As President Obama completes his last year in office, his budget for the 2017 fiscal year is complete. The budget proposal includes a plethora of tax changes. These changes will affect taxpayers on individual and corporate levels.
The most extensive changes, however, have been made to business taxes. Included is a “wish list” of sorts that the President wishes to see put in place. Some of these items are not expected to pass in Congress as it is Republican-dominant.
Changes to Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is mentioned in the President’s tax changes portion of the budget. Those that do not have a qualifying child and non-custodial parents may be increased to $1,000. Section 32 would be expanded to allow those in the age groups of 21 – 24 and 65 to 66 potentially eligible for the credit.
A secondary earner may also qualify for a credit up to roughly $500. For this particular credit, a married couple must exist of two-employed parties.
Married couples adjusted gross income (AGI) is greater than $120,000 would be disqualified from taking the credit.
Dependent Care Credits
If President Obama’s changes to child and dependent care credits is approved, the credit would be tripled to $3,000 per child. The qualifying children would be less than 5 years of age. The phasedown limit would increase and again, those earning $120,000 or more per year would be disqualified. Flexible spending account for childcare expenses would be discontinued.
Credits for Education
The education credit section of Section 25A is not seeing many changes. The biggest change involves combining Section 25A with the American opportunity tax credit. The tax credit would be expanded to make it available for a period of 5 years and a maximum refund of $1,500.
A positive move would make Pell Grants tax exempt. The grants would also be exempt from calculation into the American opportunity tax credit. Taxable cancellation-of-debt income would no longer include student loan forgiveness if this inclusion is part of the approved budget for the 2017 fiscal year.
Some changes are also listed for community colleges. The Community College Partnership Tax Credit would allow employers of local businesses to take a $5,000 tax credit. The credit would be available for local businesses that support community colleges and hire local community college graduates.
High-Income Taxpayer Reductions and Capital Gains Changes
Proposed changes limiting the value of deductions and exclusions from taxpayer AGIs and itemized deductions have been submitted. This would, however, come with a reduction to 28-percent of the value of specific deductions and exclusions. It would apply to those in the 33-percent, 35-percent and 39.6-percent tax brackets.
Net investment income also has inclusions for expansion including gross income and gain from trades and business transactions on an individual level. This income would not be permitted to be subject to employment taxes.
The “Buffet rule” would come into play in these proposed changes requiring higher-income earning individuals to pay a minimum of 30-percent income tax, minus charitable contribution deductions.
In terms of proposed changes to capital gains taxes, the President would increase the capital gains tax rate to 28-percent. This would include 3.8-percent net investment income tax as well.
Reform of Corporate Taxes
The President has proposed a reduction in the corporate tax rate. His proposed new rate is a flat 28-percent plus 19-percent minimum on foreign earnings. Any foreign income that went untaxed previously would be taxed at 14-percent on a one-time basis.
Earnings stripping and corporate inversions would not be allowed any longer.
Estate Tax Changes
Those planning to receive an inheritance or any type of income from an estate would be subjected to the previous tax rate of 45-percent. Exclusions are included at $3.5-million for estate and generation-skipping transfer taxes. Indexing for inflation would be non-existent with a $1-million gift tax exclusion.
The Cadillac Tax
The Cadillac Tax is known as an excise tax paid on high cost employer-sponsored health coverage. The new proposal would make the threshold for applicable taxes to be equal to the greater of the current law threshold or average premiums for state specific gold-plans in the marketplace.
This change is proposed to protect employers. Employers living in a high-cost state for medical coverage are subject to paying The Cadillac Tax.
Miscellaneous Proposed Tax Changes
President Obama has touched on multiple tax subjects in his fiscal year 2017 budget, including an oil tax. The fee per barrel would be $10.25 and has been estimated to produce $319 billion over the period of a decade.
Changes are also proposed for tobacco and clean energy. The President want to see higher taxes on tobacco products raising funds to expand necessary community programs for education, social workers and in-home nursing care. In terms of clean energy tax credits, there would be several permanent tax incentives in place along with new energy credits as incentives for commercial businesses. The budget proposal includes the elimination of $4 billion/year in subsidies to gas, oil and fossil fuel production companies.
It is important to remember that all of these proposed tax changes must pass Congress. Congress has the ability to approve all or a portion of a proposed change. The changes would not go into effect in the 2016 tax year. The next President to take office may propose changes to the fiscal budget reversing or improving some of these changes, should approval be granted.
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