So far … it doesn’t look so good. With no material spending reductions, it’s hard to get excited about the President’s budget. However, there is no lack of increased taxes included in the proposed Obama budget for 2014. We summarized these tax increases and the ones coming from Obamacare below. [Warning: The following data can be depressing.]
28 Percent Cap on Itemized Deductions- The tax benefit from itemized deductions and certain tax exclusions would be capped at 28 percent of taxable income for taxpayers in the 33 percent, 35 percent, and 39.6 percent income tax brackets. This provision would limit the value of itemized deductions such as mortgage interest, state taxes paid, and charitable deductions, and tax exclusions like employer-sponsored health insurance and tax-exempt interest.
Limitation on Retirement Benefits- The budget proposes an estimated cap of $3 million on an individual’s tax-favored retirement accounts including IRAs, 401(k)s, tax-sheltered annuities and deferred compensation plans. This cap includes both contributions and accruals. Non-spouse beneficiaries inheriting a retirement account would be required to take taxable distributions over five years instead of over their projected life expectancy.
Estate Tax Increases- The estate and gift tax per person exemption would decrease from $5.25 million to $3.5 million, and the highest marginal tax rate would increase from 40 percent to 45 percent. These changes would go into effect in 2018. The portability of any unused estate and gift tax exclusion between spouses would, however, remain in the law.
Chained CPI- The budget changes the inflation index for certain items in the budget to the “chained Consumer Price Index” (chained CPI). This change would both reduce the growth in federal benefit programs such as Social Security and cause an increase in taxable income in future years because the standard deduction, personal exemption and income tax bracket threshold would grow at a slower rate. The move to the chained CPI would result in a tax increase on all individual taxpayers.
Buffet Rule- Taxpayers with an adjusted gross income in excess of $1 million would pay a minimum of 30 percent income tax on the excess of the taxpayer’s adjusted gross income over the taxpayer’s modified charitable contribution deduction for the tax year.
Increased Payroll Costs- The size of the federal workforce would grow by 6,180 employees under President Obama’s proposed fiscal 2014 budget,
and let’s not forget the Obamacare tax increases beginning in 2013 and beyond. Here are just a few.
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Hike in Medicare Payroll Tax (Effective effect Jan, 2013): Current law and changes:
|All Remaining Wages
|Obamacare Tax Hike||1.45%/1.45%
Surtax on Investment Income (Effective Jan, 2013): A new, 3.8 percent surtax on investment income earned in households making at least $250,000 ($200,000 single). This would result in the following top tax rates on investment income:
For specific examples on how and on what type of income this is calculated, see this article from our newsletter archive.
Individual Mandate Excise Tax and Employer Mandate Tax (Both taxes take effect Jan, 2014):
Individual: Anyone not buying “qualifying” health insurance as defined by Obama-appointed HHS bureaucrats must pay an income surtax according to the higher of the following
|1 Adult||2 Adults||3+ Adults|
|2014||1% AGI/$95||1% AGI/$190||1% AGI/$285|
|2015||2% AGI/$325||2% AGI/$650||2% AGI/$975|
|2016 +||2.5% AGI/$695||2.5% AGI/$1390||2.5% AGI/$2085|
Employer Tax If an employer does not offer health coverage, and at least one employee qualifies for a health tax credit, the employer must pay an additional non-deductible tax of $2000 for all full-time equivalent employees. Applies to all employers with 50 or more employees. If any employee actually receives coverage through the exchange, the penalty on the employer for that employee rises to $3000. If the employer requires a waiting period to enroll in coverage of 30-60 days, there is a $400 tax per employee ($600 if the period is 60 days or longer). Bill: PPACA; Page: 345-346
Tax on Health Insurance Companies (Takes effect Jan, 2014)Annual tax on the industry, imposed relative to health insurance premiums collected that year. Phases in gradually until 2018. Bill: PPACA; Page: 1,986-1,993
Excise Tax on Comprehensive Health Insurance Plans (Takes effect Jan, 2018): Starting in 2018, new 40 percent excise tax on “Cadillac” health insurance plans ($10,200 single/$27,500 family). Higher threshold ($11,500 single/$29,450 family) for early retirees and high-risk professions. CPI +1 percentage point indexed. Bill: PPACA; Page: 1,941-1,956
“Black liquor” tax hike (Took effect in 2010) This is a tax increase on a type of bio-fuel. Bill: Reconciliation Act; Page: 105
Tax on Innovator Drug Companies (Took effect in 2010): $2.3 billion annual tax on the industry, imposed relative to share of sales made that year. Bill: PPACA; Page: 1,971-1,980
Tax on Medical Device Manufacturers (Takes effect Jan, 2013): Medical-device manufacturers employ 360,000 people in 6000 plants across the country. This law imposes a new 2.3% excise tax. Exempts items retailing for <$100. Bill: PPACA; Page: 1,980-1,986
High Medical Bills Tax (Takes effect Jan 1. 2013): Currently, those facing high medical expenses are allowed a deduction for medical expenses to the extent that those expenses exceed 7.5 percent of adjusted gross income (AGI). The new provision imposes a threshold of 10 percent of AGI. Waived for 65+ taxpayers in 2013-2016 only. Bill: PPACA; Page: 1,994-1,995
Flexible Spending Account Cap – aka “Special Needs Kids Tax” (Takes effect Jan, 2013): Imposes cap on FSAs of $2500 (now unlimited). Indexed to inflation after 2013. There is one group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special-needs children. There are thousands of families with special-needs children in the United States, and many of them use FSAs to pay for special-needs education. Tuition rates at one leading school that teaches special-needs children in Washington, D.C. (National Child Research Center) can easily exceed $14,000 per year. Under tax rules, FSA dollars can be used to pay for this type of special-needs education. Bill: PPACA; Page: 2,388-2,389
Medicine Cabinet Tax (Took effect Jan, 2011): Americans no longer able to use health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin). Bill: PPACA; Page: 1,957-1,959
Elimination of tax deduction for employer-provided retirement Rx drug coverage in coordination with Medicare Part D (Takes effect Jan, 2013) Bill: PPACA; Page: 1,994
Codification of the “economic substance doctrine” (Took effect in 2010): This provision allows the IRS to disallow completely-legal tax deductions and other legal tax-minimizing plans just because the IRS deems that the action lacks “substance” and is merely intended to reduce taxes owed. Bill: Reconciliation Act; Page: 108-113
Tax on Indoor Tanning Services (Took effect July 1, 2010): New 10 percent excise tax on Americans using indoor tanning salons. Bill: PPACA; Page: 2,397-2,399
HSA Withdrawal Tax Hike (Took effect Jan, 2011): Increases additional tax on non-medical early withdrawals from an HSA from 10 to 20 percent, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10 percent. Bill: PPACA; Page: 1,959
$500,000 Annual Executive Compensation Limit for Health Insurance Executives (Takes effect Jan, 2013): Bill: PPACA; Page: 1,995-2,000
Blue Cross/Blue Shield Tax Hike (Took effect in 2010): The special tax deduction in current law for Blue Cross/Blue Shield companies would only be allowed if 85 percent or more of premium revenues are spent on clinical services. Bill: PPACA; Page: 2,004
Excise Tax on Charitable Hospitals (Took effect in 2010): $50,000 per hospital if they fail to meet new “community health assessment needs,” “financial assistance,” and “billing and collection” rules set by HHS. Bill: PPACA; Page: 1,961-1,971
Employer Reporting of Insurance on W-2 (Took effect in Jan. 2012): Preamble to taxing health benefits on individual tax returns. Bill: PPACA; Page: 1,957
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