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Everybody exhale, especially those making big bucks. All bets are off!
President-elect Barack Obama will not increase your income taxes in 2009 and possibly not even in 2010. As the previous Democratic president made abundantly clear, "It's the economy, stupid!"
As president, Obama's focus will be on boosting the economy through spending increases and targeted tax cuts and credits. He's expected to push back any legislation that sucks out needed liquidity.
Obama originally had proposed increasing the marginal tax rate to 39.6% for individuals making more than $200,000 a year and couples making more than $250,000. So wealthy, sophisticated taxpayers were already pushing some 2009 income into 2008 to take advantage of what they thought would be lower current rates.
For example, several free-agent baseball players sought large signing bonuses last year to avoid the potential pain in 2009. (On the average major league salary in 2008 of $2,925,679, the expected tax hit would have been an additional $113,000.)
But in November, one of Obama's economic advisers, former Commerce Secretary William Daley, said it was "more likely than not" that the president-elect would favor leaving tax rates alone for the next two years. He'd simply allow President George W. Bush's 2001 reductions in the top rates to expire in 2011.
Taxpayers in the lower brackets will continue to enjoy the Bush rate cuts. Obama campaigned on retaining those 10%, 15%, 25% and 28% rates created by the Economic Growth and Tax Relief Stabilization Act of 2001.
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Obama's proposal to increase the top capital gains rate from 15% to 20% is also now in doubt, especially considering last year's stock market implosion.
Here's what the president-elect has on his tax wish list:
For individuals
Retirement:- A refundable investment credit of up to $500 ($1,000 on a joint return) would match 50% of the dollars put into a retirement account, for those making less than a certain income. It's similar to the current savers credit and is a probable winner, given the market.
- Taxpayers could withdraw 15%, up to $10,000, from their retirement accounts in 2009 without the normal 10% premature-distribution penalty (this would apply to withdrawals made in 2008, too). The ordinary income tax would still be due. This is also a probable winner.
- Obama would suspend the rules requiring those age 70 1/2 or older to take distributions from their retirement accounts. Otherwise, at current market prices, such distributions would be from forced equity sales at substantial losses. Also a probable winner.
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Stimulus package winnersA current proposal for upcoming tax breaks could benefit homebuilders and investment banks. We can call this a reward for the reckless behavior that led to the crisis, Jim Jubak says.
Mortgages: The universal mortgage tax credit would be for taxpayers who did not itemize. The credit would be 10% of the interest paid, capped at $800, and indexed to the rate of inflation after 2009. Given the current housing market, this proposal is something Congress might implement.
Higher education: The American Opportunity Tax Credit would amend the current nonrefundable Hope tax credit by making it refundable and increasing the current allowable credit amount to 100% of the first $4,000 paid. Another winner.
Child care: The child care credit would be increased to 50% of child care costs from its current maximum of 35% and be made refundable. Another probable winner with a Democratic Congress.
Estate taxes: Obama would freeze the estate-tax exclusion at the current $3.5 million, with a top rate of 45%. Now, the exclusion is scheduled to be unlimited in 2010 and drop to $1 million in 2011. There's no way a Democratic Congress will allow an unlimited estate-tax exclusion in 2010. This one will become law.
Jobless pay: Those collecting unemployment benefits would no longer have to pay federal income tax on that money. This would increase the value of those benefits by about 10% for those least able to weather the economic downturn. Another winner.
Continued: Low-income workers and seniors
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