President Barack Obama’s budget proposes to help narrow a yawning budget deficit by doing away with some sweeping Bush administration tax cuts for the wealthy.
Mr. Obama had planned tax increases for those earning more than $250,000 in last year’s budget, but they didn’t happen. However, action is more likely this time because tax cuts from the George W. Bush-era expire at the end of the year unless Congress extends them.
The budget contains some carrots for taxpayers. One popular move will be to eliminate personal taxes on employer-provided cellphones.
Here are some explanations to commonly asked questions about taxes and the proposed budget:
How would individual income-tax rates be affected under the Obama budget?
The top rate would jump to 36% from 33% for individuals and to 39.6% from 35% for joint filers in the highest brackets. The Obama administration, however, wants to preserve the Bush-era tax cuts for millions of lower-income filers.
What would happen with
Mr. Obama is renewing his proposal to limit the benefit of itemized deductions, such as those for mortgage interest and charitable donations, for top-bracket filers.
What about taxes on
The budget calls for raising the tax rates on capital gains and qualified dividends to 20% from 15% for single taxpayers earning more than $200,000 and joint filers earning more than $250,000. For those people earning less, the rate would continue to be 15%.
Will the estate tax return?
Mr. Obama wants to reinstate the estate tax, which Congress allowed to lapse for 2010, at its 2009 level of 45% with a $3.5 million exemption per individual, or as much as $7 million for couples.
The budget also proposes tightening the rules on popular estate-planning strategies, including grantor-retained annuity trusts and family limited partnerships.
What about the Alternative
The budget calls for making permanent the temporary fix that expired at the end of 2009 and indexing it for inflation. That fix shielded roughly 20 million middle-income Americans from the AMT.
What else is new this year?
The administration wants to free taxpayers with employer-provided cellphones and similar equipment from having to pay tax on the personal use of these devices. Another proposal restricts the definition of who may be classified an independent contractor.
If I am a married taxpayer with a joint income of more than $250,000, are my taxes for sure going up?
It is possible that some in an income range of roughly $200,000 to $350,000 would actually see their taxes cut in 2011 relative to the previous year, if Mr. Obama’s proposals are enacted. This happens because some income that is now subject to a 33% marginal tax rate would be taxed at a 28% rate, under Mr. Obama’s plan.
For example, a married couple with an income of $350,000 would pay $6,500 less in 2011 than they would now, according to an estimate by accounting firm Deloitte Tax. Part of the cut would be from Mr. Obama’s proposal to index the AMT for inflation, but part is a result of the expansion of the 28% bracket.
What else is significant?
Fund managers would lose the ability to claim capital-gains treatment on certain income by using “carried interest” rules. The Cobra health-insurance subsidy for unemployed workers would be extended through the end of this year instead of through the end of this month.
—Laura Sanders and Martin Vaughan