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Exceeding Expectations. Always. — Business Advisors and CPAs

Obama Budget Has Few Surprises

Before I discuss some of the more interesting items in the proposed 2013 federal budget I should mention something that is already in the works.  The two percent reduction in the employee’s share of FICA has been extended through the end of 2012.  This means 2% more of gross earnings go directly to the worker.  It’s an extra $2,202 in the pockets of those who make at least the Social Security limit of $110,100.  This is good news for wages earners and self-employed alike. 
 
New tax proposals that are up for consideration in the President’s current budget are increases in the top two individual tax brackets.  The 33% bracket will rise to 36% and the 35% bracket will go to 39.6% if the budget proposal is accepted.  Higher earners could also be limited to a tax benefit of 28% on their itemized deductions.  Dividend earners could get hit the hardest.  The budget proposes to eliminate the favorable 15% dividend tax rate and begin taxing dividends at the regular tax rates.  If you take the 39.6% bracket add the 3.8% investment tax surcharge and factor in the phase-out of deductions and exemptions, which adds maybe another 1.5%, the tax on dividends could be construed to be nearly 45% - triple the current rate.
 
On the estate side the proposals are just as top heavy.  The budget lowers the estate tax exemption from $5,000,000 to $3,500,000 and increases the tax rate from 35% to 45%.  In addition to that many estate tax reduction methods such as estate freezes and the use of certain trusts are also in the crosshairs.
 
These proposals are intended not just to fill the federal coffers, but also to make room for lowering corporate taxes – something that is mentioned in the budget in the vaguest of terms.  So there you have it - very clear wording on increasing taxes and “uncertainty” with regards to potential tax cutting. I think that tells us what we need to know – the future holds increased taxes.  Multi-year planning has never been more important than this year so I encourage you to be proactive while there is still time.