The Presidential Election and your tax bill

BankRate.com has a great article on the proposed tax changes by the two candidates. 

The two men vying to occupy the White House for the next four years say they want to reform our current complicated tax system. But until that can be achieved, President Barack Obama and Mitt Romney are proposing tweaks to the existing tax code.

Both candidates offer the American electorate only general outlines of their major tax proposals.

The Obama campaign's tax website touches on broad concepts such as raising tax rates on higher-income individuals and closing loopholes on millionaires and billionaires. As for more specifics, the president has elaborated on tax changes he supports in his annual budgets and State of the Union addresses, as well as in the corporate tax reform proposal issued by the U.S. Treasury earlier this year.

Romney also lists on his campaign website some general tax changes he favors, such as income tax rate reductions and maintaining the current tax treatment of investments. But the Republican candidate's plan also is light on details.

Romney's selection of Rep. Paul Ryan, R-Wis., to be the Republican vice presidential nominee raised some tax watchers' eyebrows. As House Budget Committee chairman, Ryan created a plan that calls for just two individual income tax rates (10 percent and 25 percent) and no investment taxes for anyone regardless of income. However, Romney says he, not the new vice presidential candidate, is in charge of the campaign's fiscal proposals.

And while Obama makes no apologies for wanting to collect more money from some taxpayers, Romney insists that any tax changes should be revenue-neutral, meaning that if some taxes are hiked, others should be lowered to counter the increase. The Romney camp, however, has not provided any detail about what tax deductions or credits it would target to achieve federal revenue neutrality.

Here's a look at Obama's and Romney's positions on major tax areas affecting individual and business taxpayers. Not surprisingly, the two men's tax plans generally reflect the differences between their two political parties.

Candidates' proposals for changes to current tax laws

Ordinary individual income tax rates

Current tax rates:

• 33 percent
• 35 percent

• 25 percent
• 28 percent

• 10 percent
• 15 percent

BARACK OBAMA'S TAX PROPOSALS	MITT ROMNEY'S TAX PROPOSALS
Six tax rates with top rate applied to adjusted gross income of $200,000 for individuals, $250,000 for families: 10 percent 15 percent 25 percent 28 percent 36 percent 39.6 percent	A 20 percent reduction of the current six tax rates. Romney is also considering itemized deductions to a certain dollar amount: 8 percent 12 percent 20 percent 22.4 percent 26.4 percent 28 percent

Interest, dividend, capital gains

Certain qualified dividends are currently taxed at capital gains rates, which are zero percent for taxpayers in the 10 percent and 15 percent tax brackets and 15 percent for all other taxpayers.

General interest earnings, i.e., on such investments as CDs, are taxed at ordinary tax rates.

Carried interest, i.e., the share of profits that private equity and hedge fund partners receive as compensation, is taxed at capital gains rates.

BARACK OBAMA'S TAX PROPOSALS	MITT ROMNEY'S TAX PROPOSALS
Increase capital gains tax rate to 20 percent on high-earners.Impose the so-called Buffett rule, i.e., a minimum 30 percent tax on high-earners. Dividends taxed as ordinary income for individuals with adjusted gross income of $200,000 ($250,000 for married couples filing jointly). Carried interest taxed as ordinary income.	Eliminate taxes on investment income for taxpayers with adjusted gross income of less than $200,000.Retain 15 percent tax on interest, dividends and capital gains for all other taxpayers.

Estate tax

Currently, estates worth up to $5.12 million are not taxed, with estates worth more than that taxed at 35 percent.

BARACK OBAMA'S TAX PROPOSALS	MITT ROMNEY'S TAX PROPOSALS
Exempt estates worth up to $3.5 million and increase estate tax rate to 45 percent.	Repeal estate tax permanently. This would enable estates worth any amount to pass from one party to the next with no tax.

Alternative minimum tax (AMT)

Separate tax rates of 26 percent and 28 percent currently apply to certain taxpayers who make more than an excluded threshold amount.

BARACK OBAMA'S TAX PROPOSALS	MITT ROMNEY'S TAX PROPOSALS
Replace the AMT with the so-called Buffett rule, which would require people making more than $1 million a year to pay at least 30 percent of investment income in taxes.	Repeal the AMT altogether.

