Update on the Budgeted Individual Taxes
 
Written by: Steven D. Beaucaire, MST
Director - Tax | Bedford Cost Segregation, LLC

On May 11, 2009, the Treasury Department released the “General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals” (also known as the Green Book* because of the color of its cover.) This 130-page document is a fairly comprehensive blueprint of the tax proposals the Obama administration hopes to shepherd through Congress to make its FY 2010 budget plans a reality. The Green Book's revenue-raising tax proposals will pose significant tax planning challenges for higher-income individuals and for the many businesses facing increased taxes and compliance costs. What follows is a brief update on the proposed tax changes for individuals in the FY 2010 budget. Next month’s article will focus on the proposed changes for businesses.


Tax Changes for Higher Income Individuals
Within the Administration's budget proposal, higher income individuals are the main focus for larger tax bills in the years to come. Proposals include:.

• Beginning in 2011, the highest income tax rate will be 39.6%. The second highest tax rate would be 36%.

• After 2010, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) elimination of the limit on itemized deductions would sunset. As a result, itemized deductions (other than medical expenses, investment interest, theft and casualty losses, and gambling losses) would be reduced by 3% of the amount by which AGI exceeds statutory floors (which would be higher than under current law), but not by more than 80% of the otherwise allowable deductions. The floors would be indexed annually for inflation. For 2011, the AGI floors would be adjusted for inflation starting with a value of $250,000 in 2009 for married taxpayers filing jointly and $200,000 in 2009 for single taxpayers.

• The EGTRRA elimination of the personal exemption phase-out would sunset after 2010 and the AGI levels at which the phase-out begins would be adjusted. For 2011, the AGI floors would be adjusted for inflation starting with a value of $250,000 in 2009 for married taxpayers filing jointly ($125,000 if filing separately) and $200,000 in 2011 for single taxpayers.

• For tax years beginning after 2010, a 20% tax rate on long-term capital gains and qualified dividends would apply for married taxpayers filing jointly with income over $250,000 less the standard deduction and two personal exemptions (indexed from 2009) and for single taxpayers with income over $200,000 less the standard deduction and one personal exemption (indexed from 2009). The reduced rates on gains on assets held over 5 years would be repealed.

• The tax value of all itemized deductions would be limited to 28% whenever they would otherwise reduce taxable income in the 36% or 39.6% tax brackets. A similar limitation also would apply under the AMT. This would apply to itemized deductions after they have been reduced under the separate proposal (see above) that would reinstate the pre-EGTRRA limit on certain itemized deductions, but with adjusted AGI thresholds in 2011 of $250,000 (indexed from 2009) for married taxpayers filing jointly and $200,000 (indexed from 2009) for other taxpayers. After 2011, these thresholds would be indexed.


Other Tax Changes for Individuals
The alternative minimum tax (AMT) would stay on the books but the exemption amounts would be indexed annually. Most of the tax reductions enacted in 2001 and 2003 which are set to expire on Dec. 31, 2010 under current law would be continued (with the changes noted above for higher income individuals), except for repeal of estate and generation-skipping transfer taxes. Estate and gift taxes would be extended at parameters in effect for calendar year 2009 (a top rate of 45% and an exemption amount of $3.5 million).

Other proposals for individuals include the following, all effective after 2010:

• The making work pay credit would be made permanent and the phaseout of the credit would be liberalized.

• The following earned income tax credit (EITC) rules would be made permanent: the $5,000 (indexed) increase in the beginning of the phase-out range for joint filers relative to other individuals; and the expansion of the EITC for workers with three or more qualifying children.

• The liberalized $3,000 earnings threshold for refundability of the child credit would be made permanent and the earnings threshold would no longer be indexed for inflation.

• The American Opportunity Tax Credit (AOTC) enacted by ARRA to temporarily replace the Hope credit for 2009 and 2010 would permanently replace the Hope credit. Additionally, the AOTC's $2,000 tuition and expense amounts, as well as the phase-out thresholds, would be indexed for inflation.


About now you are probably wondering, what can be done to offset the increases that are coming up next year? Your clients are demanding to see solutions that will help them reduce the tax increases. As the tax rate goes up, every possible deduction becomes more critical. If the tax rate increases, so does the positive effect of the deductions.


A cost segregation study (CSS) that is conducted by a qualified engineer can significantly counteract the higher tax burden. To illustrate, if a client owned a $10,000,000 suburban commercial real estate building, the 10-year Net Present Value (NPV) at the highest tax rate (35% at present) would be $454,702 after a CSS. Using the same scenario at the new proposed highest rate (39.6%), the tax savings (10-year NPV) would be $514,463 after a CSS. Suggesting that a study be done sends a clear message to your clients that you are seeking out every way possible to protect their assets in this time of economic uncertainty.

* The Green Book can be viewed at http://www.treas.gov/offices/taxpolicy/library/grnbk09.pdf.
Source:  Federal Tax Updates on Checkpoint Newsstand tab 5/12/09