Tax Changes for Wealthy
2014 Budget Proposes Tax Changes for Wealthy
President Barack Obama has delivered a $3.77 trillion US government budget for 2014 that contains a number of tax law changes of interest to preparers.
The proposal intends to reduce the deficit by nearly $2 trillion during the next decade, through a combination of new revenues and budget cuts. The president says his proposed budget is not his ideal plan to cut the deficit, but an effort at compromise to end what he says has been a cycle of short-term, crisis-driven decision-making.
The 2,000-page document includes tax changes aimed at generating revenue. These include:
- A cap on the value of itemized deductions: As he has proposed before, the president wants to limit the value of itemized deductions and exclusions for high-income households. Normally a taxpayer multiplies her top tax rate by the amount of a deduction to calculate the taxes saved. But Obama would cap that rate at 28%, which is below the top two income tax rates. So someone in the 39.6% bracket today would save $39.60 on a $100 deduction. Under Obama's proposal, she would save $28.
- Enact a “Buffett Rule.” Last year, Obama proposed the "Buffett Rule" as a guiding principle for tax reform, so that people earning more than $1 million paid their "fair share" of federal tax -- which he defined as a minimum of 30%. This year, he will include a more concrete version similar to one proposed in a bill last year by Sen. Sheldon Whitehouse, according to a senior official. The Senate legislation would impose a minimum 30% effective federal tax rate on those with adjusted gross incomes above $1 million, although it phases in for those making between $1 million and $2 million. Taxpayers subject to the Buffett Rule would still get a break for charitable deductions when calculating what they would owe under the Buffett Rule.
- Impose new limit on tax-deferred retirement accounts: Among his new tax measures, Obama would set a limit on the tax-advantaged portion of an individual's savings across IRAs and other tax-preferred retirement accounts. The account balance threshold would be based on what could finance an annuity of $205,000 a year in retirement. In 2013, that would be $3 million, the administration estimates. At that threshold, the proposal would affect far less than 1% of IRA and 401(k) account holders, according to estimates from the Employee Benefit Research Institute. Depending on how the threshold is adjusted in future years, however, that percentage could rise significantly.
- Raise tax rate on investment fund manager income: Managers of private equity, venture capital and hedge funds are taxed 20% on the portion of their compensation known as carried interest, essentially paying the long-term capital gain rate. Obama wants carried interest to be treated as ordinary income. The result: fund managers could pay a rate as high as 39.6%, or more than 2.5 times the rate they pay now.
by Industry Writer, Dave McClure
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