President proposes many tax changes in 2014 budget

President Barack Obama released his proposed FY 2014 budget on Wednesday. In it, he aims to raise approximately $580 billion in revenue through new taxes, limits on deductions, and other tax proposals. The revenue-raising portion of the proposed budget generally mirrors the president’s proposals made during the fiscal cliff negotiations last December.

One big part of the revenue proposal is the so-called Buffett rule, which would ensure that households with income over $1 million pay at least 30% of their income (after charitable donations) in tax. Its name derives from Warren Buffett’s observation that his effective tax rate is lower than his secretary’s. A White House press release describes this as “prevent[ing] millionaires from taking advantage of special provisions to pay taxes at lower rates than many middle-class families do.”

The Buffett rule proposal would implement a new “Fair Share Tax,” which would equal 30% of the taxpayer’s adjusted gross income, less a charitable donation credit equal to 28% of itemized charitable contributions allowed after the overall limitation on itemized deductions. The Fair Share Tax would be phased in, starting at adjusted gross incomes of $1 million, and would be fully phased in at adjusted gross incomes of $2 million. The Office of Management and Budget estimates that this rule would increase government revenues by $99 billion over 10 years.

Another large proposal is to limit the value of tax deductions and other tax preferences. This would affect married taxpayers filing jointly with income over $250,000 and single taxpayers with income over $200,000. The proposal would limit the tax rate at which these taxpayers can reduce their tax liability to a maximum of 28%. This limit would apply to all itemized deductions; foreign excluded income; tax-exempt interest; employer-sponsored health insurance; retirement contributions; and certain above-the-line deductions. This proposal was also in the president’s 2013 budget but was not enacted.

The proposed $3.77 trillion budget also contains many proposals beyond tax initiatives, and according to the White House it “contains $2 in spending cuts for every $1 of new revenue” and would reduce the federal deficit by $1.8 trillion over 10 years.

Other tax proposals include expanding the tax credit for child and dependent care, a tax credit to encourage employers to offer retirement savings plans, and a $3 million limit on the size of individual retirement accounts and other tax-preferred savings accounts.

In another proposal that has turned up several times in the past few years, the budget would tax carried interests in partnerships (such as those held by hedge fund managers and private-equity partners) at ordinary income rates, instead of as capital gains. This change is estimated to raise $16 billion over 10 years.

The budget also promises to make permanent the increased Sec. 179 expensing amounts currently in effect.

The proposed budget would also reintroduce the estate, gift, and generation-skipping transfer (GST) tax rules that were in effect in 2009, except that portability of the estate tax exclusion between spouses would be retained. This change would take effect in 2018. Under the proposal, the top tax rate would be 45% and the exclusion amount would be $3.5 million for estate and GST taxes, and $1 million for gift taxes.

The president’s budget would also change the depreciation rules for corporate aircraft. Currently, airplanes, such as corporate jets, that are not used in commercial aviation or to carry freight can be depreciated over five years. Commercial aircraft, on the other hand, have a seven-year depreciation period. The budget proposes applying the seven-year deprecation period to all aircraft. It is estimated that this change would reduce the deficit by $2.7 billion over 10 years.

In another proposal carried over from last year’s proposed budget, the 2014 budget would repeal a number of tax preferences that are currently available for oil, gas, and coal production. It is estimated that this would reduce the deficit by almost $44 billion over 10 years.

Other proposed tax changes in the budget would:

• Repeal the LIFO method of accounting for inventories;
• Provide a temporary 10% tax credit for new jobs and wage increases;
• Provide additional tax credits for investment in advanced energy manufacturing;
• Make permanent the deduction for energy-efficient commercial building property expenditures;
• Create America Fast Forward (AFF) Bonds to attract new sources of capital for infrastructure investment;
• Make the American opportunity tax credit permanent;
• Provide for automatic enrollment in IRAs, including a small-employer tax credit;
• Expand the child and dependent care tax credit;
• Extend the exclusion from income for cancellation of certain home mortgage debt;
• Provide exclusion from income for certain student loan forgiveness;
• Provide a new manufacturing communities tax credit;
• Enhance and make permanent the research and experimentation (R&E) tax credit;
• Provide a tax credit for the production of advanced technology vehicles;
• Provide a tax credit for medium- and heavy-duty alternative-fuel commercial vehicles;
• Extend and modify certain energy incentives;
• Eliminate capital gains taxation on investments in small business stock;
• Expand and simplify the tax credit provided to qualified small employers for nonelective contributions to employee health insurance;
• Create Promise Zones to rebuild high-poverty communities across the country by attracting private investment to build new housing and provide tax incentives for hiring workers and investing within the zones;
• Provide tax incentives for transportation infrastructure;
• Modify tax-exempt bonds for Indian tribal governments;
• Allow current refundings of state and local governmental bonds;
• Reform and expand the low-income housing tax credit; and
• Raise the federal tax on cigarettes and tobacco products to fund a Preschool for All initiative.

Proposals affecting foreign income and taxpayers include ones that would:

• Defer deduction of interest expense related to deferred income of foreign subsidiaries;
• Determine the foreign tax credit on a pooling basis;
• Tax currently excess returns associated with transfers of intangibles offshore;
• Limit shifting of income through intangible property transfers;
• Disallow the deduction for nontaxed reinsurance premiums paid to affiliates;
• Limit earnings stripping by expatriated entities;
• Modify tax rules for dual-capacity taxpayers;
• Tax gain from the sale of a partnership interest on a lookthrough basis;
• Prevent use of leveraged distributions from related foreign corporations to avoid dividend treatment;
• Extend Sec. 338(h)(16) to certain asset acquisitions; and
• Remove foreign taxes from a Sec. 902 corporation’s foreign tax pool when earnings are eliminated.

Several tax administration changes also are proposed. The proposed budget would:

• Require a certified taxpayer identification number (TIN) from contractors and allow withholding if the contractor does not provide a TIN;
• Make e-filing mandatory for exempt organizations;
• Authorize Treasury to require additional information to be included in Form 5500, Annual Return/Report of Employee Benefit Plan;
• Revise offer-in-compromise application rules;
• Streamline large partnership audits;
• Make repeated willful failure to file a tax return a felony;
• Extend the statute of limitation where a state adjustment affects federal tax liability;
• Require taxpayers who prepare their returns electronically but file their returns on paper to print a 2D bar code;
• Provide whistleblowers with stronger protections from retaliation and provide stronger protection against improper disclosure of taxpayer information in whistleblower actions;
• Extend IRS math error authority in certain circumstances;
• Index all penalties to inflation;
• Extend paid preparer earned income tax credit (EITC) due-diligence requirements;
• Extend IRS authority to require truncated Social Security numbers on Forms W-2; and
• Impose a civil penalty on tax identity theft crimes.

Finally, the budget proposes certain tax simplifications, including:

• Simplifying the rules for claiming the EITC for workers without qualifying children;
• Eliminating minimum required distribution rules for IRAs with balances of $75,000 or less; and
• Allowing all inherited plan and IRA balances to be rolled over within 60 days.

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