HPG Offers Analysis of Tax Proposals by Obama and Romney

RALEIGH, N.C. (October 29, 2012) — After the rhetoric of three presidential debates, many Americans are unclear as to what changes to the federal income tax system each candidate is proposing. Tim Robinson, CPA/PFS with Hughes Pittman & Gupton, LLP, one of the largest CPA firms headquartered and staffed in the Research Triangle Park region of North Carolina, shares his insights, as well as an analysis of the presidential candidates’ tax proposals.

“The first thing to remember is that Congress will have to vote to approve any changes in the tax laws proposed by the candidates,” says Robinson. “Given the current makeup of Congress, that process will require compromise and a lot of time. Therefore, the debate is more about direction than about a specific future.”

Robinson continues, “It is possible that the new Congress will enact retroactive tax legislation in 2013. However, the only guarantee is that January 1, 2013 will bring higher individual tax rates across the board, absent Congressional action prior to December 31, 2012 to extend the Bush Tax cuts. The new top tax rate will be 39.6 percent. Taxpayers should plan for the worst and hope for the best.”

Here is a glimpse at what the tax structure will look like if no new tax laws are enacted.

  • The current top tax rate is 35 percent. The Bush tax cuts will expire on Dec. 31, 2012. At that time, the top rate will revert to 39.6 percent.
  • Most corporate dividends and long-term capital gains are taxed at a maximum rate of 15 percent. When the Bush tax cuts expire, the top rate on dividend income will rise to 39.6 percent and the top rate on long-term capital gains will rise to 20 percent.
  • Effective January 1, 2013, some taxpayers will be subject to an additional 3.8 percent Medicare surtax on certain passive investment income under the provisions of the Patient Protection and Affordable Care Act of 2010. For individuals, the amount subject to the tax is the lesser of either net investment income or the excess of a taxpayer’s modified adjusted gross income over an applicable threshold amount.
    • Net investment income includes capital gains, dividends, interest, annuities, royalties, and rents. The surtax will also be imposed on passive income from pass-through entities.
    • The threshold amounts are $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately and $200,000 for all other individual taxpayers.
  • Effective January 1, 2013, high earners will be subject to an additional 0.9 percent Medicare tax. Single taxpayers are subject to the additional Medicare tax on wages, other compensation or self-employment income in excess of $200,000, while the threshold for married taxpayers filing jointly is $250,000. Employers will be required to withhold the 0.9 percent Medicare tax on wages paid in excess of $200,000 in a calendar year.
  • Personal exemptions and certain itemized deductions will be subject to phaseout, based on the level of income.
  • The temporary 2 percent reduction in the Social Security portion of the FICA payroll tax will no longer apply.
  • The alternative minimum tax will continue with a top tax rate of 28 percent. The law attempts to ensure that an individual who benefits from certain exclusions, deductions, or credits pays at least a minimum amount of tax.
  • Qualified taxpayers may receive a partially refundable income tax credit of up to $10,000 over four years for post-secondary education expenses under the American Opportunity Tax Credit. This is scheduled to expire on Dec. 31, 2012. If it expires, the Hope credit will return as of Jan. 1, 2013. The Hope tax credit is a nonrefundable credit for which a maximum amount of $1,800 may be claimed for each of the first two years of post-secondary education.

The changes proposed by President Obama include:

  • Extending the Bush Tax cuts only for married taxpayers filing jointly with income less than $250,000, head of household filers with income less than $225,000, single filers with income less than $200,000 and married taxpayers filing separately with income less than $125,000.
  • Retain the 15 percent maximum rate on dividends and long-term capital gains for taxpayers with income less than $250,000 per year and increase the rate on long-term capital gains to 20 percent and tax dividends at ordinary rates for taxpayers with income over $250,000
  • Replace the alternative minimum tax with the “Buffet Rule,” which states that households earning more than $1 million per year would pay a minimum income tax rate of 30 percent
  • Make the American Opportunity Tax Credit permanent

President Obama has made two different proposals regarding itemized deductions. One allows for the phaseout of itemized deductions and personal exemptions to be reinstated after 2012. The second, reduces the value of itemized deductions and other tax preferences to 28 percent for families with incomes over $250,000. It is not clear whether both proposals will apply to taxpayers or if only one will be implemented.

“If these proposals move forward, small business owners would be wise to consult their CPA, tax attorney and financial planner to discuss the implication of these changes,” says Robinson. “It is possible that in certain cases changing the legal structure of the business entity may provide some relief from the higher tax rates.”

In contrast, Governor Romney proposes:

  • Reducing the current tax rates by 20 percent across the board, with the top rate set at 28 percent.
  • Permanently repealing the phaseout of itemized deductions and personal exemptions while limiting certain deductions for high-income taxpayers
  • Eliminating taxes on capital gains, interest and dividends for taxpayers with income less than $200,000
  • Maintaining the 15 percent maximum rate on long-term capital gains and most dividends for taxpayers with income more than $200,000 per year
  • Repealing the alternative minimum tax

“One difficulty in evaluating the tax proposals made by Governor Romney is the lack of detail,” says Robinson. “There are no specifics as to what deductions and exemptions would be changed or how, nor are high-income individuals defined.”

One thing that is clear for taxpayers is that tax laws are going to change in 2013. In the short term, everyone’s taxes are going to go up. The other thing that is clear is Congress is going to be pressured by whoever becomes president to dedicate some time and energy to change the U.S. income tax code.

DISCLOSURE REQUIRED BY U.S. TREASURY DEPARTMENT CIRCULAR 230: Hughes Pittman and Gupton, LLP must inform you that any advice in this communication to you was not intended or written to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer.