Tuesday, March 10, 2009

A Deeper Look at Obama's Stimulus and Budget

With the ongoing changes and updates to both Obama’s stimulus plan and budget, it is getting hard for even of us in the tax industry to keep up. The Obama team, however, seems confident in their final budget plans for the year. "This is a deep moral imperative to make our society more just. But it’s very good economic policy, too," Geithner told the House Ways and Means Committee, emphasizing that none of the tax hikes would take effect "until we are safely into recovery" in 2011.

Fortunately, more concrete details are emerging about Obama’s proposal and we can now sort through the legal mumbo jumbo to determine exactly who will benefit from it, and how. To help the readers of my blog gain a deeper understanding of President Obama’s financial plans for the economy, I have put together this in-depth analysis of his plan.

Business Taxes

Although small businesses are likely to get off the hook, big business and corporate can expect some new and higher tax rates coming their way. U.S. companies with international operations can also expect to get hit with a tax increase.

Small Businesses

Some critics claimed that Obama had planned to raise taxes on nearly all small business owners. However, the real issue has to do with personal income filing versus corporate income filings. While it is true that a portion of business owners do file their business taxes with their individual returns, often resulting in double taxation, most small businesses do not. In addition, estimates say that a mere 5% of small business owners make enough revenue get a tax hike.

Homebuyer Credit

It is no secret that the real estate market has been hit hard by the economy, so the stimulus obviously includes incentives in for first time homebuyers to purchase property in 2009. New homebuyers will be able to claim a credit in the amount of 10% of the sale price, up to $8,000. Additionally, unlike the homebuyer credit in 2008, the new incentive is a direct tax credit that does not have to be repaid.

Bonus Depreciation Extended

The bonus depreciation made for 2008 was set to expire last year, but it has now been extended for the 2009 tax year as well. This bonus allows you to deduct 50% off of qualifying purchased business assets, and then deduct the rest over time. This can be highly useful to new and troubled businesses struggling in the recession.

Extension of AMT Relief

Although we do not know how long the Alternative Minimum Tax (AMT) will be around, the 2008 AMT relief program will be extended though 2009. The extension will assure taxpayers who did not get hit by the AMT in 2008, but may in 2009, will not be left out.

Education Tax Benefits

In the past, the IRS’ Hope credit was available to college students during their first two years of higher education, in the amount of $1,800. However, as part of Obama’s new proposals students will be able to claim $2,500 in tax credits, for their first four years of college.

Tax Increases for Wealthy Americans

Taxpayers making over $250,000 will no longer be able to take advantage of the “Bush Tax Cuts” after 2011, when they are scheduled to expire. In addition, the highest income rate will increase from 35% to 36% for individuals and 39.6% for married couples. Obama also plans to raise the capital gains tax rate from 15% to 20%.

Another part of Obama’s budget is to put deduction limits in place for the highest earning taxpayers. The new limits would be put on the amount of mortgage interest they can deduct from their taxable income. It will also reduce the rate that the highest-earning Americans use to determine their itemized tax deductions. Currently, wealthy Americans get to write off 35 cents for every dollar of their deductible expenses. However, Obama would like to reduce that to 28 cents.

Tax Relief for Families & Individuals

In his American Recovery and Reinvestment Act of 2009, Obama introduced the new "making work pay" credit. The credit is available to qualifying taxpayers with earned income, and totals $400 for single taxpayers and $800 for married couples. However, the qualifications are very specific, and you should check with a professional before taking advantage of this new credit.

An increase in the Earned Income Credit (from 40% to 45%) is also part of Obama’s new reinvestment act. As well as huge tax break for families is the lowest threshold for the refundable child tax credit. The previous minimum income level was $8,500, but has now been decreased to $3,000, making it available to many more low-income families across the country.

Economic Recovery Payments

Another part of Obama’s proposal would give all individuals who receive Social Security and Supplemental Security Income benefits a one-time $250 payment in 2009 to recover from losses in 2008. Payments are expected to be issued in late May of 2009.

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