Presented by Rich Tegge
President Obama’s $3.77 trillion budget proposal for 2014—which is projected to cut deficits by $1.8 trillion over the next 10 years—was released the morning of April 10. Many Americans will certainly be wondering about its potential impact, so we’re sharing some of the key provisions here. Keep in mind that there is a difference between proposed and approved. We can’t predict whether or not these items will eventually come to fruition, but we would like to offer some thoughts on what things would look like if they did.
Enact the “Buffet Rule”
The budget proposal calls for the implementation of the Buffett Rule, which would require households with incomes of more than $1 million to pay at least 30 percent of their income in taxes. Charitable giving would be excluded.
Cap value of itemized deductions
The president wants to restrict deductions and exclusions for the top 2 percent of high-income households, proposing a cap of 28 percent—an amount below the top two income tax rates. Typically, taxpayers multiply their top tax rate by the amount of a deduction to calculate the taxes saved. Today, a taxpayer in the 39.6-percent bracket would save $39.60 on a $100 deduction. Under the proposal, that same taxpayer would save only $28. It’s estimated that this change would raise $580 billion.
Impose new limit on tax-deferred retirement accounts
Another proposal is a limit on the tax-advantaged portion of an individual’s savings across all IRAs and other tax-deferred retirement accounts, such as 401(k)s. The account balance threshold would be based on what could finance an annuity of $205,000 per year in retirement. The administration estimates that amount would be $3 million in 2013.
According to the Employee Benefit Research Institute, this item would affect less than 1 percent of IRA and 401(k) account owners, though the percentage could rise if the threshold is adjusted in the future.
Change how social security cost-of-living adjustments are calculated
President Obama’s budget proposes a change in the way the government calculates annual cost-of-living adjustments for recipients of social security and other government benefit programs. Currently, cost-of-living adjustments are based on increases in the Consumer Price Index (CPI), which tracks a broad basket of consumer goods. But some believe that CPI overstates inflation figures. The new measure would use something called chained CPI, which is based on the idea that people often will substitute a less expensive product for another that is rising in price. Chained CPI results in a modestly lower annual inflation reading.
Over the next decade, this change is projected to cut spending on government benefit programs by $130 billion. At the same time, it is expected to raise about $100 billion in taxes; because certain parts of the tax code, including tax brackets, are adjusted for inflation, the lower chained CPI reading would mean more money taxed at higher rates.
Raise tax rate on investment fund manager income
Currently, private equity, venture capital, and hedge fund managers pay a 20-percent tax on the portion of their compensation referred to as carried interest. President Obama wants to treat this carried interest as ordinary income. As a result, fund managers could pay a rate as high as 39.6 percent—more than 2.5 times the rate they pay now.
Cut Medicare spending
The president has proposed cutting $400 billion in Medicare and other health care program spending over the next 10 years. In addition to asking wealthy seniors to pay more, savings would come from negotiating better prescription drug prices.
Offer universal preschool
Another item of interest in the proposal is the establishment of a program that would offer preschool education to 4-year-olds from families with low to moderate incomes. This endeavor would be paid for by money raised from proposed tax increases on tobacco products.
Again, it’s unclear how much of the president’s budget proposal will be enacted, but these provisions certainly would result in changes for many Americans if they were approved. If you have questions about the potential impact of these items on your personal financial situation, please call us at 906-228-3696.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
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Rich Tegge is a financial advisor located at Wealth Strategy Group, 300 South Front Street, Marquette MI 49855. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 906-228-3696 or at Richard.email@example.com
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