Corporate tax rate

The corporate tax rate is 35 percent at the present time.

BARACK OBAMA'S TAX PROPOSALS	MITT ROMNEY'S TAX PROPOSALS
The proposed rate is 28 percent, except for manufacturers, which would face a 25 percent rate.	The proposed rate is 25 percent.

International taxes

This is generally a worldwide system where all income, regardless of where earned, is taxed.

BARACK OBAMA'S TAX PROPOSALS	MITT ROMNEY'S TAX PROPOSALS
Institute a minimum tax on overseas profits and other international proposals.	Institute a territorial system that would tax U.S.-source profits of multinational corporations but would exempt profits earned abroad.

Research and development (R&D)

There was a 20 percent credit for qualified R&D expenditures in excess of a base amount; a 14 percent simplified credit was available to eligible taxpayers. This R&D credit expired Dec. 31, 2011. It's expected to be renewed.

BARACK OBAMA'S TAX PROPOSALS	MITT ROMNEY'S TAX PROPOSALS
Reinstate the current business R&D credit that expired Dec. 31, 2011.	Strengthen (no details provided) and make permanent an R&D credit.

Energy

A renewable electricity production tax credit for, in part, wind, solar, geothermal energy production is available, as is a variety of tax credits and deductions for oil and gas operations.

BARACK OBAMA'S TAX PROPOSALS	MITT ROMNEY'S TAX PROPOSALS
Make the tax credit for production of renewable electricity permanent and refundable.Eliminate tax preferences for fossil fuels.	Streamline energy production permitting. Focus on traditional energy resources rather than green technologies that typically are too expensive to compete in the marketplace.

Note: Many of these provisions are set to expire at the end of 2012.

Arm yourself against ‘Buffett rule’

Instead of sitting back and waiting for events to unfold, you can take action now to protect yourself if the Buffett rule, or some variation of it, works its way into the tax law.

Here’s the whole story: The Buffett rule is based on the concept that everyone, regardless of his or her station in life, should pay a “fair” share of the federal income tax burden. It was initially proposed by billionaire investor Warren Buffett, who last year paid an effective tax rate that was claimed to be lower than his secretary’s.

The Obama administration stands behind the basic premise to levy a minimum 30% tax rate on taxpayers earning at least $1 million a year. In other words, if the Buffett rule

is enacted, you could use perfectly legitimate tax strategies to whittle down your tax liability, but you’ll still be hit with a top tax rate of no less than 30%.

6 steps to counter higher taxes

In this case, the best defense may be a good offense. Here are six steps that could minimize the tax fallout if Congress enacts the Buffett rule.

1. Accelerate capital gains. If the Buffett rule becomes slated to take effect next year, you can expect wholesale sell-offs of securities and real estate in 2012. As an added incentive, the current maximum federal income tax rate of 15% for long-term capital gains is scheduled to jump

to 20%, while tax rates for short-term gains, currently taxed at rates no higher than 35%, are

set to reach as high as 39.6%.

2. Postpone capital gains. On the flip side, it may not be the best time price-wise to unload some of your securities or to put out “for sale” signs on real estate. Fortunately, you don’t owe any tax on appreciated property until you actually sell it. Therefore, you might hold onto the property until the Buffett rule goes away or you can pass it to your heirs.

3. Stock up on munis. The value of tax-free income, such as the interest earned from most municipal bonds (“munis”) and muni bond funds, becomes even greater under the Buffett rule. You might allocate a bigger portion of your portfolio to these obligations.

4. Give generously to charity. It’s generally expected that the sacred cow of charitable deductions

will remain in place. Giving large gifts to tax-exempt organizations sooner rather than later may bring you below the $1 million mark.

5. Donate appreciated property. Combine the idea of accelerating capital gains with giving to charity. If you’ve held the property longer than one year before you donate it, you can generally deduct the fair market value of the property, instead of its basis. Therefore, you don’t ever pay any tax on the appreciation in value.

6. Move to a no-tax state. As part and parcel of the Buffett rule, the deduction for state and local income taxes may be repealed. If you’re about to retire and move anyway, you could shuffle off to a state with no state income tax, like Florida or Nevada, or at least one with a low tax rate (see box above).

Tip: You can’t “let the tax tail wag the dog,” but don’t ignore the possible impact of

the Buffett rule either.

