Election time is a time of uncertainty, and for tax practitioners — especially tax planners, who, by definition, take a long-term view of managing their clients’ tax interests — it’s always helpful to wet your finger and put it up in the prevailing political winds to try to gauge the tax weather ahead.

This article looks at each of the presidential candidates’ proposed tax plans with an eye toward how they would affect the income taxes of
individual taxpayers.

All of the provisions discussed below were culled from the Websites of the respective candidates and are, of course, simply proposals put forth by the candidates. Do not overlook the word “proposed” as it is way too early to view these positions as anything more than the prevailing winds in an active election season.

Having said that, here is a top-line look at the candidates’ proposed
tax plans.

Obama

Let’s look at his provisions affecting individual income taxpayers and
their families.

Increase Taxes for Those Earning More than $250,000: Senator Obama’s tax plan would increase taxes paid by individuals earning more than $250,000 annually. Both their individual income tax rate would rise (up to 39% from the current top rate of 35%) as well as their capital gains rate (up to 20% to 28% from the current 15% capital gains rate).

Social Security: Obama proposes that individuals earning over $250,000 be subject to an increase in Social Security taxes of two percent to four percent more in total (i.e., the combined employer and employee amount). This change would not occur for another 10 years.

Create a Tax Credit for Working Families: Individuals earning less than $150,000 would be able to claim a $500 per worker tax credit, or $1,000 per family, if they do not itemize.

Expand the Earned Income Credit: Obama wants to increase the benefit of the Earned Income Credit (EIC). He proposes increasing the benefit up to $555 (it is currently $175) for workers with a qualifying child and who are earning the minimum wage. Workers supporting their children on child support payments could receive a benefit as high as $1,110.

Expand the Child and Dependent Care Tax Credit: Obama’s plan would make the Child and Dependent Care Tax Credit a refundable tax credit and qualifying families could be reimbursed for up to 50 percent of their child care expenses.

Create an American Opportunity Tax Credit: Obama’s plan would create a refundable $4,000 credit per child attending college, making the first $4,000 of a college education free. The student, in return, would be required to perform 100 hours of public service. Furthermore, the plan entails using the taxpayer’s prior year tax data in order to deliver the credit at the time of enrollment, rather than the following year when the tax return is filed.

Create a Universal Mortgage Credit: The plan would create a 10 percent refundable tax credit for non-itemizers, up to $500 a year.

Seniors: Seniors who earned less than $50,000 annually would not pay any income tax.

Expand the Savers Credit: The Savers Credit is also known as the “Retirement Savings Contribution Credit.” Obama would provide a 50 percent match for the first $1,000 of savings by families earning less than $75,000 annually and would make it a refundable credit.

Create an Advanced Vehicle Tax Credit: With the idea of investing in advanced vehicle technology and promoting the use of better lightweight materials and new engines, Obama would create a new $7,000 tax credit to taxpayers who purchase advanced vehicles like plug-in hybrids.

Simplify Tax Filing: Obama proposes giving some taxpayers the option of using a pre-filled tax form, partially completed with information the IRS already receives from banks and employers.

Support Small Businesses: Obama proposes eliminating capital gains taxes on start-up companies and small businesses and would reduce the self-employment tax.
 
Create a Small Business Health Tax Credit: Obama proposes creating a refundable credit of up to 50 percent of premiums paid by the small business on behalf of its employees.

Support Rural Small Businesses: Obama’s plan includes a 20 percent tax credit for up to $50,000 of investment in small owner-operated
rural businesses.

McCain

Now, let’s look at how Senator McCain’s tax plan would affect individual income taxpayers and their families.

Reduce Health Care Costs: Senator McCain’s plan would provide $5,000 for health insurance to every family ($2,500 for a single taxpayer) and would support small businesses that want to offer health insurance to
their employees.

Keep Tax Rates Low: McCain would hold the top income tax rate at 35 percent and the capital gains and dividends rate at 15 percent. He wants to maintain the same tax rates as today for small business owners.

Phase-out the Alternative Minimum Tax: McCain would phase out the Alternative Minimum Tax.

Give the Middle Class a Tax Cut: McCain’s plan would increase the personal exemption for each dependent from $3,500 to $7,000.

Allow First-year Expensing: McCain would allow businesses to expense the cost of new equipment and investments in technology.

Issue a Clean Car Challenge: McCain would like to issue a “Clean Car Challenge” to all American automakers to help break our dependency on foreign oil. His plan proposes giving a $5,000 tax credit to every taxpayer who purchases a car that has zero carbon emissions. The idea is to encourage the automakers to be first to market with these cars so that the consumer, in order to take advantage of this incentive, will choose whichever automaker is first to make such technology available.

Further, McCain’s plan includes a graduated tax credit for other vehicles that, even if they don’t have zero carbon emissions, are still lower in their emissions. The lower the vehicle’s carbon emissions, the higher the tax credit will be.

Simplify Tax Filing: McCain is proposing a new and simpler tax system where anyone who wants to remain under the current tax system may do so, but anyone else could choose a simpler system that has only two tax rates and a “generous” standard deduction.

Make It More Difficult to Raise Taxes: McCain’s plan would require a three-to-five majority vote in Congress to raise taxes.

In Summary

The above discussion only focuses on individual income taxes. It, therefore, represents a small portion of what is contained in each candidate’s platform. For example, McCain would cut corporate taxes from 35 percent to 25 percent and Obama would enact a windfall profits tax on excessive oil company profits.

It’s always a good idea for tax planners to plan ahead and equip themselves to be as responsive as possible to their clients’ needs. To that end, it’s important to make sure that the software one relies on has a reputation for not only impeccable quality and accuracy, but for responsive and timely updates, as well.

Nancy Faussett, CPA, has over 25 years of tax accounting experience. With BNA Software since October 2001, Nancy serves as in-house expert on fixed assets, depreciation, and various areas of corporate and individual income taxation. Author of the Best Depreciation Guide for Best Software (now Sage), Nancy has also been published in Strategic Finance and the ACT Journal. Previously she was vice president of tax preparation for General Business Services and later worked as a depreciation and tax specialist for Best Software.