New Obama Budget Proposal Includes Old Tax Increases and Some Surprises

Pres. Obama released his fiscal year 2015 budget proposal on March 4, 2014.  Most commentators view the proposal as a political document designed for the elections this fall.  Nevertheless, some tax proposals have a way of finding themselves law in the future and so it is important to be aware of the proposals.

The following tax increases are proposed:

·       Increase IRS funding by 6.3% to increase the number of tax audits.

·       Reduce the tax rate benefit of itemized deductions to 28% (which impacts taxpayers paying tax at the higher 33%, 35%, and 39.6% rates).

·       Implement the so-called “Buffett Rule” to require millionaires to pay no less than a flat 30% tax on income after the deduction of charitable contributions.

·       Prevent individuals from saving additional money in tax-preferred retirement accounts once their accumulated balances exceed roughly $3.2 million per person.

·       Require non-spouse beneficiaries of IRAs and qualified plans and annuities to fully distribute the inherited account by the end of the fifth year.
·       Require Roth IRAs to make lifetime minimum required distributions when the account owner turns age 70 1/2 (currently only Roth 401(k) accounts are required to make lifetime MRDs).

·       Increase the estate, gift, and generation skipping tax (GST) rate from 40% to 45%.

·       Lower the estate tax and GST exemptions from $5.34 million to $3.5 million.

·       Lower the gift tax exemption from $5.34 million to $1.0 million.

·       Require grantor-retained annuity trusts (GRATs) to have a minimum 10-year term and to have a remainder value greater than zero.

·       Eliminate the benefits of sales to “defective” grantor trusts by coordinating the income tax rules with the transfer tax rules.

·       Limit the duration of the exemption from GST tax to 90 years for “dynasty” trusts created after the date of enactment.

·       Eliminate the unlimited number of permitted annual gift tax exclusions for gifts of present interests of $14,000 in favor of a flat $50,000 per donor for all gifts.

·       Require professional service business profits to be subject to Social Security and Medicare taxes regardless of whether the business is conducted through an S corporation, an LLC, or a limited partnership.

·       Repeal the last-in, first-out (LIFO) method of inventory tax accounting.

·       Limit the amount of real estate like-kind exchange gain that can be deferred to $1 million per taxpayer per year after 2014.

·       Tax “carried interests” (partnership or LLC profits interests) as ordinary income instead of long-term capital gain.

·       Eliminate the specific identification method and require the average cost method for identifying the cost basis of stocks purchased after 2014.

Several new tax-cut proposals are proposed:

·       Permanently increase the Section 179 equipment expensing limit from $25,000 to $500,000.

·       Permanently extend the research and experimentation tax credit (expired after 2013).

·       Permanently increase the exclusion for qualified small business stock to 100%, and extend the time for tax free reinvestment from 60 days to 6 months for stock held for more than 3 years.

·       Make the expanded American Opportunity Tax Credit for college costs permanent.  It is currently scheduled to revert to the lower credit amount after 2017.

·       Allow non-spouse beneficiaries of IRAs and qualified plans to rollover the inherited balances within 60 days (presently only spouse beneficiaries can do so).

·       Eliminate required minimum distributions for those who attain age 70 ½ if the IRA balance is $100,000 or less.

·       Establish the MyRA savings bond announced in the state of the union address.