Wipfli Alerts & Updates: President’s Budget–Possible Significant Tax Changes Ahead

February 14, 2012
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Earlier this week, the Obama Administration released its Fiscal 2013 Budget, which includes over 100 proposed tax changes. Given the current unpredictable economic and political climates, it is pure speculation at this point which (if any) of the proposed changes will actually see the light of day.

Nevertheless, the proposed changes hint at ideas, including some rehashed proposals, that are on the government’s radar screen and should at least be considered when structuring current or pending transactions or planning your financial or estate matters. From an overall planning perspective, the proposed changes generally encourage acceleration of certain planning techniques to take advantage of today’s more favorable laws. We list below a very brief summary of several proposed changes that could impact our clients.

Please note that these changes are in addition to any changes set to take effect under the Health Care Law (e.g., additional 3.8% Medicare tax on unearned income for certain taxpayers starting in 2013). Some changes would be effective upon passage, while others would be delayed.

Overview of select budget proposals:

  1. Repeal “Bush Tax Cuts” in 2013 for individuals earning more than $200,000 per year ($250,000 if married), including:
    a. Reinstatement of the 36% and 39.6% tax rates
    b. Reinstatement of the phaseouts on personal exemptions and itemized deductions
    c. Reinstatement of maximum long-term capital gain rate of 20%
    d. Reinstatement of ordinary income treatment and tax rates for dividend income
  2. Extend the payroll tax cut (2% reduction on employee share of FICA taxes) through 12/31/12.
  3. Restore transfer tax laws after 2012 (estate, gift, and generation-skipping) to 2009 levels, including:
    a. 45% top tax rate and unified exemptions of $3,500,000 per person
    b. Permanent extension of portability provisions included in health care law
  4. Create and impose significant restrictions and limitations on the use of valuation discounts in valuing intra-family transfers of family-controlled entities.
  5. Eliminate the ability to make tax-free lifetime transfers using so-called “defective” grantor trusts.
  6. Impose a 10-year minimum term requirement on Grantor Retained Annuity Trusts (GRATs), which would limit the benefits available with GRATs.
  7. Extend favorable 100% bonus depreciation rules through 12/31/12.
  8. Create a new 10% credit for new jobs created and/or payroll wage increases by small businesses in 2012.
  9. Provide additional tax credits related to domestic clean energy manufacturing.
  10. Extend permanently the partially refundable American Opportunity Tax Credit for tuition and related expenses.
  11. Extend permanently and broaden the Earned Income Tax Credit for larger families.
  12. Provide automatic enrollment into IRAs for employees of small employers after 2013.
  13. Permanently expand the availability and amount of the child and dependent care tax credit.
  14. Extend income exclusion rules for cancellation of certain home debts.
  15. Provide tax incentives for locating jobs and business activity in the United States and prohibit tax deductions for shipping jobs overseas.
  16. Create a new “Manufacturing Communities” tax credit to encourage investments in communities affected by military base closures, plant closures, and mass layoffs. 
  17. Focus the domestic production activities deduction (DPAD) on manufacturing, with a larger (double) deduction for advanced manufacturing activities and disallow the deduction for oil and other fossil fuel production.
  18. Replace the current research credit with a 17% credit based on the alternative simplified credit (ASC). 
  19. Eliminate permanently the capital gains tax on certain small business investments. 
  20. Double the amount of currently deductible start-up expenditures. 
  21. Expand and simplify the Small Business Health Care Tax Credit.
  22. Tax carried interests as ordinary income. 
  23. Lengthen the depreciable life of private and corporate aircraft to seven years (12 ADS).
  24. Eliminate the LIFO method of valuing inventory.
  25. Provide numerous provisions designed to “reform” international tax, including:
    a. Limit the deferral of deduction of interest expense related to foreign subsidiaries
    b. Determine the foreign tax credit on a pooling basis
    c. Limit the shifting of income through intangible property transfers

As noted earlier, it is pure speculation at this point which (if any) of these proposed changes will actually become law. However, taxpayers cannot ignore the impact that these changes could have on current or pending transactions. If you have any questions, or for more information, please contact Rick Taylor, Ryan Laughlin, or your Wipfli relationship executive.

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