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Examining the President's 2016 Budget Proposal

by
Lee Reams, BSME, EA
on
2/5/2015
Examining the President's 2016 Budget Proposal

The newly released Fiscal Year 2016 Budget Proposal submitted by President Barack Obama has just been released to the public. Aspects of the proposed plan would raise taxes on higher-income taxpayers while increasing the tax breaks and write-offs available to low income and middle-income taxpayers. The proposal has a number of points of interest to individuals, as well as to business owners. 

Highlights for Businesses

  • Cash Basis Accounting

The proposal would make businesses with less than $25 million in average annual gross receipts eligible to use the cash method of accounting. This change would extend the use of the method to 99% of American businesses.

  • Mandatory Employer IRA Payroll Deductions

Those companies that have ten or more workers and who don't offer a 401K plan would be required to automatically enroll all employees, full and part-time, into an optional IRA payroll deduction plan.

  • Qualified Small Business Stock

The 100% exclusion on capital gains from sales of tax-qualified small business stock  held by individuals for more than five years would become permanent, and excluded gains from the Alternative Minimum Tax would be eliminated.

  • Section 179 Expensing

The 179 expense cap, which was originally established at $25,000 but increased to $500,000 in 2014, will stand at $500,000 for 2015 and increase permanently to $1,000,000 in 2016, with inflation adjustment for future years.

  • Small Employer Health Insurance Credit

The credit that is currently available to provide health insurance to 25 employees would increase to up to fifty full tie equivalent employees, and the phase-out would increase from between ten and twenty five to between twenty and fifty. 

  • Start-Up & Organizational Expenses

The deduction available for start-up and organizational expenses would increase and consolidate.

Highlights for Individuals

  • Buffett Rule

Named for philanthropist Warren Buffett, the rule would make it a requirement for the wealthy to pay a minimum 30 percent effective tax rate. This proposal was originally submitted with the 2014 budget.

  • Child Care

This proposal would eliminate flexible spending accounts for children but introduce a credit of up to $3,000 (%0% credit for up to $6,000 of expenses per child) for every child under the age of five. The proposal is designed to allow parent(s) or other qualified taxpayers to have gainful employment. The beginning phase out number of $15,000 for the credit for children between the ages of five and twelve would increase to $120,000.

  • Earned Income Tax Credit (EITC)

The EITC for workers who don't have a child would double, and the credit applicability for childless workers would increase from 125% to 150%  of the federal poverty level.  It would also change the age range of applicability for the EITC from 24 to 64 to 21 to 66.

  • Education Tax Benefits

The existing education tax benefits would be modified in a number of ways, including expanding the American Opportunity Tax Credit (AOTC) from four years of post-secondary education to five and adjusting the $2,500 tax credit for inflation. The portion of the AOTC that is refundable would increase to $1,500 and the credit available for part-time students would increase from $750 refundable to $1,250 refundable. Other credits that have been deemed redundant or less effective would be eliminated. Those eliminated include the Lifetime Learning Credit, the student loan interest deduction for new borrowers, and the tuition and fees deduction. Coverdell accounts for new contributions would either be allowed to expire or would be repealed, and the AOTC's coordination with the Pell Grants would be optimized.

  • Itemized Deductions

Married taxpayers with incomes over $250,000 and individual taxpayers with income over $200,000 would have the value of all of their itemized deductions and other tax preferences, including itemized deductions, tax exempt interest, tax exclusions for retirement contributions and tax exclusions for employer-sponsored health insurance, limited to 28%. 

  • Limit Retirement Account Contributions

Once tax-preferred retirement plans and IRA balances reach approximately $3.4 million – enough to provide an annual retirement income of $210,000 – additional contributions and accrual of additional benefits would be prohibited.

  • Second Earner Tax Credit

Adds a tax credit of up to $500 (5% of the first $10,000 of earnings for the lower-earning spouse) for those taxpayers with two wage earners who file jointly. The credit would be fully available up to an income of $120,000, which is where phase out would begin. Credit availability would be eliminated at a family income of $210,000. Roughly 24 million joint filers would benefit.

  • Top Capital Gains Rate

The top effective capital gains rate, as well as the qualified dividends tax rate, would increase to 28 percent, calculated as 24.2 percent plus the 3.8 percent net investment income tax. The 28 percent rate would apply to couples whose income exceeds $500,000 per year.

Highlights of the Gift & Inheritance Tax Changes

  • Inheritances and Gifts

The current step-up in tax basis at death would be eliminated. Capital gains taxes would need to be paid on the increase in value of securities when they are first inherited.  A portable-between-spouses exclusion of $100,000 per person would be applied to inherited appreciated assets, and exceptions for small businesses, surviving spouses residences and charities would also apply. No tax would be due on a couples' assets until the time of the second spouse's death, and inherited small, family-owned businesses would not be required to pay inheritance taxes unless and until the business was sold. Closely held inherited businesses would be able to pay tax on gains over 15 years time.  An additional $500,000 exemption for personal residences would be extended to couples, based on a calculation of $250,000 per individual. This exemption would automatically become portable between spouses.  With the exception of expensive art and other collectibles, tangible personal property including gifts of clothing, furniture and small family heirlooms would be exempt from gift and inheritance tax.

  • Inheritance and Gift Tax

The estate and gift tax rates that were in place in 2009 would be reinstated with lower exclusions of 45% at $3.5 million for estates and $1 million for gifts, with some exceptions.

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Lee Reams, BSME, EA

Lee Reams, BSME, EA

Editor-in-Chief

Besides his role at CountingWorks as an educator and speaker to thousands of accountants nationwide, Lee manages a technical research service for a large group of tax accountants which sharpens his technical skills. Lee served on the Board of Blackline Systems, is a former Board of Director for the California Tax Education Council, is a Past President of the San Fernando Valley Chapter of Enrolled Agents, Member and Past Director for the California Society of Enrolled Agents.

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