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TAX NEWS - January 2010

Obama previews FY 2011 tax priorities in State of the Union message

President Barack Obama used his January 27 State of the Union address to preview several of the tax provisions likely to be included in his budget proposal for fiscal 2011. As expected, the president reiterated his long-standing promises of tax cuts for small businesses and working families, tax increases for certain larger businesses and upper-income individuals, an end to perceived corporate loopholes, and curbs on tax benefits for companies that move jobs overseas. The White House is expected to release its FY 2011 budget on February 1.

Business provisions

Addressing domestic job growth and economic recovery, Obama emphasized that to encourage businesses "to stay within our borders, it's time to finally slash the tax breaks for companies that ship our jobs overseas and give those tax breaks to companies that create jobs in the United States of America."

Although the president offered no specifics during his speech, his FY 2010 budget package called for substantial changes to the international tax regime including, among other things, proposals to modify the deferral and foreign tax credit rules, limit earnings stripping by expatriated entities, prevent repatriation of earnings in certain cross-border reorganizations, repeal the 80/20 company rules, and repeal the dual-capacity rules.

Financial crisis responsibility fee - The president renewed his call for a fee on large financial institutions to offset the costs of the Troubled Assets Relief Program (TARP). The fee, which would go into effect on June 30, 2010, and would continue for at least 10 years, was proposed on January 14. (For prior coverage, see Tax News & Views, Vol. 11, No. 2, Jan. 15, 2010.)

Small business tax credits - The president called for a small business tax credit "that will go to over 1 million small businesses who hire new workers or raise wages." The White House followed up on January 28 by releasing a proposal that would provide small businesses a $5,000 tax credit for every net new employee that they employ in 2010 (capped at $500,000 per firm) and reimburse small businesses for the Social Security payroll taxes they pay on real increases in their payrolls. Firms would be able to claim the credit on a quarterly basis.

In his speech, the president also proposed eliminating capital gains taxes on small business investment (something he advocated on the campaign trail and in his FY 2010 budget package) and providing a "tax incentive for all businesses, large and small, to invest in new plants and equipment."

Individual provisions

Obama renewed his promise to extend the 2001 and 2003 individual income tax cuts for lower- and middle-income taxpayers, but not for taxpayers making over $250,000 a year, and touted several new or expanded middle-class tax breaks that the administration unveiled on January 25. These latest proposals would:

- Increase the Child and Dependent Care Tax Credit for families making under $85,000 a year from 20 percent to 35 percent of child care expenses;

- Expand and simplify the Saver's Credit to match 50 percent of the first $1,000 of contributions to a retirement savings account by families earning up to $65,000, provide a partial credit to families earning up to $85,000, and make the tax credit refundable; and

- Require an employer to offer an automatic IRA option to employees on a payroll-deduction basis if the employer does not already provide a qualified retirement plan.

In his speech, Obama also proposed to "give families a $10,000 tax credit for four years of college," but provided no additional details.

Spending freeze

President Obama also announced that he will propose a three-year freeze on nondefense discretionary spending beginning in 2011. Spending in the areas of defense, homeland security, veterans affairs, and international affairs, as well as Medicare, Medicaid, and Social Security would all be exempt. The freeze is estimated to save $250 billion over the next 10 years, as compared to the budget baseline.

The announcement followed the January 26 release of the Congressional Budget Office's (CBO) annual budget outlook, which predicts a deficit of $1.3 trillion for FY2010, or about 9.2 percent of gross domestic product - the second highest since level the end World War II. The CBO cited decreases in revenue as well as increased spending during the downturn as factors influencing the large deficit.
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