Obama's Plans May Be Delayed, But Your Tax Bill Will Change



By Andrea Coombes

Taxpayers' bills will very likely change under President-elect Barack Obama's administration, but don't hold your breath for major tax changes as soon as he takes office.

The first thing on Obama's plate will be jump-starting the ailing U.S. economy, economists and tax experts say.

"Most bets are out the window until we get the economy and the financial markets straightened out," said William Gale, an economist and senior fellow at the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution.

"The mandate for the new president has to be to get the economy going again, and following the dictates of particular proposals just doesn't seem as important as solving the problem," Gale said.

Speaking in terms of individual taxpayers' bills, that's good news for high- income earners. "I don't think there are going to be any tax increases in the next year or so," said Len Berman, director of the Tax Policy Center.

Though a ballooning deficit has some expecting the government to increase revenue by hiking taxes soon, many economists say stimulating the economy, even if it means a record-level deficit, is more important now, for the short term, than balancing the budget.

"We had deficits of 4% or 5% or even 6% GDP back in the 1980s," said Dean Baker, co-director of the nonpartisan Center for Economic and Policy Research in Washington. "Six percent of GDP now would be $900 billion. We might run something close to that next year, but we're not going to keep it there ... Would we be happier with a balanced budget and 15% unemployment? We'd be crazy."

If Obama's administration and Congress follow that line of thinking, then tax hikes may well wait. But spending probably won't. The economic crisis likely means another fiscal stimulus package, many economists said. But unlike the fiscal stimulus earlier this year, a new bill probably won't include direct rebates to a broad swath of taxpayers.

"The problem of sending checks out is people saved a lot of it and they'd probably save even more in the current environment," Baker said. "That doesn't help the economy."

Instead, many experts said a new fiscal stimulus likely will include aid to local and state governments, extending unemployment benefits or suspending income tax on those benefits, spending on infrastructure improvements and energy conservation. Another possibility, Baker said: Tax breaks to businesses that offer health insurance to people who are currently uninsured.

On Thursday, House Speaker Nancy Pelosi said in an interview with the Wall Street Journal that a two-stage fiscal stimulus package - part this year, part next year - would include a "permanent tax cut" in 2009, but she didn't specify what kind of tax cut.

One tax perk related to the financial crisis is expected soon for retirees: some form of help to avoid required minimum distributions from their individual retirement accounts. "We think there will be a very serious effort to put some provisions in [a new stimulus bill] to take care of the RMDs," said Clint Stretch, managing principal of tax policy for Deloitte. "People are very sympathetic to the plight of retirees who are forced to take money out at the depths of the market."

Another tax change expected in 2009: The estate tax. Under current law the estate tax completely disappears in 2010, and so look for Congress to act in 2009. Lawmakers may opt for a quick solution - a one-year patch that holds this year's exemption amount and tax rate in place - or they may put in place a permanent estate tax law. Obama's proposal: A permanent estate tax rate of 45% and a $3.5 million exemption.

Tax Cuts Coming - But When?

What about one of the central tenets of Obama's tax plan - tax cuts for families earning less than $250,000 and individuals earning less than $200,000?

Under Obama's proposals, for instance, a married couple with two children under 17, a household adjusted gross income of $76,000 and no capital gains or dividend income could see their tax bill drop by $1,000. A married couple with no children, household income of $130,000 and no capital gains or dividend income would see a similar $1,000 cut, while a single taxpayer with no kids and $180,000 income ($9,000 of it from capital gains) would see his tax bill decrease $100, according to an analysis by Deloitte.

Experts said Obama may push some of his middle-class tax breaks early in 2009, though it's a matter of some debate how soon that push will come, and what form it will take.

Likely suspects for a push in early 2009 include Obama's refundable tax credit, called "Making Work Pay," which essentially returns FICA taxes to some taxpayers - specifically, 6.2% of up to a maximum of $8,100 of earnings - and increasing the Hope credit for college tuition costs to $4,000.

An Obama spokesman declined to comment regarding an expected timeline for such proposals.

"We think we may see some move to cement the middle-class tax cuts early on, although that might cause a fight over higher-income taxpayers," Stretch said. Obama may not want to venture into that fight early on. Still, both the work- related and education credits "have broad-based appeal and might be early candidates," Stretch said.

But Obama is unlikely to push his planned tax increases on higher-income earners, Stretch said. "If he comes with taxes on high-income people as an early issue, that might be taken as a signal by conservatives that he's not interested in doing business with them. He may come with other things where there's greater hope for common ground."

Still, tax hikes are coming - eventually. Obama's plan is to allow the Bush tax cuts to expire for high-income earners in 2010, but make those cuts permanent for taxpayers in the lower tax brackets. That means the top income tax rate will likely rise to 39.6% by 2011.

According to Deloitte's analysis, a married couple with two children under 17, household income of $1 million ($500,000 of it from capital gains or dividends) could see their tax bill rise by $34,900. "That's a real increase," Stretch said, with that couple's effective tax rate rising to about 28% from about 24% now. "It's higher than the Bush years but where it was in the Clinton years."

Eventually, higher-income taxpayers "will definitely be paying higher taxes," Baker said. "I can't imagine [Obama] turning back on that."

Obama has also said he'll increase the capital gains tax rate for higher earners to 20% from the current 15%, though many agree that won't happen soon. " If he decided to raise capital gains tax rates right now, the financial markets would probably go crazy," Berman said.

The message for higher-income earners? Don't panic, Stretch said. "Yes, your tax rates may go up. Think about what you want to be invested in, think about the costs of repositioning your portfolio," Stretch said. "If you have a large holding with a small gain on it, it's not going to be sensible to incur a transaction cost to save a little bit on the cost of the gain," he said.

"The places where we say it is worth taking a look are assets with very low basis and high value - businesses that you build up with sweat equity, real estate that's appreciated very well in the commercial sector," Stretch said.

For those eager to know more about their tax future, patience may be required. "With all the other issues at this point in time there may not be substantial tax legislation in 2009," said Randy Frischer, a New York-based tax partner with BDO Seidman. "Probably next year is going to be a very big year for tax planning. We'll have more knowledge of what the administration is contemplating on the tax front,"