The Obama tax proposals: Tailored cuts and hikes

January 27 04:32 2015

President Obama’s State of the Union plan proposed several tax changes that will benefit middle-class taxpayers but cost wealthy taxpayers and financial services companies more. The proposals could raise $320 billion over 10 years, according to White House estimates. The president hopes to use that money to give $175 billion in tax breaks to middle-class taxpayers and to fund his $60 billion proposal to make community college free for two years.Obama_0c245_image_1024w1

The tax on long-term capital gains — gains on assets such as stocks held for more than a year — is lower than the tax on ordinary income. For tax year 2014, the maximum capital gains tax is 23.8%, which includes a 3.8% tax on net investment income. The maximum federal income tax rate is 39.6%. The president’s proposal would hike the capital gains rate for wealthy taxpayers to 28%. In the 2014 tax season, single filers with taxable income above $406,750 and joint filers with taxable income above $457,600 pay the highest capital gains rate.

The proposal would also raise the tax on qualified dividends to 28%. There are separate capital gains schedules for precious metals, collectibles and commercial buildings. Details on those, if any, haven’t been released. The White House notes that the capital gains rate under President Reagan was 28%. Jon Traub, managing principal of the tax policy group at Deloitte, notes that the maximum income tax rate during President Reagan’s term was also 28%, so the comparison is not entirely apt.

The end of the step-up basis. Under current tax law, if you buy a stock for $25 a share and it soars to $500 a share, you can pass the entire amount on to your heirs without paying capital gains tax on your $475 gain. Instead, the entire amount passes tax-free to your heirs, and their cost basis — the amount used to determine capital gains tax — would then rise to $500. The Obama proposal would eliminate that, calling it “the single largest capital gains tax loophole.” Capital gains taxes would be owed at death — in the case of couples, at the death of the second spouse. Capital gains of $100,000 — $200,000 in the case of joint filers — would be free from tax. Couples would have an exemption of $500,000 on the gains on their personal residences, and no taxes would be due on inherited small-family businesses until those businesses were sold.