News & Events


With Congress only now coming back in the week of September 10, 2012 from its traditional August recess, there is not too much to report for September 2012. Consequently, with the 2012 Presidential election almost here, it seems appropriate to compare and contrast in general terms the tax policies being advanced by President Obama and former Governor Romney. It is likely that the policies being advanced now by the winner of the November 6, 2012 election will impact not only 2013, but also 2014 and beyond.

  1. Where Are We Now As A Nation? – Under current law, the Bush-era tax cuts (for example, the reduced income tax rates, the reduced capital gains/qualified dividends tax rates, and the reduced gift and estate tax rates implemented during President Bush's tenure as President) are scheduled to expire on January 1, 2013. Also, effective January 1, 2013, the sequestration mandated under the Budget Control Act of 2011 is scheduled to take effect. The sequestration required by the 2011 legislation, if not revised by Congress prior to January 1, 2013, is intended to reduce the annual federal budget deficits by nearly $1 trillion over 10 years. In addition, after 2012 a number of temporary tax incentives are scheduled to expire. One of the more significant tax incentives set to expire is the 2% reduction in an employee's share of Social Security Taxes which has been in effect for 2011 and 2012. The combination of all of these events has led many commentators to refer to January 1, 2013 as the "Fiscal Cliff" facing the American economy.
     
  2. So What Are Some of the Major Tax Changes That President Obama And Former Governor and Candidate Romney Are On Record as Proposing in Order to Help Keep America From Falling Over the Fiscal Cliff?
Tax Category President Obama Governor Romney
1. Income Tax Rates Continue the Bush-era individual tax rates for all but "higher income" taxpayers (which President Obama broadly defines as individuals with annual incomes over $200,000 and families with annual incomes over $250,000). Those taxpayers would see an increase in their top marginal tax bracket from 35% (where it is today) to 36%, and for some, as
high as 39.6%.
Extend the current "Bush-era" tax brackets of 10, 15, 25, 28, 33, and 35 percent, at least for 2013. Long term, Romney is also on record as favoring a comprehensive reform of the Internal Revenue Code which would replace the current tax structure with a more streamlined  tax structure. For this purpose, Romney is proposing a Tax Code with fewer deductions, but also with fewer tax brackets and a lower rate for the top most tax bracket. Romney has not, however, provided specifics as to how such reform would be accomplished.
2. Capital Gains/Dividends Tax all dividends (whether or not considered to be "Qualified Dividends" under present law) received by "higher income" taxpayers as ordinary income (rather than as capital gain as now applies to Qualified Dividends) at the proposed 36% and 39.6% tax brackets. Also, for "higher income" taxpayers, those capital gains which for 2012 are being taxed at a 15% rate will instead be taxed at a 20% rate.

NOTE: As part of the Patient Protection Affordable Care Act of 2010, the tax rate on capital gain is already scheduled to increase in 2013 by 3.8% for "higher income" taxpayers.
Make permanent all
of the "Bush-era" tax cuts, including the reduced tax rates on Qualified Dividends and capital gains. In addition,
Romney has also discussed exempting from tax all capital gains, dividends, and interest income for individuals making less than $200,000 annually.
3. Marriage Penalty Extend the marriage penalty relief for married taxpayers filing jointly presently in place (an increase in the standard deduction and an increase in the 15% tax rate brackets to twice the amount applicable to single taxpayers) EXCEPT for "higher income" taxpayers. Extend the marriage penalty relief for all married taxpayers filing jointly.
4. Alternative Minimum
     Tax ("AMT")
For 2012 and 2013, provide for some sort of "patch" similar to the one that officially expired on December 31, 2011 (the "patch" that just expired increased the amount of the AMT exemption amount, and made some other specifically targeted relief). Long term, replace the AMT with the so-called "Buffett Rule". President Obama has described the "Buffett Rule" as a tax provision that ensures that taxpayers who make over $1 million annually pay an effective tax rate of at least 30% (to date, the President's attempts to pass legislation that imposes something on the order of this rule has been soundly defeated by the Republicans in the House of Representatives). Abolish the AMT.
5. Individual Tax Incentive
    Extenders
Extend for 2012 and 2013, the following tax incentives (among others):
  • Teachers' classroom expense deduction of $250
  • Sales and local sales tax deduction
  • Qualified Mortgage Insurance deduction
  • Tax-free charitable distributions from IRAs.
To date, Romney has not formally addressed the extension of those tax incentives that expired on January 1, 2012.
6. "Carried Interests" in
    Private Equity/Hedge
    Funds
In general, tax most "Carried Interests" as ordinary income. To date, Romney has not formally addressed the taxation of a "Carried Interest".
7. Oil & Gas Tax
    Preferences
Repeal many of the tax preferences targeted to oil and gas producers (including, for example, percentage depletion and deduction of intangible drilling and production costs). To date, Romney has not formally addressed the retention of special tax preferences for oil and gas producers.
8. Federal Gift and
    Estate Taxes
Set the maximum federal estate tax rate at 45% for decedents dying after December 31, 2012 (for 2012, the maximum tax rate is 35%) with a $3.5 million exemption amount (for 2012, the exemption amount is $5,120,000). Continue the present rules on the portability of the exemption amount between spouses. Reduce the gift tax exemption amount to $1,000,000 (for 2012, the exemption amount is $5,120,000). Abolish the Federal Estate and Gift Taxes (and presumably the Federal Generation Skipping Transfer Tax, as well).

For additional information regarding this topic, please contact your local UHY LLP professional.

 

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¹General partners in private equity and hedge funds are typically compensated for their services rendered to the fund by paying them a percentage of the fund's earnings (as a so-called "carried interest"), which typically consists largely, if not entirely, of capital gains realized by the partnership. Accordingly, under current law, to the extent the partnership's income consists of capital gains, any income recognized by the partner because of the partner's receipt of such "carried interests" is therefore taxed as capital gains, rather than as ordinary income.