The Obama Budget: What Every Taxpayer Should Know

President Obama's budget proposal for the federal government's 2015 fiscal year is more than 1,500 pages long, with $3.9 trillion in spending proposals. But even though most political experts have already declared the Obama budget dead on arrival, the initiatives that the president chose to stress in his budget still carry valuable insight into what the administration will see as its priorities for the rest of this election year. Smart taxpayers will want to use that insight to predict coming tax changes that could get through Congress and past the president's desk. Let's take a look at some of the major tax provisions of the Obama budget and how they would affect you.

Source: White House.

Raising tax revenue
The Obama budget includes several provisions that would increase taxes dramatically on upper-income earners. The largest is a proposal to put a 28% limit on the value of itemized deductions and certain items that are excluded from taxable income, including contributions to traditional IRA, 401(k), and other qualified retirement plan accounts. Although those in the 28% tax bracket and below would still get the full value of such tax breaks, those in the 33%, 35%, and 39.6% brackets would see the value of their deductions drop substantially. The White House Budget Office projects that such a move could raise $600 billion over the next 10 years.

Other tax-raising items include the implementation of what has become known as the "Buffett Rule," which would ensure that those making $1 million or more pay an effective tax rate of at least 30%, regardless of deductions other than charitable contributions. The impact of the provision is relatively small, with estimates of about $53 billion in revenue over the next decade, but the tax is squarely targeted at the highest levels of income.

Also, the president would limit the maximum balance in tax-favored retirement accounts so as to prevent wealthy individuals from establishing tax-deferred assets above certain levels. The exact limits are determined by complex actuarial calculations geared toward establishing the maximum annuity allowed under pension law, but according to estimates from the Tax Policy Center, the limits last year for a 62-year-old would have been $3.4 million, but a 40-year-old's limit would have been only $1 million.

The budget also aims to cut certain loopholes. Private-equity firms Carlyle Group (NASDAQ: CG  ) , Apollo Global Management (NYSE: APO  ) , and Blackstone Group (NYSE: BX  ) won't like provisions ending the tax preference for carried interest. Even though Carlyle, Apollo, and Blackstone won't necessarily see their corporate profits affected, the ripple effect could have negative effects in the industry and have implications for compensation costs and other expenses. In addition, S corporation shareholders and other professional services firms will no longer be able to shelter income from payroll taxes by splitting it into salary versus business profits.

Finally, the budget would raise estate taxes back to their levels from several years ago. The rate on taxable estate would rise to 45%, and the exemption amount would drop from its current $5.34 million to $3.5 million.

Tax cuts
On the other side of the budget equation, most of the president's budget proposals cutting taxes aim at lower-income taxpayers. Expansion of the earned income tax credit will double the maximum amount of the credit for families without children, boosting the amount paid under the credit by almost $60 billion over the next decade. In addition, the budget boosts the value of the Child and Dependent Care Tax Credit for those with children under age five, providing for up to a 65% credit on qualified expenses up to $3,000 plus 30% for the next $1,000.

Educational assistance is also a focus of the budget. Proposals include excluding Pell Grants from income tax and making the education-related American Opportunity Tax Credit permanent, resulting in more after-tax assistance for those who fall under the income limits for the credit and various other educational tax incentives.

What to watch for
Again, with a Republican-controlled House, the Obama budget doesn't stand a chance of passing in its current form. But there's actually a reasonable chance that at least some of these tax provisions could make it into law, especially on the tax-cut side. As the budget debate heightens throughout this election year, watch closely to see where the two parties draw battle lines and where, if anywhere, they find consensus.

Another Tax Issue to Watch Closely
Even before the Obama budget was proposed, a 2013 law called the "American Taxpayer Relief Act" (ATRA) threatened to impose big tax increases on many Americans. Fortunately, The Motley Fool recently uncovered an arsenal of little-known loopholes to protect yourself from ATRA and help keep the taxman at bay when he inevitably comes calling. We reveal them all in a brand-new special report. Simply click the link below for instant, 100% FREE access.

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Read/Post Comments (17) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 05, 2014, at 7:14 PM, malclave wrote:

    "with a Republican-controlled House, the Obama budget doesn't stand a chance of passing in its current form."

    I know it's convenient to blame Republicans... but can you honestly say that it has a chance of passing the Senate, given Reid's history with budgets?

  • Report this Comment On March 05, 2014, at 7:22 PM, eddietheinvestor wrote:

    Malclave, I agree with you. It's interesting that most of the Motley Fool articles seem to be anti-conservative and to be very supportive of all of Obama's policies. I'm not saying that the Fool should do the opposite, of course. But some fairness and objectivity would be welcome.

  • Report this Comment On March 06, 2014, at 2:40 PM, msorrentino wrote:

    Instead of removing deductions are decreasing them, in some cases I feel they should be increased. An example is donations to educational institutions, allow companies and individuals that make donations to such institutions write off the entire amount.

    How does this help the gov. well if Apple donates $2 million dollars worth of computers to a community college. The college saves $2 million dollars on computers which in turn decreases the tuition to attend the school. Thus, the gov. would decrease the amount of money they lend out to students in loans.

  • Report this Comment On March 06, 2014, at 2:41 PM, twcooper wrote:

    @malcave

    Or perhaps he was <i>crediting</i> Republicans with stopping the plan.

    This is as fact-based an article as they come. If you know the White House's priorities, you know what the bargaining will center around and what could possibly pass through to an actual budget.

  • Report this Comment On March 06, 2014, at 2:51 PM, Mathman6577 wrote:

    Budget is DOA.

