State of the Union: Fact sheet outlining president’s tax proposals

Fact sheet outlining president’s tax proposals

According to a White House “fact sheet,” President Obama will in his State of the Union address tomorrow “…outline his plan to simplify our complex tax code for individuals, make it fairer by eliminating some of the biggest loopholes, and use the savings to responsibly pay for the investments we need to help middle class families get ahead and grow the economy.”

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The White House fact sheet highlights both revenue raisers and tax incentives, as well as substantial simplification of existing education tax benefits.

Details of many of the proposals are lacking at this time. It is possible that the proposals outlined in the White House fact sheet will be included in the president’s budget proposal for FY 2016, expected to be released on February 2, 2015.

Revenue raisers

Revenue raisers would increase capital gains rates, impose capital gains taxes on transfers by gift or bequest, and limit the tax benefits of individual retirement accounts (IRAs) with large balances.

The administration also would impose a new tax on large financial institutions.

White House sources are reported to have said the revenue-raising provisions of the president’s plan would raise approximately $320 billion over 10 years, with $110 billion attributable to the tax on financial institutions, and the remainder coming from the other changes.

Increase capital gains and dividends rates

The fact sheet indicates that the president proposes to increase the “total top capital gains and dividend rate” to 28%. The top rate would apply to couples with incomes over “about $500,000.”

Change rules for transfers of property on death

The fact sheet describes an individual’s ability to step up the basis of capital assets to fair market value on death as the “largest capital gains loophole—perhaps the largest single loophole in the entire individual income tax code.”

According to the fact sheet, the president’s proposal would “close the stepped-up basis loophole by treating bequests and gifts other than to charitable organizations as realization events,” subject to the following exceptions and special rules:

  • For couples, no tax would be due until the death of the second spouse.
  • Up to $200,000 of capital gains per couple ($100,000 per individual) could be bequeathed free of tax, plus couples would have an additional $500,000 exemption for personal residences ($250,000 per individual)—with these exemptions being automatically portable between spouses.
  • Transfers of tangible personal property, other than “expensive” art and similar collectibles (e.g., clothing, furniture, and small family heirlooms) would be tax-exempt.
  • No tax would be due on inherited “small, family-owned and operated” businesses, unless and until the businesses are sold.
  • Any “closely held” business would have the option of paying tax on gains over 15 years.

KPMG observation

More details are needed to understand the scope of the administration’s proposed changes. For example, although the fact sheet refers to changing the treatment of “gifts” as part of closing the “stepped-up basis loophole,” gifts made during life generally do not result in a “step up” of the recipient’s basis under current law. Thus, it is not clear what “gifts” are intended to be subject to the proposal.

As another example, the fact sheet does not mention whether the estate tax would apply on top of the capital gains tax if transfers of property at death were treated as realization events. If so, the rate of tax on transfers of property at death could be considerably higher than the 28% capital gains rate.

Fee on large financial institutions

The fact sheet indicates that the president’s proposal would impose a 7-basis-point fee on the liabilities of large U.S. financial firms (roughly 100 firms in the United States with assets over $50 billion), noting that this approach is broadly consistent with a proposal in the tax reform bill introduced by former chairman of the House Ways and Means Committee, Dave Camp, in the last Congress.

Details of the base of the tax and its possible application to financial institutions other than banks are not provided, although according to the administration, the proposal would raise almost twice as much revenue as its previous proposal to tax assets of financial institutions.

Limit size of tax-preferred retirement plans

The fact sheet indicates that the president’s plan would prohibit contributions, and accruals of additional benefits, to tax-preferred retirement plans and IRAs once balances are “about” $3.4 million. This is intended to prevent wealthy individuals from accumulating large balances in their retirement plans.

Other proposals and incentives

The fact sheet indicates that the president’s plan would include a number of other proposals, including, for example:

  • A new “second earner” credit of up to $500 for families in which both spouses work (for families with incomes up to $120,000, with a partial credit available up to $210,000)
  • Expansions of the earned income tax credit (EITC) and child care tax benefits
  • Consolidation and improvements to various education tax incentives

Other qualified plan provisions

In addition, the fact sheet indicates that the president’s plan would require every employer with more than 10 employees that does not currently offer a retirement plan to automatically enroll its workers in an IRA. To minimize the burden on small businesses, an employer with 100 or fewer employees that offers an “auto-IRA” would be provided with a $3,000 tax credit.

The existing “start-up” credit also would be tripled, so that small employers who newly offer a retirement plan could receive a $4,500 credit. An employer who offers a plan also would be required to permit employees who have worked for the employer for at least 500 hours per year for three years to make voluntary contributions to the plan.

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