The tax proposals included in President Obama’s fiscal 2013 budget released February 13 would largely end the Bush tax cuts for higher-income earners and tax dividends as ordinary income, a reform that would raise $1.5 trillion over 10 years.
As previously expected, the revenue raisers would focus on upper-income households earning more than $200,000 per year ($250,000 for joint filers). Notably, the Obama proposal would eliminate the preferential tax rate on qualified dividends, currently at 15 percent, and tax dividends as ordinary income for such higher-income earners at an individual income tax rate of 39.6. Coupled with the new Medicare contribution tax of 3.8 percent on net investment income, taxpayers could be taxed at a rate of up to 43.4 percent on their dividend earnings. Long-term capital gains, however, would be taxed at a top rate of 20 percent.
The Obama administration argues that the proposed tax changes would move the tax system closer to adhering to the “Buffet rule.” By replacing the alternative minimum tax (tax rate of up to 28 percent) applicable to taxpayers when certain conditions are met, the Buffet rule would apply to anyone earning more than $1 million per year, subjecting them to at least a 30 percent income tax rate.
Manufacturing & Small Business Incentives
Incentives to grow U.S. manufacturing and keep or return jobs to U.S. shores include a 20 percent credit for all expenses incurred while “in-sourcing” a U.S. business, while deductions for expenses incurred in connection with “outsourcing” a U.S. trade or business would be disallowed. The proposal would permanently eliminate capital gains taxes on stock sales of qualified small businesses, double the amount an individual can deduct to $10,000 for start-up expenses, and expand the small business healthcare tax credit to more workers while removing the requirement that an eligible employer pay a uniform percentage of the premium for each employee.
A proposal available for 2012 only is the extension of 100 percent bonus depreciation and a new 10 percent tax credit for new jobs and wage increases of up to $5 million, for a maximum credit of $500,000.