"Barack Obama’s tax plan delivers broad-based tax relief to middle class families and cuts taxes for small businesses and companies that create jobs in America, while restoring fairness to our tax code and returning to fiscal responsibility."
It’s now clear that these changes will be rolled out in two stages. The first stage was the American Recovery and Reinvestment Act of 2009 signed into law on February 17. This stimulus plan attempts to deliver on the broad-based tax relief for middle-class families.
The second stage was floated in Obama’s 2010 budget proposal on February 28. This proposal outlined multiple tax increases aimed at “restoring fairness to our tax code and returning to fiscal responsibility.”
STIMULUS PLAN PROVISIONS
Let’s start with the good news. The stimulus plan extended several provisions that will help small businesses. They are:
• Bonus depreciation. This provision, which was already in place but extended through the end of 2009 in Obama’s stimulus plan, allows a business to immediately write off 50 percent of the cost of depreciable property in the year it was acquired.
• Enhanced small business expensing. This provision, also extended through 2009, allows a small business to write off up to $250,000 in capital expenditures. This is more than the usual veterinary practice will spend in a given year on new equipment, but the extension is a nice bonus.
• Alternative minimum tax patch. This provision helps reduce the impact of the alternative minimum tax through 2009.
• New vehicle deduction. This part of the bill lets people who buy a new automobile take a deduction for the sales tax paid on the vehicle, subject to income limitations of $135,000 for single taxpayers and $260,000 for those filing jointly.
• Homebuyer credit. First-time homebuyers receive a tax credit of $8,000 if their home was purchased after December 31, 2008, but before December 1, 2009. This credit is also subject to income limitations.
BUDGET PROPOSAL PROVISIONS
Now, for at least some taxpayers, let’s move on to the bad news. The broad outline President Obama put forward in his budget proposal was consistent with the tax plan discussed during the campaign.
• Increased rates for high earners. President Obama proposes to increase tax rates on higher-income taxpayers. If you file as single and your income is less than $200,000, there would be no change to your current tax rate. However, if your taxable income is more than $200,000, you’d pay more. If you’re taxed now at a 33 percent rate, you’d be taxed at 36 percent, and if you’re currently taxed at 35 percent, you’d bump up to 39.6 percent. If you’re married and file jointly, the cutoff is $250,000. If together you and your spouse make more than that, you would see a rate increase: from 33 percent to 36 percent, or from 35 percent to 39.6 percent.
• Increased taxes on qualified dividends for high earners. Qualified dividends from stocks, bonds, and mutual funds are currently taxed at unusually low rates. People in the 25 percent or lower a tax bracket pay just 5 percent on qualified dividends. Those in a higher tax bracket pay 15 percent on these earnings. President Obama has proposed raising the tax rates on qualified dividends for higher-income taxpayers. Under his plan, if your income is more than $200,000 for individuals or $250,000 for married filing jointly, you’d pay 20 percent instead of 15 percent on qualified dividends. If your income is less than that, you’d stay at the 5 percent rate.
• Increased capital gains taxes for high earners. Long-term capital gains are currently taxed as follows: You pay either your current tax rate or 15 percent, whichever is lower, on all long-term capital gains. As a third way to impose fairness into the tax code, President Obama has proposed raising tax rates on long-term capital gains for higher-income taxpayers. Tax rates on long-term capital gains would remain the same unless your income is more than $200,000 for individuals or $250,000 for married people filing jointly. If your taxable earnings are higher, you’d pay 20 percent instead of 15 percent on long-term capital gains.
This rate change applies to stock sales, real estate transactions, sale of veterinary practices, and gains you receive in installments. Given this, you’d want to plan the timing and structure of a large transaction in any of these areas very carefully.
• Fewer itemized deductions for high earners. The president’s 2010 budget overview proposes to cut back the tax benefits allowed to high-income individuals who itemize deductions. The 2010 budget would limit itemized deductions for families with incomes over $250,000 to the same after-tax benefit as those individuals in the 28-percent bracket.
• Increased Social Security tax for employers and employees. Another controversial subject is Social Security tax. In 2009, workers will pay a Social Security tax of 6.2 percent on their first $106,500 in wages. Employers match the same amount. If you’re self-employed, you’ll pay both sides of this tax—or 12.4 percent—on your first $106,500 in earnings. Under the Obama plan, an extra 2 percent tax would be added to wages over $250,000. Employers would match the same amount. So, for example, an employee with a salary of $300,000 would pay extra Social Security tax of $1,000 ($50,000 x 2 percent). The employer would match the same amount. It can probably be assumed that the same parameters would apply to self-employed individuals.
NO WORD YET ON STUDENT LOAN INTEREST
One area that wasn’t mentioned in the Obama plan is increasing the deductibility of student loan interest. As of now, a maximum of $2,500 per year is deductible for student loan interest paid. And there are limitations. If you file as single and make more than $70,000, you don’t get any deduction at all. Given the high levels of student debt that new veterinarians are carrying, this is one area of the tax code that many in the profession hope will be adjusted.
Remember, most of this is only a proposal at this point. President Obama, his advisors, and his treasury secretary will no doubt tweak many details, drop some, and add others. Then Congress will have to decide what to do, no doubt introducing even more changes before anything becomes law. Also, some of the biggest changes—like those affecting capital gains and dividends—don’t have effective dates yet. Will they take place in 2010? 2011? We don’t know. Usually tax increases are not retroactive, so you’ll have plenty of time to plan for them. So pay attention to the news and make sure your practice’s finances are in order.
Tom McFerson, CPA, is a partner with veterinary accounting firm Gatto McFerson in Santa Monica, Calif.