During President Obama’s State of the Union speech in January, a number of significant tax measures were addressed that set the tone for Congressional action in the coming months.
A number of tax increases were proposed that would generate about $320 billion in revenue over the next decade, as well as new and revised tax credits and a program to promote retirement savings.
These proposals can be broken into three groups — revenue raisers, tax credits and retirement savings.
On the revenue side, highlights include:
Capital gains/dividend tax rates: Long-term capital gains and dividend tax rates would be increased to 28 percent for high-income households defined as taxpayers filing a married joint tax return whose income is greater than $500,000 annually.
Trust-fund loophole: This is closing the so-called “trust-fund loophole” by requiring payment of capital gains tax on the increase in value of securities at the time they are inherited. This would eliminate the “stepped-up” basis loophole that lets wealthy taxpayers pass appreciated assets onto their heirs tax free, although the proposal would allow couples to defer the tax until the death of the second spouse.
In addition, no tax would be due on inherited small, family owned businesses unless and until the business was sold, and any closely held business would have the option to pay tax on gains over 15 years. Capital gains of up to $200,000 per couple ($100,000 per individual) could be bequeathed free of tax, with this exemption automatically portable between spouses.
Couples would have an additional $500,000 exemption for personal residences ($250,000 per individual), with this exemption also automatically portable between spouses. Tangible personal property — other than expensive art and similar collectibles, such as bequests or gifts of clothing, furniture and small family heirlooms — would be tax exempt.
New borrowing fee: A fee would be charged on large, highly leveraged financial institutions in order to discourage excessive borrowing. This would apply to financial institutions with assets greater than $50 billion.
In terms of tax credits, people should expect to hear more about the following items in the weeks and months to come.
Two-wage earner tax credit: This is a credit up to $500 for households with two wage earners with combined income of up to $210,000. Families could claim a maximum credit equal to 5 percent of the first $10,000 of earnings for the lower-earning spouse in a married couple. The maximum credit would be available to families with incomes up to $120,000, with a partial credit available to couples with income up to $210,000.
Child tax credit: The child tax credit could be increased to as much as $3,000 for each child under the age of five. Families could claim a 50 percent credit for up to $6,000 of expenses per child under five. The maximum credit for young children, older children and elderly or disabled dependents would be available to families with incomes up to $120,000.
Earned income tax credit: This credit would be doubled for workers without qualifying children, increasing the income level at which the credit phases out, and making it available to workers age 21 and older.
Education tax credits: The six education-related tax incentives would be combined into just two, while improving the American Opportunity Tax Credit (AOTC) to provide students up to $2,500 each year over five years as they work towards a college degree.
The refundable portion of the AOTC would be increased to $1,500. Part-time students would be eligible for a $1,250 AOTC (up to $750 refundable).
In addition, many of the tax credits that are scheduled to expire after 2017 would be made permanent.
Finally, there is a major initiative being proposed regarding retirement savings, which would require employers with more than 10 employees who don’t have a 401(k) retirement plan to automatically enroll full-and part-time employees in an individual retirement account.
The employers, in turn, would receive tax credits to cover the costs involved.
There is currently no timeframe proposed for these tax changes, and people should expect to hear more about these proposals throughout 2015.
Andrew Lattimer is a tax partner with BlumShapiro in the firm’s West Hartford office.
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