President’s budget proposes AMT elimination, tax reform

BY ALISTAIR M. NEVIUS

FEBRUARY 13, 2012

President Barack Obama unveiled his proposed budget for fiscal year 2013 on Monday. Included in its 256 pages are several tax reform proposals, including plans to eliminate the alternative minimum tax (AMT), to repeal LIFO, and to tax dividends of high-income taxpayers at ordinary income rates. The budget estimates that the proposed tax changes would raise more than $1.5 trillion over the next 10 years. Overall, the document’s introduction claims that the budget would reduce the federal deficit by more than $4 trillion over that span.

At the same time, the Treasury Department issued its General Explanations of the Administration’s Fiscal Year 2013 Revenue Proposals (Green Book). In a prepared statement, Treasury Secretary Timothy Geithner called the proposed budget “a responsible, long-term deficit reduction plan that simplifies the tax code and asks the most fortunate to pay their fair share.”

Tax reform

The budget’s introduction sets out five tax reform principles:

1. Simplify the Internal Revenue Code and lower tax rates;
2. Reform inefficient and unfair tax breaks;
3. Decrease the deficit and protect progressivity;
4. Increase job creation and growth; and
5. Observe the “Buffett Rule.”

The budget characterizes the “Buffet Rule” as: “No household making over $1 million annually should pay a smaller share of its income in taxes than middle class families pay” (2013 budget, page 39). Its name derives from Warren Buffet’s observation that his effective tax rate is lower than his secretary’s.

The budget proposes that those making more than $1 million should pay at least 30% of their income in tax. The budget’s introduction says that “[t]he Administration will work to ensure that this rule is implemented in a way that is equitable, including not disadvantaging individuals who make large charitable contributions” (id.), but no specifics are provided.

The president is proposing that this “Buffet Rule” replace the current AMT.

To achieve these five tax reform principles, and “[t]o begin the national conversation about tax reform” (id.), the budget offers five specific proposals:

Tax cut expiration and estate tax changes

The budget proposes to allow some of the 2001 and 2003 Bush-era tax cuts to expire. These tax cuts, enacted by the Economic Growth and Tax Relief Reconciliation Act, P.L. 107-16, in 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27, introduced lower tax brackets and a lower capital gains tax rate. The cuts were extended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312, and are scheduled to expire at the end of this year.

The budget proposes to let the lower tax rates expire for taxpayers with household income over $250,000 per year (that is, the 36% and 39.6% brackets would be reinstated).

The budget would also:

• Reinstate the limitation on itemized deductions for upper-income taxpayers;
• Reinstate the personal exemption phaseout for upper-income taxpayers;
• Tax qualified dividends as ordinary income for upper-income taxpayers; and
• Tax net long-term capital gains at a 20% rate for upper-income taxpayers.

The budget also proposes returning the estate tax to its 2009 parameters. Read more in the Journal of Accountancy