President Obama Releases Federal Budget

February 15, 2012

President Barack Obama released the FY 2013 federal budget on Monday in which he proposes spending of $3.8 trillion, revenues of $2.9 and a deficit of $901 billion. The next ten years (FY 2013- 2022) would see cumulative deficits of $6.7 trillion (about $600 to $700 billion annually). Federal receipts would grow to approximately 20 percent of GDP while expenditures would be in the 22 to 23 percent of GDP range. The deficit is projected to decline from the FY 2012 level of 8.5 percent of GDP to 2.8 percent of GDP by 2022. Debt held by the public is projected to remain about 76-77 percent of GDP.


The administration projects the GDP growing from $15.6 trillion in FY 2012 to $25.5 trillion in 2022, an increase of 63 percent. This is based on the assumption that real GDP will grow a robust four percent for FY 2013 to FY 2017 and ramp down to 2.5 percent by the end of the decade. Unemployment is projected to remain historically high until 2016.

Of particular note is a 3.5 percent increase in the budget for the U.S. Small Business Administration (SBA). Below, please find a summary of the key provisions in the budget as they relate to small business.


Key Spending Provisions (in billions)

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·         Repeal Last-In, First-Out (LIFO) Method of Accounting for Inventories: The President’s budget would repeal the use of the LIFO inventory accounting method for Federal income tax purposes.


·         Increase IRS Power with Respect to Worker Classification: The proposal would permit the IRS to require prospective reclassification of workers who are currently misclassified and whose reclassification has been prohibited under current law. The Department of the Treasury and the IRS also would be permitted to issue generally applicable guidance on the proper classification of workers under common law standards.


·         Restore the Estate, Gift, and Generation-Skipping Transfer Tax Parameters in Effect in 2009: For 2013 and thereafter, the proposal would make permanent the estate, GST, and gift tax parameters as they applied during 2009. The top tax rate would be 45 percent and the exclusion amount would be $3.5 million for estate and GST taxes, and $1 million for gift taxes.


·         Reinstate the Limitation on Itemized Deductions for Upper-Income Taxpayers: The Administration proposes to reinstate the limitation on itemized deductions for upper-income taxpayers starting in 2013. Itemized deductions (other than medical expenses, investment interest, theft and casualty losses, and gambling losses) would be reduced by 3 percent of the amount by which AGI exceeds statutory thresholds, but not by more than 80 percent of the otherwise allowable deductions. The thresholds would be $250,000 for married taxpayers filing joint returns, $225,000 for head-of household taxpayers, $200,000 for single taxpayers, and $125,000 for married taxpayers filing separately. The AGI thresholds are at 2009 levels, and would be indexed for inflation thereafter.


·         Reinstate the Personal Exemption Phase-out for Upper-Income Taxpayers : The Administration proposes to reinstate the phase-out of personal exemptions for upper-income taxpayers starting in 2013. The thresholds are the same as for the limitation on itemized deductions above


·         Reinstate the 36-Percent and 39.6-Percent Tax Rates for Upper-Income Taxpayers: The Administration proposes to replace part of the 33 percent and all of the 35 percent tax rate brackets with the prior law tax rate brackets of 36 percent and 39.6 percent for 2013.


·         Tax Qualified Dividends as Ordinary Income for Upper-Income Taxpayers; Tax Net Long-Term Capital Gains at a 20-Percent Rate for Upper-Income Taxpayers: Under current law, the maximum rate of tax on net long-term capital gains of an individual is 15percent. Starting in 2013, the maximum long-term capital gains tax rate for upper-income taxpayers would be 20 percent. The proposal would allow the current reduced tax rates on qualified dividends to expire as scheduled for income that would be taxable in the 36 percent or 39.6 percent brackets.


·         Reduce the Value of Various Deductions and Exclusions: Starting in 2013, the proposal would limit the tax value of specified deductions or exclusions from AGI and all itemized deductions. This limitation would reduce the value to 28 percent of the specified exclusions and deductions that would otherwise reduce taxable income in the 36-percent or 39.6 percent tax brackets. A similar limitation also would apply under the alternative minimum tax.

The income exclusions and deductions limited by this provision would include any tax-exempt state and local bond interest, employer-sponsored health insurance paid for by employers or with before-tax employee dollars, health insurance costs of self-employed individuals, employee contributions to defined contribution retirement plans and individual retirement arrangements, the deduction for income attributable to domestic production activities, certain trade and business deductions of employees, moving expenses, contributions to health savings accounts and Archer MSAs, interest on education loans, and certain higher education expenses.


·         Eliminate Capital Gains Taxation on Investments in Small Business Stock: The proposal would make the 100-percent exclusion for qualified small business stock permanent. The AMT preference item for gain excluded under section 1202 would be repealed for all excluded small business stock gain. The time for a taxpayer to reinvest the proceeds of sales of small business stock under section 1045 would be increased to 6 months for qualified small business stock the taxpayer has held longer than three years. The proposal would be effective for qualified small business stock acquired after December 31, 2011. To qualify as a small business, the corporation, when the stock is issued, may not have gross assets exceeding $50 million (including the proceeds of the newly issued stock) and must be a C corporation.


·         Extend Temporary Reduction in the Social Security Payroll Tax Rate for Employees and Self-Employed Individuals: The Administration proposes to extend the 2.0 percentage point reduction in the Social Security tax on employees to the first $110,100 of taxable wages and salaries received during 2012. Similarly, the Administration proposes to extend the 2.0 percentage point reduction in the Social Security tax on the self-employed to the first $110,100 of taxable self-employment earnings received during 2012. The Social Security Trust Fund would receive transfers from the General Fund equal to the reduction in payroll taxes attributable to these reductions in the payroll tax rate.


·         Extend 100 Percent First-Year Depreciation Deduction for One Additional Year: The proposal would extend the 100-percent additional first-year depreciation deduction for one additional year. Thus, qualified property acquired and placed in service through 2012 (2013 for property eligible for a one-year extension of the placed-in-service date) could be fully expensed.


·         Provide a Temporary 10-Percent Tax Credit for New Jobs and Wage Increases: Under the proposal, qualified employers would be provided a tax credit for increases in wage expense, whether driven by new hires, increased wages, or both. The credit would be equal to 10 percent of the increase in the employer’s 2012 eligible wages over the prior year (2011).


To read the President’s budget, including the proposed budget, historical tables and analytical perspectives, click here.


To read the Treasury Department’s detailed explanation of the many tax proposals in the budget, click here.