The President is slated to give his State of the Union address Tuesday night, and with it a proposal to raise $320 billion of revenue over the next 10 years.  We felt that the discussion over taxes could have an impact on our clients and friends and we felt it is our duty to bring you the facts.  Please be aware, because this is a discussed proposal without written specifications, there is much that is open-ended.  No legislation has been written, proposed, or passed yet.

1. Increase in the Capital Gains Tax Rate

This tax is on the investment assets that are not sheltered in tax deferred savings, such as IRA’s & 401(k)’s.  If you invest with after tax dollars, your gains have been subject to a lower tax rate.  The proposal suggests increasing the top rate* 23.8% to 28%.  It does not make any mention to the capital gains rates that are currently at 15% or 0%.  (*top rate is on couples making over $464,000/year, in the 39.6% income tax bracket).  The administration points out that the 28% capital gain rate is the same as it was under President Reagan. However, the top marginal tax bracket then was 28% compared to the current 39.6%.

2.  Eliminate the “Stepped-Up Basis”

If you have an account of after-tax investments (stocks, bonds, mutual funds, etc), when you pass, the cost basis steps up to its current value.  For example, if you invested $50,000 in a stock, and now that stock is worth $400,000.  You would owe capital gains on that $350,000.  But if you hold it until you pass away, your beneficiary (spouse if not a joint account, children, etc) would inherit that stock with the cost basis stepped up to $400,000 and owe $0 in capital gains taxes.  In 2013, the “stepped-up basis” saved taxpayers $50 billion.  Only 21% of that $50 billion went to the top 1%.

3.  “Roll back” 529’s and Coverdell Education Benefits

While little detail is announced publicly, the administration included this in their pre-speech announcement.  529’s and Coverdell are tax-deferred accounts designed to help save for education.  The 529 is a very popular way to save for a child’s college education.  Like a Roth IRA, you invest with after-tax dollars.  These dollars grow tax-deferred and are tax free if used for qualified education expenses.  The administration is proposing to somehow eliminate the tax preferred nature of these accounts.  Details are lacking, so there is nothing about existing accounts, if the tax treatment is eliminated altogether, if there is a graded income based regulation, etc.

4.  Institute a 0.07% Tax on Leverage at Large Banks

The tax is on banks that borrow, or leverage.  It is designed to impact the nation’s 100 largest banks.  The administration’s stated goal is to make the institutions think twice about borrowing heavily.  The possible negative is that the banks will just pass this increase on to the public.  For a mortgage, a car loan, or a small business loan, the increased rate will most likely be passed through to consumers.

5.  Trust Tax Loophole Closure

There are very few specifics on this proposal.  There are numerous types and structures of trusts, so without details, this cannot be discussed with logic and data.

6.  Maximum Tax Preferred Savings

The administration is proposing to limit the amount of money one can save in tax deferred vehicles (IRA, 401(k)’s).  The example being used in debate is Mitt Romney.  He was able to accumulate $21 million in his IRA.  The administration plans to limit an individual’s contributions and savings to $3.4 million inside these vehicles.

7.  Increased Benefits for those making less than $210,000 (couple)

• Maximum child care credit raised to $3,000/year
• Double income households receive a $500 second earner tax credit
• Extension of the higher education tax credit
• Eliminate taxation on “forgiven” student loan debt.
• Exemption of Pell grants from taxation

8.  Increased Tax Breaks for Small Businesses that Auto-enroll Employees in 401(k)’s

Again, not much detail, so no facts to research or debate.

2015 Married Filing Jointly Tax Brackets

2015 Individual Tax Bracket

Written by the Questmont Team

Sources:
Collins, Sam, Thingprogress.org, What You Need to Know about Obama’s Proposal to Tax the Rich
Faler, Brian, Politico.com; 5 Things About Barack Obama’s Robin Hood Tax Plan
McKinnon, John, wsj.com, Obama Tax Plan Likely to Stir Up Long-Simmering Debate
CNN.com, Obama State of the Union