Obama’s 2013 budget takes aim at wealthy

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President Barack Obama’s fiscal year 2013 budget released Monday doesn’t contain any big surprises on the tax front. The president has talked about many of the proposals in recent months and included some of them in previous budget proposals.

The president did, however, take a few new approaches to reach his long-held, but not yet accomplished, tax goal of increasing taxes on wealthier individuals.

Alternative tax replaced by Buffett Rule: The alternative minimum tax, for example, has long been a Washington, D.C., target. Many lawmakers in both parties have urged elimination of this parallel tax, which Congress must tweak each year so that it won’t hit middle-class taxpayers because it is not indexed for inflation.

Obama would replace the alternative minimum tax with the Buffett Rule. This proposal, named after billionaire businessman Warren Buffett who got a lot of attention when he said his secretary faced a higher income tax rate than he did, would impose a 30 percent minimum tax on individuals with an annual income of at least $1 million.

Higher taxes on some investments: Another budget target is earnings of private equity fund managers.

This occupation was in the spotlight when Republican presidential candidate Mitt Romney revealed that he paid around 14 percent in taxes on the millions he earned as a fund manager because that money was taxed at the lower capital gains tax rates. Obama wants to tax such profit-based compensation at ordinary income tax rates.

As for the investment income of others, Obama’s budget would hike the current 15 percent capital gains tax rate to its previous 20 percent level. It also would treat certain dividends earned by individuals making more than $200,000 annually and married couples making more than $250,000 a year as ordinary income rather than as lower-taxed capital gains.

However, investment earnings of taxpayers in the 10 percent and 15 percent income tax brackets would remain untaxed under this budget proposal. And those taxpayers in the current 20 percent, 25 percent and 28 percent tax brackets still would pay capital gains at the 15 percent tax rate.

Ending top Bush tax cuts: The president renewed his annual call for ending the Bush-era tax rates on higher ordinary income.

The two current top tax rates, now at 33 percent and 35 percent, would increase to 36 percent and 39.6 percent. The remaining tax rates — 10 percent, 15 percent, 25 percent and 28 percent — would remain on the books.

If the Bush-era rates are allowed to expire as scheduled on Jan. 1, 2013, the top rates would increase and the lowest 10 percent rate would disappear.

Reducing some deductions: In addition to facing higher taxes on all types of earnings, wealthier taxpayers would see the value of their itemized deductions reduced.

They also would face phased-in limits on foreign excluded income, tax-exempt interest, employer-sponsored health insurance, retirement contributions and selected above-the-line deductions.

Permanent American opportunity: The American opportunity credit, worth $2,500 for college costs, is a temporary replacement of the Hope education credit. It is set to expire at the end of 2012, with the lower $1,800 Hope amount to return. The president wants the more generous American opportunity tax credit to be a permanent part of the tax code.

Estate tax limits: One area where Obama might find some broader Congressional support is his estate tax proposal. The current estate tax is set to expire at the end of 2012 and revert to pre-Bush tax levels of a $1 million exemption and top rate of 55 percent. Obama wants to keep the exemption level at the current $3.5 million with a 45 percent tax on the excess.

Obama’s tax proposal

The proposal How it would work
Buffett Rule. People making more than $1 million would pay a minimum of 30% in federal taxes, but it’s unclear what counts as income or if the proposal creates a income tax bracket.
Keep Bush tax cuts for almost all. The top 2 income tax brackets would increase from 33% and 35% to 36% and 39.6% — what they were under Bill Clinton. In other words, single filers making more than $178,650, married-jointly folks making more than $217,450 and head-of-household filers making more than $198,050 would get a tax increase.
Change estate tax. The estate tax would jump by 10 percentage points from 35% to 45% with a $3.5 million exemption.
Limit itemized deductions for the rich. Taxpayers in the top two income tax brackets would see their itemized deductions drop from 33% or 35% to 28%.
Raise taxes on investment fund managers. Currently, managers of private equities and hedge funds pay 15% on capital gains (aka “carried interest”). This proposal would tax capital gains at regular income levels, instead of a flat tax.
Make the American opportunity credit permanent. Allows college filers to get up to $2,500 a year in tax credit for college expenses.