Filed under: Investing
President Obama released his budget proposal yesterday, and as expected, it included a number of new provisions that would dramatically change the tax laws once more, with impacts on taxpayers up and down the income scale. The Obama proposal comes as a clear disappointment to anyone who believed that the resolution to the fiscal cliff crisis at the beginning of the year would prove to be the last word on the tax front, but for those who want to see further revenue increases as part of a broader solution to address the national debt, the budget’s tax provisions address some of their concerns.
Let’s take a look at some of the budget’s most important tax proposals and the impact they could have on both individual and corporate taxpayers, as well as the businesses that serve them.
Limited tax savings for itemized deductions and municipal-bond interest
The biggest revenue-raising part of the Obama budget would limit the value of itemized deductions, including the mortgage interest deduction, to 28%. That would impact only high-income taxpayers above the $200,000 and $250,000 income thresholds for single and joint filers, respectively, costing them as much as 11.6 percentage points in tax savings. Because of the high-end focus, the impact on industries like the homebuilding sector that benefit from customers taking advantage of those deductions would be limited, with luxury-oriented companies Toll Brothers and Ryland more at risk than homebuilders aimed at lower price points.
Implementing the Buffett Rule
The budget also wants to ensure that those with taxable income above the $1 million mark pay an effective tax rate of 30%. The mechanics of implementing what’s become known as the Buffett Rule would include a phase-in of the tax for incomes between $1 million and $2 million, representing a further increase for those highest-income taxpayers with extensive deductions other than charitable contributions.
Lower inflation adjustments for tax-related provisions
The same proposal to link Social Security benefits to the chained Consumer Price Index would also have an impact on taxes. The budget would use the chained CPI to adjust tax brackets, personal exemptions, and standard deductions, leading to slower increases in those figures going forward. Unlike the limits on itemized deductions, the inflation adjustment provisions would affect all taxpayers.
Maximum amounts in IRAs and other retirement accounts
The budget would limit IRA, 401(k), and other tax-favored retirement balances to about $3 million. Combined with increases on carried-interest tax rates, this provision would capture hedge-fund managers and other investors who’ve used retirement accounts as successful high-growth investing vehicles.
A new cigarette tax
The Obama budget would hike federal taxes on cigarettes by $0.94 per pack. Altria and other cigarette manufacturers would inevitably get hurt by such an increase, as it would add yet another impediment to cigarette demand that has already been falling sharply for decades.
Lower estate tax exemptions