citizens and residents report to the US Treasury
whether they own bank accounts in foreign countries. Obama proposes to
expand the amount of information reported about foreign accounts.
Americans would be required to report transfers to or receipts from
accounts held abroad if they totaled $10,00 or more during the year.
Furthermore, Obama proposes that banks and other financial institutions
submit reports to the IRS about transfers made by Americans to foreign
bank accounts or about foreign accounts opened. Americans would also be
required to report information about their foreign accounts on their
income tax return in addition to filing the annual foreign bank account
report with the Treasury Department.
Repeated late filing of tax returns would become a felony, punishable by
up to five years in jail or a fine up to $250,000. A felony offense
would be failing to file a tax return in any three years within any
consecutive five-year period in which the total tax liability is at
least $50,000. Currently, failing to file a tax return is a misdemeanor
offense, punishable by up to one year in jail and a fine of not more
The penalty for writing a bad check (which currently covers only checks
and money orders) would be expanded to include any "commercially
acceptable payment," including electronic payments.
Currently the IRS cannot assess additional tax or initiate an audit
after three years from the date a tax return is filed. This three year
period also applies to receiving refunds from the IRS. Obama proposes to
allow the statute of limitations to be extended by up to two years for
federal changes in a tax return related to an audit by a state or local
Taxpayers would no longer have to submit non-refundable lump-sum or
periodic payments when requesting an offer-in-compromise from the IRS to
settle an outstanding tax debt. Starting in 2006, the tax laws required
a taxpayer to begin making payments on a proposed settlement at the
time that an offer is requested.