The Obama administration has been vocal about its proposals for health care, education and environmental regulations, but one of the cornerstones of the 2010 budget that appears to be hiding in the shadows is a series of tax-related provisions destined for law next year — should Congress give the thumbs up. While the effects of these tax proposals hit home for everyone, there are separate, specific implications for high-income individuals and many large businesses, which is precisely why an in-depth understanding of the Green Book is essential for tax professionals. This 130-page document is a blueprint of all tax proposals by the administration for its Fiscal Year 2010 budget and a careful study will foreshadow the tax planning challenges practitioners may encounter with clients.

While the thesis for the proposed tax changes is “the more you make, the more you’ll be taxed,” the administration’s impetus for the edits is an attempt to level the playing field. John Stevko, a consultant, lecturer, author and trainer for Thomson Reuters, says the administration is pushing for changes to provide a catalyst to stimulate the economy.

“President Obama wants the people who have benefitted the most from the uptick in the economy over the past several years to bear more of the burden,” Stevko explains. “Married couples who make under $250,000 and single filers who make under $200,000 won’t see tax raises.”

Tax Implications for Individuals

Assuming the budget is approved and the changes are inevitable, the question then becomes, “how will tax professionals prepare to assist clients?” It all starts with understanding the facts. Most of the tax provisions will affect those individuals making more than $200,000 and married couples with a $250,000 and higher income. Specifically:

• The highest income rate will be taxed at 39.6 percent, following the next group at 36 percent. These increases are only at the federal level. State taxes are not factored into the proposed changes. (Those in the current 28 percent tax bracket will not see a tax
  rate increase.)
• Itemized deductions (charitable deductions, property taxes, mortgage taxes, etc.) will be capped at 28 percent. This means that although a high-income individual is taxed at 36 percent or more, he can only deduct up to 28 percent. “This is the first time there’s been a disconnect between what a person can take as a deduction and what they could pay as income tax,” Stevko explains. Itemized deductions not affected are medical expenses, investment interest, theft and casualty losses and gambling losses.
• Further, people in the higher income tax bracket will see a three percent decrease in the amount they are able to deduct. If the proposed budget is approved, these individuals will only be able to account for 97 percent of the deductions instead of 100 percent.
• The tax implications for individuals don’t stop there. According to the Green Book, “Estate and gift taxes would be extended at parameters in effect for calendar year 2009,” which means they are capped at 45 percent and at an exemption amount of $3.5 million.

Tax Changes for Businesses
Businesses will also see significant changes should the proposed tax amendments take effect. One of the biggest surprises, Stevko says, is how accountants will calculate inventory if LIFO (last in first out) is eliminated. Taxpayers will be compelled to use one of the other acceptable methods.

“This one-time increase in gross income would be taken into account ratably over the first tax year and the following seven tax years,” proposes the administration in the Green Book.

Another change is a mandatory individual retirement account (IRA) option for employees. Businesses operating for a minimum of two years with 10 or more employees would be required to offer an automatic IRA option to employees as a payroll deduction — but only if these businesses don’t already have a qualified retirement plan or a simple retirement plan in place. These employers could, according to the Green Book, claim a temporary tax credit and receive $25 per enrolled employee (up to $250 each year) for two years, which in reality may or may not balance out the hassle factor. The main purpose for this proposal is to make it easier for employees to secure an IRA, Stevko explains.

The administration is also looking for additional ways to capture unreported income. Under the tax proposals, businesses would be required to issue 1099 forms to all corporations. Further, with respect to contractors, a business would be required to secure a W-9 from a contractor and then submit the form to the IRS for qualification. Once under review, the IRS may require the business to backup withhold on the contractor. Both of these provisions, says Stevko, are potential aggravations for businesses, but are designed to encourage compliance.

With the myriad proposed tax changes possibly set to take effect in 2010, practitioners are wise to get up to speed on the intricacies now.

“What’s interesting about this is that all of these tax provisions are in the budget bill — and not necessarily on the practitioner’s radar,” Stevko says. “These practitioners have to alert their clients by year end so they can be compliant in January. Once the budget bill is passed … you want to be proactive with clients and strike quickly. Tax professionals are going to want to inform their clients and show they’re on the cutting edge.”

— From the CPE & Training Solutions eZine from the Tax & Accounting business of Thomson Reuters, July 2009. To view current and past issues of the eZine, click here.