Obama Unveils Middle-Class Tax Proposal

January 22, 2015

pic-taxes-fileDuring the course of the past few days, as well as during his State of the Union address on Tuesday night, President Barack Obama reiterated that middle class families today bear too much of the tax burden because of unfair loopholes that are only available to the wealthy and big corporations.

In advance of his address, the president released a $320 billion proposal for “A Simpler, Fairer Tax Code That Responsibly Invests in Middle Class Families” that calls for giving an estimated $175 billion in tax breaks to middle-class taxpayers and funds a $60 billion proposal to make community college free for two years. To pay for it, investment and inheritance taxes on the wealthy would be increased and some loopholes that would be closed.

More specifically, 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 percent, which includes a 3.8 percent tax on net investment income. The maximum federal income tax rate is 39.6 percent.

The president’s proposal would increase the capital gains rate for wealthy taxpayers to 28 percent. 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 percent and proposed expanding the number of items subject to capital gains taxes by eliminating the “step up in basis” for inherited assets.

According to the president, stepped-up basis is the largest capital gains loophole in the entire individual income tax code. Stepped-up basis refers to the fact that capital gains on assets held until death are never subject to income taxes.

His plan does include some additional insurance for small-business owners. These extra protections are:
• No tax would be due on inherited small, family-owned and operated businesses-unless and until the business was sold.
• Any closely-held business would have the option to pay tax on gains over 15 years.

However, these changes would mean that an inherited business could be subject to both capital gains taxes and estate taxes.

Most Republican leaders have been vocal in their opposition to the president’s proposal and view it as tax increases that will only hurt American small businesses, savers and investors. Needless to say, policy proposals such as this one will not make it through a Republican-controlled control.

For more information, please see the fact sheet released by the White House that outlines the President’s proposals.