  • Report this Comment On March 06, 2014, at 5:37 PM, johnnylg wrote:

    Mr. O has never had any of his budgets passed. In fact, he only got a handful of 'yes' votes TOTAL in the past 5 years..including both the Senate and the House. Only ONE budget has ever been passed in Mr. O's first and second terms. No budget was passed in Mr. O's first two years in office, when BOTH the Senate and the House were Democrat controlled. It only takes a majority vote to pass a budget. Senator Reid, a couple of times, did not even put Mr. O's budget up for a vote in the Senate... to save Mr. O the embarrassment of having it voted down unanimously. To read Mr. O's budget is a waste of time.

  • Report this Comment On March 06, 2014, at 7:19 PM, cmalek wrote:

    Conspicuously absent is the mention of any spending cuts. Don't you think that taxpayer should and would like to know about the spending cuts, if any???

  • Report this Comment On March 07, 2014, at 12:40 AM, DBrown7 wrote:

    The tax preference for carried interest should have ended long ago.

  • Report this Comment On March 07, 2014, at 8:08 AM, jdp245 wrote:

    @Johnnylg, as far as I can remember, no President has EVER had one of his budgets passed. Congress always changes them.

  • Report this Comment On March 07, 2014, at 3:34 PM, craigboyercpa wrote:

    Regarding the $3.4 million cap on tax-favored retirement accounts, I would conclude that this would not apply to Roth IRA accounts since they do not create deferred tax assets. Since I have not read the budget proposal, is this the case? I would think Obama would want the cap to apply to all types of retirement accounts, including Roth IRAs, to limit people from accumulating assets in them in excess of the cap.

  • Report this Comment On March 07, 2014, at 5:59 PM, sheldonross wrote:

    @cmalek

    Cut spending? Hah, you obviously don't know how government works.

  • Report this Comment On March 07, 2014, at 9:42 PM, johnnylg wrote:

    @jdp245 do you ever remember when a budget was NOT passed during the entire first term of a Presidency (and the first year of his second term)? The Federal Gov't's 'budget' was the Debt Ceiling....they just kept spending until they hit their 'credit limit'. The only budget that was passed during Mr. O's Presidency included a 'blank check' for the Debt Ceiling until March 2015. In other words...the Treasury could raise the 'Debt Ceiling' at will..w/o the Consent of Congress...until March 2015. This is outrageous and unconstitutional. But then I am not sure Congress and the Executive Branch ever read the Constitution.

  • Report this Comment On March 07, 2014, at 9:58 PM, johnnylg wrote:

    @cmalek..that is why the President/Reid shutdown the Federal Gov't (Yes, the President and Reid shut it down and blamed it on the Republicans. Mr. O/Reid knew the Liberal Media would go along with it..it worked). Mr. O claims that the Sequester was 'austerity'. The Sequester only slowed the rate of growth...the spending still went up, just not as fast. Mr. O's budget reflects his desire to 'accelerate' the spending to makeup for the Sequester. The Republicans are scared to death to even mention cuts because the President may shutdown the government again and blame it on them. BTW, Fed Gov't shutdown is a suspension of 'non essential' services only. The Fed Gov't shuts down every Friday...then reopens on Monday. Extended shutdowns have happened before...and all Federal Workers got back pay (it was just a paid vacation for them). The only protests were from 'hired' guns masquerading as Federal Workers. (Is this news to you???)

  • Report this Comment On March 09, 2014, at 7:19 AM, nivekluap wrote:

    Correct me if I'm wrong with this....if I'm able to work my butt off and set my personal budget so that I can put the max in a Roth IRA, and then do my due dilligence and become wealthy within the IRA, there's a LIMIT to how successful I can be within the IRA? I'm not close to the limit yet, but I hope to be there by 70 (52 right now). Maybe I should stop reading the FOOL and elsewhere so that I can just rely on the govt. to take care of me....NOT!!!!! Now I have another goal in life, to get to, and surpass that limit and give it all to deserving charities.

    FOOL on,

    KD

  • Report this Comment On March 09, 2014, at 11:29 AM, jdp245 wrote:

    @johnnylg, you clearly have no clue how the appropriations process works in our government. It is pointless to discuss the budget with someone who thinks that the debt ceiling determines what the government spends.

    And, by the way... Congress has not passed a full budget since 1997. It has relied on Continuing Resolutions since then. The people you are listening to are feigning new outrage at something that Congress has been doing for nearly 20 years.

  • Report this Comment On March 10, 2014, at 12:18 AM, johnnylg wrote:

    @jd245..you are correct Omnibus and Continuing Resolutions are the norm. Constitutionally, the House has the Power of the Purse, and it does not do it's job.

    With regards as to how the appropriation process works...rather than being dismissive, educate us.

  • Report this Comment On March 10, 2014, at 12:43 AM, johnnylg wrote:

    Congressman Trey Cowdy, SC, is introducing a Bill that will allow Congress to take the President to Court over not enforcing the laws, as written. Enlightened by the non-performance of the House regarding Budgets/Spending, it look's like this type of Bill could be used against them also. Then are we going to have to get a Bill passed force the Supreme Court to make decisions based on the Constitution as written and it's intent...??

    The Fed Gov't is a mess...with both sides giving out false/misleading info. It does appear that it is Gov't vs. the People...more accurately, DC vs. the rest of the Country. Even w/ all this corruption, the economy inches along. Credit goes to the Hard Working, Innovative Citizens of the US. Need to get the Gov't to work w/ us...instead of against us. But as the Framers said...Government tends grow and grow, for its own sake... Has it gotten so big that it can't pass a budget, can't balance a budget, this is something American's do all the time...yet our Gov't can't do it. Is it time for an Article V Convention?

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