Midyear planning is a must this year

Major tax change is just months away: the Bush-era tax cuts are scheduled to expire at the end of this year, and the payroll tax cut ends after December 2012. The general expectation is that tax rates will go higher in 2013, at least for wealthier taxpayers. Whenever major tax change is about to occur, the opportunities for tax-cutting multiply. That makes midyear planning critical this year if you want to keep your 2012 and 2013 taxes as low as the law allows. Contact our office for your midyear review.

How will the Presidential Election affect your Tax Bill?

Taxes are going up sooner or later--sooner if you're well-off and Democrats take the White House. Here's the canadiates positions and what actions you can take.

As president, Senator John McCain (R-Ariz.) aims to balance the budget while extending the Bush-era income tax cuts, doubling the personal exemption and eliminating the alternative minimum tax. The Democratic candidates say they'll raise taxes only on the well-off-those making over $200,000 for Senator Barack Obama (D-Ill) while showering tax breaks and health insurance on working families.

What about income taxes? A Democratic President is likely to return the top stated rate on ordinary income-salary and interest- to the 39.6% that Bill Clinton's presidency ended with.

That would put the real salary tax bite at around 50% if, as Obama has suggested, the 6.2% Social Security tax is applied to wages above the current $102,000 cap and two sneaky provisions make a comeback- the phaseout of personal exemptions and a haircut to itemized deductions. Under a Democrat, the top capital gains tax rate, now a historically low 15%, will likely rise to 28% or higher whereas McCain would keep taxes where they are and fight to reduce rates. Given the budget gap, even Republican McCain may well resort to closing loopholes and curbing deductions.

John McCain

Republican

Tax Proposals

Reduce top corporate tax rate from 35% to 25%

Allow First-Year Deduction, Or "Expensing", Of Equipment And Technology Investments for businesses

Calling for congress to suspend the federal gas tax (18.4 cents per gallon) from this Memorial day until Labor Day

Raise the personal exemption for each dependent from $3,500 to $7,000

Keep capital gains and dividend rates at 10/15%

Make the Bush income and investment tax cuts permanent

Ban internet and cell phone taxes

Permanently repeal the Alternative Minimum Tax.

Barack Obama
Democrat

Tax Proposals

Universal Mortgage Credit - 10% credit, refundable

American Opportunity Tax Credit: create universal and refundable credit for first $4,000 of a college education, tax credit available at time of enrollment

Increase capital gains to 10/20 or 10/28%

Crack down on offshore tax havens, create an International Tax Evasion Watch List;

Eliminate special interest loopholes and deductions, limit the ability of large multi-national corporations to use tax havens to hide income overseas

Repeal tax cuts those making over $200,000 or $250,000, restore PEP and Pease phaseouts for households making more than $250,000, restore 36 and 39.6% statutory income tax rates

Social Security/payroll taxes: increase the maximum amount of earnings covered by Social Security

Tax-Planning Ideas

None of this is cause for panic, but with higher taxes on the horizon it does make sense to prepare now.
1) Contribute to a Roth. A Roth Individual Retirement Account or Roth 401(k) can be a great hedge against higher rates. You put in aftertax dollars, the money grows untaxed and all withdrawals in retirement are tax free.
2) Do a Roth conversion. This strategy involves taking money out of a traditional IRA, declaring the taxable income and depositing it in a Roth, where all future growth is tax free. Only taxpayers with gross income below $100,000 are eligible, but that limit will end in 2010-unless Congress reneges.
3) Relocate assets. Investors may have been lulled into complacency over capital gains taxes in the three years through 2005 as their mutual funds used losses booked over the previous couple of years to offset gains. The holiday's over. Last year funds distributed $393 billion in long- and short-term gains to taxable shareholders, up 270% from 2005, estimates Thomas Roseen, a senior analyst at Lipper.
4) Buy munis. If you're in a high tax bracket, tax-exempt municipal bonds are a buy, says Robert Gordon, president of Twenty-First Securities. While off their peak of this year, muni yields are still high relative to Treasurys, even at current tax rates (see story). Avoid private purpose bonds-the kind whose income is taxable in the AMT. Vanguard, which offers some of the lowest-cost funds around, eliminated most of these bonds from its muni funds last year.