Tax Rates
Currently there are six tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%. Those tax brackets were implemented in 2001 and are scheduled to expire at the end of 2010. Obama proposes to continue using the 10% through 28% tax rates and to replace the top two rates with 36% and 39.6% rates. How income is measured in determining the tax bracket would change. The 36% bracket would begin at $200,000 minus the standard deduction and one personal exemption for single filers, and at $250,000 minus the standard deduction and two personal exemptions for married filers. How tax rates are determined remains unchanged for the other tax brackets. The beginning of the 39.6% bracket was not explained in the Greenbook; for 2009, the highest tax rate begins at $372,950 for married filers. The new tax rates would begin in 2011.
Itemized Deductions
Itemized deductions are reduced for filers with adjusted gross income of $166,800 (for 2009) or higher. The amount of the reduction have been gradually minimized from 2006 to 2009, and in 2010 there will be no reduction in the amount of itemized deductions for higher-income filers. In 2011, the reduction amount is scheduled to revert back to a level 3% of AGI in excess of the AGI exceeding the certain threshold amount. The Obama administration proposes to allow the law to revert back. Some deductions are not subject to reduction: medical expenses, investment interest, casualty and theft losses, and gambling losses. The threshold amount would be $200,000 for single filers and $250,000 for married filers, and those thresholds would be indexed for inflation.The tax value of itemized deductions would be further limited for higher-income filers. "The proposal would limit the value of all itemized deductions by limiting the tax value of those deductions to 28 percent whenever they would otherwise reduce taxable income in the 36 or 39.6 percent tax brackets," according to the Greenbook. This limitation to the 28% bracket would apply even after deductions have been reduced.
Personal Exemptions
Personal exemptions are reduced for higher-income filers. This reduction is eliminated in 2010. President Obama would reinstate the reduction beginning in 2011 for single filers with income over $200,000 and married filers with income over $250,000.
Capital Gains and Dividends
Currently qualified dividends and long-term capital gains are taxed at rate of 15% or zero percent for the taxpayers in the two lowest tax brackets. These rates are scheduled to expire at the end of 2010, at which time capital gains would be taxed at 20% and dividends would be taxed at ordinary income taxes rates. Obama proposes that capital gains and qualified dividends be taxed at 20% for taxpayers in the top two tax brackets of 36% and 39.6%, at 15% in the middle two tax brackets, and at zero percent in the lowest two tax brackets. The new rates would take effect in 2011.
Information Reporting
Reporting on non-employee compensation is required only for payments of $600 or more paid to individuals and to other non-corporate recipients. The Obama administration proposes that information reporting be expanded to include corporate recipients. Additionally, Obama proposes to increase reporting requirements for certain types of life insurance policies, requires contractors to provide businesses with their correct name and taxpayer identification number, and would allow business to withhold tax on non-employee payments at a rate of 15%, 25%, 30%, or 35%, with the rate of tax selected by the contractor. Obama would also double the fines for failing to submit the required documents to the IRS.
Foreign Bank Account Reporting
Currently, American citizens and residents report to the US Treasury whether they own bank accounts in foreign countries. Obama proposes to expand the amount of information reported about foreign accounts. Americans would be required to report transfers to or receipts from accounts held abroad if they totaled $10,00 or more during the year. Furthermore, Obama proposes that banks and other financial institutions submit reports to the IRS about transfers made by Americans to foreign bank accounts or about foreign accounts opened. Americans would also be required to report information about their foreign accounts on their income tax return in addition to filing the annual foreign bank account report with the Treasury Department.
Penalties
Repeated late filing of tax returns would become a felony, punishable by up to five years in jail or a fine up to $250,000. A felony offense would be failing to file a tax return in any three years within any consecutive five-year period in which the total tax liability is at least $50,000. Currently, failing to file a tax return is a misdemeanor offense, punishable by up to one year in jail and a fine of not more than $25,000.The penalty for writing a bad check (which currently covers only checks and money orders) would be expanded to include any "commercially acceptable payment," including electronic payments.
Statute of Limitations
Currently the IRS cannot assess additional tax or initiate an audit after three years from the date a tax return is filed. This three year period also applies to receiving refunds from the IRS. Obama proposes to allow the statute of limitations to be extended by up to two years for federal changes in a tax return related to an audit by a state or local tax agency.
