Last week President Obama introduced his fiscal year 2013 budget proposal.  While this budget is unlikely to pass in its current form, the proposals give insight into what some government officials are considering for future tax policy.

We have reviewed the President’s proposal and put together a brief summary of some key areas that could bring change in coming years:

  • Extend Bush tax cuts for all but the top two brackets.

The only change would be to have the 33% and 35% rates go back to their pre-2001 levels of 36% and 39.6%. Taxpayers in the top two marginal brackets would still benefit from reduced rates on the portion of their income taxed in the lower brackets.

  • Raise the long-term capital gains rate for certain taxpayers.

Capital gains tax rate would increase to 20% for single taxpayers making more than $200,000 per year, $250,000 for married taxpayers filing jointly and $125,000 for married taxpayers filing separately.

  • Increase qualified dividends to ordinary income tax rates (up to 39.6%) for the same taxpayers.

For everyone else, the rate would stay at 15% (or 0%)

  • End LIFO Accounting
  • Extend 15-year life on Qualified Leasehold, Restaurant and Leasehold improvements through 12/31/12
  • Extend 100 percent Bonus Depreciation through 12/31/12
  • Extend Work Opportunity Tax Credits
  • Tax carried interest as ordinary income.
  • Reduce value of itemized deductions for taxpayers in the 33% and 35% brackets to 28%.

(33% bracket current starts at $178,650 for single taxpayers and $217,450 for married filing jointly.

  • Reinstate the personal exemption phase-out for upper income taxpayers.
  • Enact a permanent AMT Patch.
  • Make the HOPE tax credit permanent. The credit is worth up to $2,500 per year.
  • Make recent expansions of the low-income tax credit permanent.
  • Restore the estate, gift and GST tax to 2009 rates.
  • Require a minimum term for GRATs of ten years.
  • Limit the duration of GST tax exemption to 90 years.
  • Modify the rules on valuation discounts.
  • Require consistency in value for transfer and income tax purposes.
  • Enhance and Make Permanent the Research and Experimentation Tax Credit

 The proposal calls for making it permanent and increasing the rate of the alternative simplified credit from 14 to 17 percent effective 12/31/11.

  • Provide Additional Tax Credits for Investment in Qualified Property for Advanced Manufacturing Projects

Provides a 30 percent tax credit for investments in eligible property used in a qualifying advanced energy project

Projects would expand, re-equip, or establish a manufacturing facility for the production of:

    • Alternative energy property
    • Fuel cells, micro turbines, or batteries for electric cars
    • Electric grids for renewables
    • Property designed to capture CO2 emissions
    • Property designed to refine or blend renewable fuels
    • Electric vehicles
    • Other advanced energy property

Sets a $5 billion cap on credits

  • Change 179D to a Credit

Sets 179D as a credit instead of a deduction

Changes the reference to ASHRAE 90.1-2004 from 90.1-2001

Changes the credit calculation to the following:

    • 20 percent reduction – $0.60/sf
    • 30 percent reduction – $0.90/sf
    • 50 percent reduction – $1.80/sf

Special rules would be implemented for REITs, but those rules have not been specified.  It is also not referenced how this would affect designers.

  • Extend 1603 Grant on Alternative Energy Property through 2012
  • 45L Credit for the construction of energy efficient homes would be extended for 2012

Treasury has put out a summary document explaining the proposals.  The full text of the Treasury Document can be found here.

As stated, the proposals listed are just proposals and carry no weight unless passed.  However, it is important to know the policies and proposals being discussed when planning for the 2012 tax year.  If you have any questions feel free to contact us directly.