On April 10, 2013, President Obama released the fiscal year 2014 federal budget. Among the numerous proposed budget provisions, listed below are six proposed tax increases included in the budget:
  • 28 Percent Cap on Itemized Deductions. The tax benefit from itemized deductions and certain tax exclusions would be capped at 28 percent of taxable income for taxpayers in the 33 percent, 35 percent, and 39.6 percent income tax brackets. This provision would limit the value of itemized deductions such as mortgage interest, state taxes paid, and charitable deductions and tax exclusions like employer-sponsored health insurance and tax-exempt interest.
  • Chained CPI. The budget changes the inflation index for certain items in the budget to the "chained Consumer Price Index" (chained CPI). This change would both reduce the growth in federal benefit programs such as Social Security and cause an increase in taxable income in future years because the standard deduction, personal exemption and income tax bracket threshold would grow at a slower rate. The move to the chained CPI would result in a tax increase on all individual taxpayers.
  • Estate Tax Increases. The estate and gift tax per person exemption would decrease from $5.25 million to $3.5 million and the highest marginal tax rate would increase from 40 percent to 45 percent. These changes would go into effect in 2018. The portability of any unused estate and gift tax exclusion between spouses would, however, remain in the law.
  • Limitation on Retirement Benefits. The budget proposes an estimated cap of $3 million on an individual's tax-favored retirement accounts including IRAs, 401(k)s, tax-sheltered annuities and deferred compensation plans. This cap includes both contributions and accruals. Non-spouse beneficiaries inheriting a retirement account would be required to take taxable distributions over five years instead of over their projected life expectancy.
  • Buffet Rule. Taxpayers with an adjusted gross income in excess of $1 million would pay a minimum of 30 percent income tax on the excess of the taxpayer's adjusted gross income over the taxpayer's modified charitable contribution deduction for the tax year.
  • Carried Interest Taxed as Ordinary Income. A carried interest in an investment partnership will be taxed as a service partnership interest that is not attributable to invested capital and will therefore be taxable as ordinary income. Taxpayers at the top income tax bracket who receive carried interests will experience an increase in the tax rate from 23.8 percent to 44.3 percent.
Overall, the fiscal year 2014 Obama budget would, if enacted as is, increase taxes by nearly $1 trillion over the next ten years. As was the case with the American Taxpayer Relief Act of 2012, the vast majority of these tax increases would be funded exclusively by those taxpayers determined to be "wealthy." Although it is doubtful that each of the proposed budget provisions described above will be enacted as is, certain aspects of these proposals could be enacted. As a result, this budget initiative certainly provides an advanced warning to "wealthy" taxpayers to re-address tax planning sooner than later.