Although President Obama did not delve into great detail during his State of the Union address on January 20, 2015, he proposed several tax changes that would make a significant difference to individual Americans. Here is a roundup of some of the key points, and how they might affect you.
Changes to Stepped-Up Basis for Inherited Assets
Basis is your initial investment in an asset, and people are taxed on the difference between their basis and the fair market value of that asset at sale. Using a simple example, if you purchase stock for $100 and sell for $1,000, you are taxed on the $900 increase in value. For inherited assets, individuals receive a "stepped-up basis" in the asset and the basis becomes the fair market value of the asset at the time of the inheritance. Continuing the above example, a individual could purchase the same stock for $100, and if he or she passes on the stock as inheritance when it is worth $1,000, the recipient could sell the stock and not have any taxable gains. Under Obama's proposal, stepped-up basis would be eliminated and the sale of the inherited stock above could be taxable. There would be a $200,000 per couple exemption on the capital gains appreciation and $500,000 exemption for homes and property. There would also be an exemption for gifts to charitable organizations.
Raise Top Capital Gains and Dividend Rates
President Obama also proposed to raise the top capital gains and dividend rate to 28-percent. The current long-term capital gains rate of 23.8%. This would bring the rate closer to the maximum federal income rate of 39.6%, but it would not remove the built in preference of capital gains over ordinary income.
Changes to "529 Plans"
College savings accounts known as "529 Plans" were established to help middle class Americans save for educational expenses for eligible individuals, most often their children. 529 Plans allow individuals to make contributions that grow tax-free. The money in the accounts can be withdrawn, without paying capital gains tax, as long as they are used for education expenses. Obama's proposal would have eliminated the ability to withdraw the funds tax-free. However, due to an intense backlash, the administration has currently backed off the proposed changes.
Finally, President Obama proposed a number of tax credits. Among the proposals were making the American Opportunity Tax Credit permanent (currently slated to end in 2017), and increasing the child care tax credit $3,000 while making it available to families with higher incomes than in previous years.
Pending Budget Release
These are currently just proposals. They may never see the light of day, like the proposed changes to 529 Plan. But with the coming budget negotiations, it is likely that these and other items will be on the table for 2014. We will continue to follow proposed changes from both parties and keep you informed of how such changes may affect taxpayers.