Key Provisions of the President's Fiscal Year 2015 Budget

President Obama recently released his proposed fiscal year 2015 federal budget. Inside this budget are a number of proposed tax law changes. Here is a look at some of the highlights of the proposed changes.

Reduce the Value of Certain Deductions and Tax-Exempt Income

The fiscal year 2015 budget proposes capping the benefit of certain deductions and exclusions at a 28 percent tax rate.

There are three brackets above the 28 percent rate at 33 percent, 35 percent and 39.6 percent. Under the current law, taxpayers receive a deduction equal to their highest or marginal tax rate. For example, if you are in the 35 percent tax bracket, every $100 of a deductible expense reduces your tax liability by $35. Under the president’s 28 percent deduction cap, you would be limited to a $28 tax reduction on the same $100 deduction.

President Obama has also suggested that the 28 percent limitation would not only apply to itemized deductions but also to tax exempt income sources such as state and municipal bonds. This means that a person with a 35 percent marginal rate would pay a 7 percent tax on what has traditionally been a tax-exempt income source.

The Buffett Rule

The Buffett Rule aims to ensure all taxpayers pay a fair share of their income by creating a minimum effective tax rate of 30 percent on those with adjusted gross incomes of $1 million or more. Proponents such as the President believe this is necessary to ensure high income taxpayers do not pay lower tax rates than those who make substantially less simply because of the nature and sources of their income.

The proposed budget would attempt to accomplish this by basically adding an alternative minimum tax calculation. This Buffet Rule alternative computation would put an end to the preferable treatment on long-term capital gains and qualified dividends for wealthy taxpayers.

Return the Estate Tax to 2009 Levels

Back during the latest fiscal cliff negotiations, the estate tax exemption was set to revert back to $1 million starting in 2013; however, this never happened. The agreement reached keeps the exemption at $5.25 million with a 40 percent tax rate. This amount was made permanent and the exemption was indexed for inflation.

In his current budget, the President is trying to go back to his original position from the fiscal cliff negotiations by proposing to return the estate tax exemption to the 2009 level of $3.5 million. The proposed amount is also coupled with a 40 percent tax rate and this limit is not indexed for inflation.

Shutting down the Payroll Tax Loophole for S Corporations

Shareholder-employees in S corporations frequently avoid payroll taxes by taking money out of the business as distributions instead of compensation. The President’s proposed budget aims to close this loophole, though it does not give the details on exactly how it would accomplish this tax law change.

Conclusion

Many of the tax provisions in this current budget are simply repackaged versions of ideas that were proposed previously. As a result, many pundits feel that this gives them a slim chance of becoming law since they failed to do so the first few times they were considered. Nevertheless, mid-term elections are approaching this fall and you never know what will happen as a result.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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