President Obama’s Proposed Budget Contains Key Tax Changes
The Obama Administration in April 2013 advocated some important tax changes in its proposed budget for the 2014 U.S. fiscal year. These changes include:
- Capping the tax benefit of an itemized deduction at 28 percent of the claimed deduction; this means that most taxpayers in the three highest income brackets- 33 percent, 35 percent, and 39.6 percent- would see their income taxes increase. There are a variety of itemized deductions, but among the most important are the mortgage interest deduction and the charitable contributions deduction.
- The highest estate tax bracket would rise to 45 percent from 40 percent.
- The lifetime credit for gift and estate taxes would decrease to $3.5 million from $5.25 million.
- Taxpayers with income of at least a million dollars would be subject to a “Buffet” tax of at least 30 percent.
- Taxpayers with retirement account balances (IRAs, 401(k)’s, etc.) of more than $3 million would not be able to make deductible contributions to these accounts. The $3 million figure would be adjusted annually to take into account inflation and interest rate changes.
- Inflation would be measured with the chained consumer price index (“chained CPI”). Under this version of CPI, consumers facing higher prices are more likely to substitute cheaper, comparable alternatives. Chained CPI yields a lower estimate of inflation than the traditional CPI. This is important from a tax perspective because tax brackets are adjusted every year for inflation; if inflation estimates are lower than they would otherwise be, more taxpayers get “pushed” into higher tax brackets over time and consequently pay more in income taxes.
The Obama administration estimates that the tax changes in its proposed budget would increase tax revenue by $600 billion over the next ten years.