Obama Tax Policy Means Wait And See

Throughout the course of Barack Obama’s presidential campaign his message to the nation was one of change—a new agenda for foreign policy that would end the war in Iraq, a first-of-its-kind federal initiative to make healthcare more affordable and aggressive new targets to combat climate change.

Now that he’s won the White House, however, the biggest question on the minds of many Americans is how the sweeping tax law changes he’s proposed will affect them in the years to come.

Barack Obama
Barack Obama

“There is a large degree of uncertainty,” says Mark Nash, a partner with PricewaterhouseCoopers Private Company Services practice and co-author of the accounting firm’s “2009 Guide to Tax and Financial Planning.”

“Obama has stated that he plans to repeal Bush’s tax cuts and we thought that could happen as soon as 2009, but in recent days he has said the economy is his top priority so he may not implement those roll backs quite so swiftly.”

Bill Gale, vice president and director of economic studies for the Brookings independent research institute and co-director of the Tax Policy Center, agrees.

“Those proposals [to raise taxes on the wealthy] were put together more than a year ago and we live in a different world right now,” says Gale. “We can’t do everything all at once so the president will have to decide what his priorities are and initially at least that has to be the economy and the financial problems we’re facing.”

That said, it’s safe to say that if Obama’s tax plan does get the Congressional green light—in 2009 or at any other point during his four-year term—some families will feel the sting while others will reap the benefit of a bigger monthly paycheck.

“Most people would see their taxes change in some way, but it depends on how much you earn,” says Gerald Prante, senior economist for the Tax Foundation, a nonpartisan educational group.

Here’s a look at how your tax bill may change.

Under $250,000

If you’re among the 95 percent of Americans who make less than $250,000, you will generally see your tax bill drop under Obama’s proposed plan.

The official Barack Obama Web site states that “middle class families will see their taxes cut—and no family making less than $250,000 will see their taxes increase.”

Much of that tax relief would come from new credits. Among them:

  • A new “Making Work Pay” tax credit for 150 million workers, providing a refundable tax cut of $500 per worker or $1,000 for working couples.
  • A refundable $4,000 “American Opportunity” tax credit, covering 100 percent of the first $4,000 of qualified tuition expenses.
  • A Universal 10-percent Mortgage Interest Tax Credit to help offset mortgage interest payments and make homeownership more affordable to lower and middle income families. The universal credit will provide an average tax cut of $500 to 10 million homeowners who do not currently itemize.
  • An Earned Income Tax Credit (EITC) expansion to boost the number of working parents eligible for Earned Income Tax Credit benefits, increase the benefits available to noncustodial parents who fulfill their child support obligations” and reduce the EITC marriage penalty.
  • Increased benefits for child care through reform of the Child and Dependent Care Tax Credit by making it refundable and allowing low-income families to receive up to a 50 percent credit on the first $6,000 of child care expenses.
  • A 50-percent federal match on the first $1,000 of retirement savings for families that earn less than $75,000.
  • A new policy that would eliminate all income tax of seniors making less than $50,000 per year.


Middle-income taxpayers, in particular, should also watch closely next year to see if Congress adjusts the Alternative Minimum Tax (AMT) threshold, a move Obama has said he supports.

The AMT was originally designed to ensure wealthy individuals pay a minimal level of income tax, requiring them to use a separate calculation to determine their liability to Uncle Sam.

Congress typically “patches” the AMT on an annual basis by temporarily raising the exemption threshold.

Should lawmakers fail to do so, however, the Tax Policy Center estimates that by 2010 89 percent of married couples with two or more kids and an adjusted gross income of between $75,000 and $100,000 will be hit with the AMT.

Over $250,000

Obama has pledged to repeal President Bush’s tax cuts on the two highest marginal tax rates of 33 percent (which kicks in at $164,550 for single filers and $200,300 for married filers) and 35 percent (which kicks in at $357,700.)

Taxes & Stocks -- A CNBC Special Report
Taxes & Stocks -- A CNBC Special Report

If he keeps his word, those two tax brackets would return to their 1990s level of 36 percent and 39.6 percent respectively.

All other tax brackets would remain unchanged.

As a result, if your family makes more than $250,000 (or $200,000 for single filers), you will likely see your tax bill climb—significantly so in some cases.

In addition to higher tax rates, Obama has also vowed to raise the capital gains rate for those in the top two tax brackets to 20 percent from 15 percent today.

The top dividends rate for those making more than $250,000, meanwhile, will also be set at 20 percent. Currently, it is taxed at the same rate as long-term capital gains (15 percent.)

The estate tax for those with estates valued at more than $3.5 million per person (or $7 million per couple) will be retained at 45 percent.

Perhaps the biggest change for upper income families, however, will come from Social Security taxes.

During his campaign, Obama said he would apply the Social Security payroll tax to all annual incomes above $250,000.

Casey Serin

Currently, the 6.2 percent payroll tax is applied to all income up to $102,000 a year, which Obama believes disproportionately takes its toll on lower- and middle-income taxpayers.

Under the new plan, the Social Security tax would not apply to income between $102,000 and $250,000, but would kick in again on any income above the quarter-million-dollar mark.

According to Nash, high-income taxpayers should start planning now for higher rates down the road.

“We are advising our clients that we expect Obama to make good on his tax policy agenda so taxpayers should be taking a longer-term perspective,” he says. “In an environment where you think rates are going to go up it’s always wise to accelerate income where possible, but that’s doubly the case for earned income because [Obama] wants to repeal the cap on Social Security tax.”

Many executives, for example, who are in a position to choose the year in which they will collect bonuses or other forms of compensation, like stock options and restricted stock, might consider collecting that income this year.

“In a tax planning environment, most people in [the highest] income range are saying 35 percent [this year] is not that bad,” says Nash. “I’ll take it.”

Easy Does It

Beyond reasonable estimates, of course, it’s impossible to determine the extent to which your personal income tax may be affected by our incoming president.

If you do end up owing more, however, the upside is Obama has proposed simplifying the tax system so 40 million Americans who take the standard deduction “can do their taxes in less than 5 minutes” without the help of an accountant.

His proposal includes consolidating several credits and giving taxpayers the option of pre-filled tax forms to verify, sign and return.