Press Room: Tax Release

January 20, 2015

Obama Seeks to Raise Taxes on High Income Individuals

The White House released the President’s plan to raise taxes on high-income individuals and the financial sector ahead of the State of the Union address.

Proposed Tax Increases

The President’s proposed tax increases for high income individuals and the financial sector include:

  • Treats the transfer of appreciated assets upon death as a taxable event thus triggering capital gains tax on unrealized gains 
  • Treats the gift of an appreciated asset as a taxable transaction triggering income taxes on unrealized gains, except for gift to charities
  • Increases the total top capital gain and qualified dividend rate from 20% to 24.2% (28% inclusive of the 3.8% tax on net investment income) for married-filing-joint taxpayers with incomes over approximately $500,000
  • Prohibits contributions to and accruals of benefits in tax preferred retirement plans and IRAs once balances are about $3.4 million (enough to provide an annual income of $210,000 in retirement)
  • Imposes a seven basis point fee on the liabilities of U.S. financial firms with assets in excess of $50 billion

The White House says that the plan would raise $320 billion over 10 years, which would be more than enough to pay for proposals to provide a tax credit for two-earner families, expand the earned income tax credit for workers without children and noncustodial parents, make expanded child tax credits and earned income tax credits scheduled to expire in 2017 permanent, streamline child care tax incentives, simplify education tax benefits, and make changes to tax-favored retirement plans.

Prospects for Tax Reform

President Obama’s proposed budget for 2015 and prior years would restore the estate tax rates to those that were in effect in 2009 and would severely curtail some popular tools for shifting assets to future generations. This latest proposal, named the trust fund loophole by the White House eliminates the tax-free basis step-up by requiring income tax to be paid on unrealized appreciation. Presumably the recipient would continue to receive an increase in basis. Under the proposal, an estate is subject to income tax on the unrealized appreciation of most assets and the estate tax on those assets. This is a new proposal for this White House, adding a second layer of taxation upon death for high-wealth families.  Since the Administration has not released draft statutory language to implement its proposals, the exact nature of those proposals remains uncertain. Although it claims to exempt small business and middle income families, subjecting the gain inherent in a closely held business to income tax upon the founder’s death could potentially drive the deceased taxpayer above the very modest income limitations contained in the proposal.

Republicans were quick to dismiss the White House plan. However, certain elements of the plan mirror Republican proposals. The White House stated that the proposed tax on the liabilities of financial firms was broadly consistent with a proposal to impose an excise tax on financial firms contained in former Ways and Means Committee Chairman Camp’s tax reform discussion draft. Republicans have also proposed reforms to education tax credits and changes to the child tax credit and earned income tax credit. In addition, Camp’s plan has many areas of overlap with President Obama’s framework for business tax reform released in 2012. While it remains unclear whether any kind of tax reform can pass in the 114th Congress, this proposal adds a new dimension to the debate.

The Takeaway

Whether it is this year or after the next Presidential election, the time to prepare for changes in tax legislation is upon us. It is critical for the taxpayer community to be involved in the short-term and long-term debates on the federal budget and deficit reduction. 

Please contact us if you’d like to discuss the impact of these proposals and strategies to provide a voice on pending legislation being considered by Congress.