“Recent history supports the likelihood that there will be a major tax bill in 2009, but historical data suggests that no first-term tax law will pass until May, and usually not until late July,” according to George Jones, JD, CCH senior tax analyst.

“But, when legislation is passed, it’s likely that many tax provisions will be retroactive to January 1,” Jones said.

Middle-class Benefits
Middle-class and working-class families would benefit under Obama’s tax proposals from the continuation of the 10-percent bracket past its scheduled expiration date in 2011 and a $500 per-wage earner tax credit based on the first $8,100 in payroll taxes. Obama has also promised to eliminate income taxes for seniors with incomes under $50,000 a year.

Other proposals discussed with little elaboration during the campaign include a refundable mortgage interest credit, enhancing and making refundable the child and dependent care credit, new education credits and expanding the Earned Income Tax Credit. Tax-free unemployment benefits for 2008 and 2009 have also been mentioned, and may be part of a second “stimulus” bill if Congress returns for a lame duck session this year.

High Incomes Affected
Obama’s tax policy for individuals also entails a partial retreat from the Bush tax cuts for high-income taxpayers. Obama would make the 10-, 15-, 25- and 28-percent brackets permanent, but he would bump the 33-percent bracket up to 36 percent and the 35-percent bracket up to 39.6 percent, where they stood before Bush took office.

The President-elect also has proposed restoring the personal exemption phase-out (PEP) and itemized deduction limitation (Pease deduction) for individuals making over $200,000 and families with incomes above $250,000, provisions set to expire under Bush’s tax plan.

“Taking into account restoration of PEP and the Pease limitation, the top marginal individual income tax rate would effectively be above 40 percent,” Jones observed. “Because of this, 2008 year-end tax planning should consider such things as accelerating some income into 2008 and deferring some deductions until 2009 or beyond.”

High-income wage earners would also see an increase in FICA tax, in the form of a payroll “surtax,” possibly as high as four percent, on earnings above $250,000.

As with other proposals that have yet to be cast into concrete legislative language, the potential tax increases for high-income taxpayers are open to a certain amount of interpretation, however, as well as temporary modification in response to the nation’s financial crisis.

“Obama’s statements so far have left unclear whether the cut-off amounts, for example, apply to wages, gross income, adjusted gross income or taxable income,” Jones noted. “There’s a fair amount of ‘wiggle room’ between these different tax categories, leaving the next President and Congress some ability to fine-tune the actual impact on individuals and on the federal budget.”

The CCH Special Tax Briefing notes that a repeal of the alternative minimum (AMT) tax is unlikely to be proposed, but that some attempt will probably be made to continue, and possibly make permanent, the “patch” that keeps millions of taxpayers free of the AMT.

Dividends, Capital Gains, Retirement Issues
Obama would continue to give dividends the same favored treatment as capital gains, but would increase the top capital gains rate for individuals earning more than $200,000 and families over $250,000 from 15 percent to 20 percent.

“Taxpayers in the 10- and 15-percent brackets should still benefit from a zero-percent capital gains rate, and Obama has proposed a zero rate for all investors for certain small business stock, but hasn’t provided many specifics,” Jones said.

The Briefing notes that Obama has supported relaxing penalties for early withdrawals from retirement plans and temporarily suspending required minimum distributions.

Obama has also proposed pegging the estate tax at 45 percent, but with a $3.5 million per-person, $7 million per-couple exemption. This would effectively eliminate the tax for 99.7 percent of estates, according to the President-elect.

A “Mixed Bag” for Business, Energy
The CCH Special Tax Briefing predicts that business can expect a “mixed bag” of provisions under an Obama administration, with tax cuts keyed to domestic job creation, extension of $250,000 in first-year expensing and making the research and development credit a permanent fixture of code offset by provisions to discourage moving jobs offshore, closing of unspecified “loopholes” and possible limits on executive compensation.

Small businesses may also benefit from a tax credit for providing health benefits to their employees.

Tax provisions are likely to feature in Obama’s energy policy, as well. The CCH Briefing notes that at various times, Obama has endorsed expanded tax breaks for alternative energy production, tax rebates to help pay home heating costs and a windfall profits tax.

“Some of these proposals were made when energy prices were much higher than they are now,” Jones said. “Nevertheless, they may still surface in legislation this year or next.”

“Change” Written Into Law
The road from tax proposal to amendment of the Internal Revenue Code can be a long and tortuous one, but with the swearing in of Obama, for the first time in three years, the same party will control the White House and both Houses of Congress.

“The theme of Obama’s campaign was ‘change’ and in the realm of taxes, that theme is likely to be written into law within the near future,” Jones said.