Overview of Individual and Business Tax Provisions in President Obama’s Fiscal Year 2014 Budget

Overview of Individual and Business Tax Provisions in President Obama’s Fiscal Year 2014 Budget

On April 10, 2013, the President called “on Congress to immediately begin work on corporate tax reform that will close loopholes, lower the corporate tax rate, encourage investment here at home, and not add a dime to the deficit,”  and released his federal budget proposals for fiscal year 2014.  The President proposed significant changes to the Internal Revenue Code that will have a material impact on business and individuals. Except as otherwise noted, the proposals would generally apply for tax years and events occurring after December 31, 2013.

Business Tax Proposals

• A one-time, 10% tax credit for an increase in wages and/or new hires, up to a $5 million increase.  The credit would be applied to small businesses with less than $20 million of total wages paid in 2012.
• Permanently extend increased expensing of qualified property (including off-the-shelf computer software) under §179, with a $500,000 deduction limit and phase-out beginning at $2 million.
• Permanently extend the Work Opportunity Tax Credit and modify its calculation to equal 20% of the excess of qualified wages and health insurance costs paid.
• Increase the rate of the alternative simplified research credit (ASC) from 14% to 17%, after Dec. 31, 2012.
• Beginning in January 1, 2015, require certain small businesses to enroll their employees in a direct-deposit Individual Retirement Account.
• Repeal the last-in, first-out (LIFO) accounting method. Taxpayers required to change their inventory method would report their beginning-of-year inventory at its first-in, first-out value.
• Deny deductions for punitive damages paid or incurred after Dec. 31, 2014.
• Permanently double the maximum amount of start-up expenditures that a taxpayer may deduct from $5,000 to $10,000.

Tax Changes for Personal, Gift and Estate Taxes

• Reduce the value of itemized deductions to 28% for families with income in the top three highest tax brackets (33 – 39.6%).
• Implementation of the “Buffett rule” by requiring millionaires to pay no less than 30% of income (after charitable contributions) in taxes. This would be referred to as the “fair share tax.”
• Permanently extend the American Opportunity Tax Credit (AOTC), a partially refundable tax credit worth up to $10,000 per student over four years of college after Dec. 31, 2017.
• Prohibit individuals from accumulating over $3 million in tax-preferred retirement accounts.
• Beginning in 2018, return the estate, generation-skipping transfer (GST), and gift tax exemption and rates to 2009 levels. The top tax rate would be 45%.   The exclusion amounts would be $3.5 million for estate and GST taxes, and $1 million for gift taxes.
• Require Grantor Retained Annuity Trusts (GRATs) to have a minimum term of ten years and a maximum term of the life expectancy of the annuitant plus ten years.  A remainder interest must have a value greater than zero at the time the interest is created, and any decrease in the annuity would be prohibited.

At this time, these proposals are still pending, but some are expected to pass without debate.  Others, such as changes to personal tax rates and the estate tax proposals are expected to be further examined by Congress.