President Obama’s 2013 Budget Proposal Includes Many Tax Reform Provisions

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On Monday, President Barack Obama unveiled his proposed fiscal year 2013 budget. The proposed $3.8 trillion budget emphasizes creating jobs while backing away from further spending cuts. He called for increased spending for job training, community colleges, research and development, and infrastructure, saying the nation "can’t cut our way to growth." Obama abandoned his promise to cut the deficit in half by the end of his first term.

Additionally, the budget is full of specific tax proposals, and five principles for tax reform:

  1. Simplify the Internal Revenue Code and lower tax rates;
  2. Reform inefficient and unfair tax breaks;
  3. Decrease the deficit and protect progressivity;
  4. Increase job creation and growth; and
  5. Observe the “Buffett Rule.”

The budget defines the “Buffet Rule” as: “No household making over $1 million annually should pay a smaller share of its income in taxes than middle class families pay”.  It’s name comes from the famous comments of Warren Buffet observing that he pays a lower effective tax rate than his secretary.  The reason being of course, is his income is derived mostly from capital gains, which are taxed at a lower tax rate to incentivize investment in the economy.  The budget proposal would replace the current alternative minimum tax with the “Buffet Rule”, and allow certain 2001 and 2003 tax cuts to expire.

The budget would also repeal the LIFO method of accounting for inventories.

Other proposed changes include:

    • Reinstate the limitation on itemized deductions for upper-income taxpayers;
    • Reinstate the personal exemption phaseout for upper-income taxpayers;
    • Tax qualified dividends as ordinary income for upper-income taxpayers;
    • Tax net long-term capital gains at a 20% rate for upper-income taxpayers;
    • Cap the value of itemized deductions;
    • Tax carried interests as ordinary income

The list of potential tax changes is lengthy, and the Journal of Accountancy has prepared a great in-depth analysis in their article here.

We will continue to monitor these proposals as they progress through the government.

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