More On Tax Planningfrom The Advisor's Professional Library
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
President Barack Obama’s proposed budget for FY 2012 contains a number of provisions to close budget deficits that will no doubt affect wealthy clients. While this budget will be parsed, dissected and debated, and may look very different once it is final, here is some of what's in the budget released Monday.
The Treasury’s “Greenbook,” which explains the proposals in the budget, sets out this overview: The budget “positions our nation to win the future and out-innovate and out-compete the rest of the world by including tax cuts to encourage needed investments in innovation, infrastructure, and education, including tax cuts for small business investment, clean energy, and research and development. While preserving these incentives, the President also believes that, to be competitive, we must pursue comprehensive corporate tax reform, and, as the President has announced, we are now looking at ways to lower the corporate tax rate and to pay for this by cutting corporate tax expenditures.”
The proposals acknowledge the need to help the economy grow and while decreasing the budget deficit. Most proposals that most directly affect wealthy clients involve higher taxes once temporary cuts expire in 2012.
Obama remarked in his Budget Message: “I continue to oppose the permanent extension of the 2001 and 2003 tax cuts for families making more than $250,000 a year and a more generous estate tax benefiting only the very largest estates. While I had to accept these measures for 2 more years as a part of a compromise that prevented a large tax increase on middle-class families and secured crucial job-creating support for our economy, these policies were unfair and unaffordable when enacted and remain so today. I will push for their expiration in 2012.”
What follows is a summary of provisions in the proposed budget that are likely to affect wealthy clients.
For those earning more than $250,000, tax breaks from 2001 and 2003, which were extended through 2012, would expire.
The budget says allowing the “tax on large estates” to expire at the end of 2012, going back to 2009 exemption and tax levels, coupled with allowing the income-tax break, above, to expire, will shave an estimated $963 billion from projected deficit between fiscal 2012 and fiscal 2021.
The proposal includes raising the qualified dividend and long-term capital gains tax to 20% from 15%, for those earning more than $250,000, beginning in 2013.
AMT Patch and Reduced Itemized Deductions
Speaking of “a tax system that’s a complex, inefficient, and loophole-riddled mess,” the President proposed a temporary “fix” to prevent the “Alternative Minimum Tax (AMT) from hurting many middle-class families.” The Budget proposed a three-year “fix to the AMT”—which was never meant to be paid by the middle class, but rather the highest earners—“that is paid for by an across-the board 30 percent reduction in itemized deductions for high-income taxpayers,” adding that the Administration will seek, with Congress, “a long term offset for these costs.”
Hedge Fund Taxation
The proposal also addresses investment partnerships, and carried interest, by proposing to eliminate “the carried interest loophole for hedge fund managers and other professional investors,” which it says allows for “services income” to be taxed at “capital gains rates, which are lower than the tax rates most moderate-income Americans pay on their earnings. Closing this loophole would raise $15 billion over the next 10 years.”
Deferred Interest Deduction on Foreign Source Income
The proposal would “defer the deduction of interest expense that is properly allocated and apportioned to a taxpayer’s foreign-source income that is not currently subject to U.S. tax.” It also proposes determining “foreign tax credit on a pooling basis.” Both of these provisions would, if enacted, be effective on Dec. 31, 2011.
Watch AdvisorOne for details and analysis of the tax changes proposed in the new budget.
Want to know how you can plan for clients now, for 2011 and 2012?
See “Outlook 2011, Tax Planning: Big Changes From Tax Bill; Extended Deadlines,” for the impact of the comprehensive Tax Bill passed in Dec. 2010.