Obama's Big Tax Plan

Boy was I wrong! $300 billion in tax cuts are probably on the way -- and soon.

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Right after the election, I was virtually certain that upper-income individuals would face higher federal income tax bills as early as this year. And I didn’t see anything very good on the business tax horizon, either. But after two more months of horrifying economic data, it’s a whole new ball game.

Now, President-elect Obama is proposing a $775 billion economic stimulus package that does not appear to impose higher taxes on anybody or anything for 2009. Instead, it looks like we will immediately see some of the “middle-class tax cuts” Obama promised, plus some unanticipated business breaks too. All in all, these tax cuts could add up to $300 billion (or more) over the next two years.

As Congress mulls over the Obama proposals, more details will emerge. Until then, here are some guesses about what might be coming.

Individual Tax Breaks
New Credit for Middle-Class Workers
We will likely see a new credit of up to $500 for working singles and up to $1,000 for working couples. The credit will probably be delivered via reduced federal payroll tax withholding, so it will take a few months for most workers to collect the full benefit in the form of bigger paychecks. When a similar-sounding credit was pitched during the campaign, it was to be phased out for singles earning over $75,000 and for couples earning over $150,000, but it appears those income limits may be moving targets now. How the credit might be extended to self-employed folks remains to be seen.

Liberalized Earned Income Credit
During the campaign, Obama pledged to increase the number of individuals who are eligible for the earned income credit and provide larger credits to noncustodial parents who fulfill their child support obligations, low-income married couples, and families with three or more children. Earned income credits are “refundable,” which means taxpayers can collect them even if they don’t owe any federal income tax (in other words, the government pays you instead of the other way around). There’s a good chance the upcoming stimulus package will include this change.

Business Tax Breaks
New Five-Year Loss Carry Back Allowance
Businesses might be allowed to "carry back" tax losses incurred in 2008 and 2009 to the previous five years. That way, taxes paid on earlier profits that were wiped out by recent losses can be reclaimed immediately as tax refunds. Under the current rules, losses can generally be carried back only two years and excess losses must be carried forward to future years -- which means those losses can’t do any tax-saving good until future profits are earned. With many companies facing uncertain prospects, extending the loss carry back period to five years would be good tax policy in my opinion.

Extended Section 179 Deduction Allowance
Thanks to the Section 179 deduction privilege, many small and medium-sized businesses can depreciate most or all of the cost of qualifying new and used assets in the first year they are put to use. Most depreciable assets (other than real estate) qualify for this deduction -- including equipment and most purchased software. For tax years beginning in 2009, the maximum Section 179 deduction was scheduled to drop from $250,000 to only $133,000. The upcoming stimulus package could extend the $250,000 allowance or perhaps make it even bigger.

Extended First-Year Bonus Depreciation
Last year, businesses were allowed to claim 50% first-year bonus depreciation for qualifying new (not used) assets that were both purchased and placed in service during calendar 2008. But this valuable break expired on Dec. 31. Unlike the Section 179 deduction, first-year bonus depreciation was available to even the largest businesses. The upcoming stimulus package could extend the first-year bonus depreciation deal through 2009.

New Jobs Credit for Employers
The stimulus package could include new tax credits for employers that hire more workers and perhaps even for those that forgo laying off workers. Details are cloudy, but a range of $40 to $50 billion worth of tax savings is being mentioned. (During the campaign, the Obama tax plan included giving businesses a $3,000 credit for each new full-time job created in the U.S.)

More Details to Come
For what it's worth, everything you’ve read here is nothing more than informed speculation. That said, there’s little doubt that we will soon see a whopping stimulus bill that includes some major tax breaks. Once the dust settles, we'll help you understand what it all means.