President Obama has proposed many changes to the tax laws. What follows is a summary of tax hikes.
These proposals have not yet made it into law.
Tax Rates
Currently there are six tax brackets: 10%,15%,25%,28%,33%, and 35%. Those tax brackets were implemented in 2001 and are scheduled to expire at the end of 2010. Obama proposes to continue using the 10% through 28% tax rates and to replace the top two rates with 36% and 39.6% rates. How income is measured in determining the tax bracket would change. The 36% bracket would begin at $200,000 minus the standard deduction and one personal exemption for single filers, and at $250,000 minus the standard deduction and two personal exemptions for married filers. How tax rates are determined remains unchanged for the other tax brackets. The beginning of the 39.6% bracket was not explained in the Greenbook; for 2009, the highest tax rate begins at $372,950 for married filers. The new tax rates would begin in 2011.
Itemized Deductions
The tax value of itemized deductions would be further limited for higher-income filers. “The proposal would limit the value of all itemized deductions by limiting the tax value of those deductions to 28 percent whenever they would otherwise reduce taxable income in the 36 or 39.6 percent tax brackets,” according to the Greenbook. This limitation to the 28% bracket would apply even after deductions have been reduced.
Personal Exemptions
Personal exemptions are reduced for higher-income filers. This reduction is eliminated in 2010. President Obama would reinstate the reduction beginning in 2011 for single filers with income over $200,000 and married filers with income over $250,000
Capital Gains and Dividends
Currently qualified dividends and long-term capital gains are taxed at rate of 15% or zero percent for the taxpayers in the two lowest tax brackets. These rates are scheduled to expire at the end of 2010, at which time capital gains would be taxed at 20% and dividends would be taxed at ordinary income taxes rates. Obama proposes that capital gains and qualified dividends be taxed at 20% for taxpayers in the top two tax brackets of 36% and 39.6%, at 15% in the middle two tax brackets, and at zero percent in the lowest two tax brackets. The new rates would take effect in 2011.
The recently enacted health reform legislation (LAW) includes a 3.8% Medicare contribution tax on net investment income of higher income taxpayers. The tax is for tax years beginning after Dec. 31, 2012
3.8% Medicare tax on investment income
A 3.8% tax will apply to net investment income of higher income taxpayers. The tax for individuals is 3.8% of the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount. The threshold amount is $250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 in any other case.
