President’s budget proposes many tax changes

President Barack Obama released his last proposed budget, for the government’s 2017 fiscal year, on Tuesday. It contains tax provisions affecting education, health care, and retirement, as well as proposing extensive changes affecting businesses. The budget presents a wish list of changes the administration would like to see enacted; however, the Republican-held Congress is unlikely to support much of the president’s plan. Among the many proposed tax changes are the following:

Earned income tax credit

The budget proposes expanding the Sec. 32 earned income tax credit for taxpayers who do not have a qualifying child (including noncustodial parents). The amount of the credit available to these taxpayers would increase to roughly $1,000. The credit would also be made available to workers who are ages 21–24 and ages 65 and 66. It also would create a new second-earner tax credit of up to $500 for married couples in which both spouses work. The credit would be phased out for couples whose adjusted gross income (AGI) exceeded $120,000.

Child and dependent care credit

The budget would essentially triple the amount of the child and dependent care credit to $3,000 per child for families with children under the age of 5. It would also increase the phasedown limit so that it does not apply to taxpayers with annual AGI of less than $120,000. (The credit is currently phased down for taxpayers with AGI above $15,000.) However, the budget would also eliminate flexible spending accounts for child care expenses.

Education credits

The budget proposes folding the Sec. 25A lifetime learning credit into the American opportunity tax credit. It would also expand the American opportunity tax credit to make it available for five years and refundable up to $1,500. (Currently, it is available for four years and is refundable up to $1,000.) Pell Grants would be exempt from taxation and from the American opportunity tax credit calculation, and student loan forgiveness would no longer be considered to result in taxable cancellation-of-debt income.

Community colleges

The budget would create a new $5,000 tax credit—called the community college partnership tax credit—for employers that help community colleges fill their investment shortfalls and that hire qualifying community college graduates.

The budget calls for funding of a program called America’s College Promise that would create a federal-state partnership to make two years of community college free.

Retirement savings

The proposed budget includes a number of proposals that are designed to increase access to retirement plans and to make portability of retirement savings and benefits easier. These include requiring employers with more than 10 employees that do not offer a retirement plan to automatically enroll their employees in an IRA. Businesses with fewer than 100 employees would get tax credits of up to $4,500 for offering automatic IRA enrollment.

Reducing tax benefits for high-income taxpayers

The budget would limit the value of certain deductions and exclusions from AGI and all itemized deductions. The proposal would reduce to 28% of the value of the specified exclusions and deductions that would otherwise reduce a taxpayer’s taxable income in the 33%, 35%, or 39.6% tax brackets. The definition of net investment income would be expanded to include gross income and gain from any trades or businesses of an individual that is not otherwise subject to employment taxes. The budget also proposes implementation of the so-called Buffett rule (called a “Fair Share Tax” in the budget), which would require high-income taxpayers to pay at least a 30% tax rate (after charitable contributions).

Capital gains tax

Under the budget, the maximum capital gains tax rate would increase to 28% (inclusive of the 3.8% net investment income tax). It would also eliminate basis step-ups on gifts and bequests by treating transfers of appreciated property as a sale, so that the donor or deceased owner would realize a capital gain on the transfer. The budget would also tax carried interests at ordinary income tax rates instead of as capital gain.

Corporate tax reform

The budget would cut the corporate tax rate to 28%. It would also impose a 19% minimum tax on foreign earnings, which would be imposed when the earnings are earned. As a transition to the minimum tax, previously untaxed foreign income would be subject to a one-time 14% tax. The budget would also provide further rules against earnings stripping and corporate inversions.

Incentives to bring jobs to the United States

The budget proposes to provide a tax credit equal to 20% of eligible expenses to businesses that reduce or eliminate a line of business currently conducted overseas and start up, expand, or otherwise move the same trade or business to the United States.

Sec. 179 expensing

The budget proposes increasing the maximum Sec. 179 expensing limitation to $1 million and to index it for inflation (the phaseout threshold would remain $2 million, indexed for inflation).

Simplified accounting for small business

The proposed budget would create a uniform small business average annual gross receipts threshold of $25 million for allowing exceptions from certain accounting rules. Eligible businesses would be allowed to use the cash method, avoid the uniform capitalization rules, and use an inventory accounting method that either conforms to their financial accounting method or otherwise properly reflects income.

Startup expenses

Under the budget proposal, the limit on deductible startup expenses would be increased to $20,000 (from $5,000). This amount would be reduced (but not below zero) by the amount by which those expenditures exceed $20,000 (currently $50,000).

Research credit

The budget would do away with the current bifurcated Sec. 41 research credit, under which eligible taxpayers can claim either a 20% regular credit or a 14% simplified credit. Instead, the budget proposes to create a single formula with a credit worth 18%.

Increase in tobacco tax

The budget would increase taxes on tobacco to fund an initiative to expand access to preschool and to expand home visiting programs by nurses, social workers, and other professionals.

Clean energy

The budget would simplify, expand, and make permanent several tax incentives for clean energy investment. It would also create two new tax credits to provide an incentive for commercial deployment of carbon capture, utilization, and storage. The budget would also eliminate $4 billion a year in tax subsidies to oil, gas, and other fossil fuel producers.

Cadillac tax

The budget proposes changes to the Sec. 4980I excise tax on high-cost employer-sponsored health coverage (known as the Cadillac tax). The Cadillac tax has been the focus of repeal efforts in Congress, and the recently enacted Consolidated Appropriations Act, 2016, P.L. 114-13, postponed its effective date to 2020. (It was originally scheduled to take effect in 2018.) Under the proposal, the threshold above which the tax applies would be modified to be equal to the greater of the current law threshold or the average premium for a marketplace gold plan in each state. This is designed to protect employers from paying the tax just because they are in a high-cost state.

Estate tax

The budget proposes to revert the estate tax to its form in 2009, with a 45% tax rate, a $3.5 million exclusion amount for estate and generation-skipping transfer tax purposes, and a $1 million gift tax exclusion (with no indexing for inflation). The budget would also expand the property subject to the new basis reporting consistency requirement under Sec. 1014(f) to include property eligible for the estate tax marital deduction and gifts required to be reported on a federal gift tax return.

Oil tax

The budget proposes a $10.25-per-barrel “fee” on oil. The Office of Management and Budget estimates that this provision would raise $319 billion over 10 years.

—Alistair Nevius (anevius@aicpa.org) is the JofA’s editor-in-chief, tax.