The President’s State of the Union Address

On January 20, President Obama presented the State of the Union Address which included proposals that would increase taxes for certain high income earners to pay for incentives for lower income earners. While not specific, the President also called for closing loopholes for certain corporations and he also took a shot at lobbyists for “rigging” the tax code.

Initially, the White House has stated that the plan could raise $320 billion over the next ten years in order to pay for the expanded proposed credits.

Some of the highlights of the President’s proposals are repeats from earlier initiatives and include:

• Raising the top rates on dividends and capital gains from 20% to 28%.
• Repealing the step-up in basis for inherited assets and requiring the gain to be immediately included in income.
• Apply fees to the liabilities of financial institutions with more than $50 billion in assets. This fee, at 7 basis points, would also apply to asset managers and insurance companies.
• Repealing the student loan interest deduction.
• Repealing enhancements to Section 529 education savings plans.
• Limiting contributions and tax benefits to IRAs and other tax-deferred retirement plans once accounts exceed certain thresholds ($3.4 million).

These revenue raisers would be used to pay for incentives for lower-income taxpayers.

Some of the most significant provisions designated for lower income families would include the following:

• Create a new $500 credit for families with two working spouses.
• Increase the earned income tax credit (EITC) for taxpayers without children.
• Make the EITC permanent.
• Increase the child and dependent care credit for children under five to up to $6,000 and raise the phase out threshold.
• Enhance and make permanent the American Opportunity Tax Credit and repeal the Lifetime Learning Credit.
• Require employers with 10 or more employees to auto-enroll employees in an individual retirement account (IRA).
• Increase credits for offering retirement plans.
• Make student loan forgiveness exempt from income.

Without being very specific, the President indicated that there is great disparity between the very wealthy and the middle class. This inequality has led to the top 1% potentially not paying taxes on their wealth. As a result, the President’s earlier proposals included restoring estate tax rates to those in effect in 2009.

Some other non-individual proposals include:

• Making research credits permanent.
• Changes to corporate inversions that keep profits out of the country.
• Revenues from tax reform could be used to pay for infrastructure or by issuing a new type of Qualified Public Infrastructure Bond (similar to Private Activity Bonds.)

Being that Republicans control the Congress, the chances of enactment of many of these provisions during the remainder of the President’s term is unlikely.

If you would like to understand how these proposals may affect you or your business, please contact your Marcum Tax professional.