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Monday January 26, 2015

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White House Tax Proposals

In the State of the Union Address on January 20, President Obama outlined several White House proposed tax reforms for 2015. The general plan includes several tax increases on upper-income persons and financial corporations. These will be combined with middle-income tax reductions.

Proposed Tax Increases

1. Capital Gains Tax – The current top 20% rate for upper-income persons would be increased to 28%. Because the 3.8% Medicare tax also applies to capital gains, the current top 23.8% rate would be increased to 31.8%. Many states also tax capital gains. In some states, the proposed combined capital gains rate could be 35% to 38%.

2. Estate Appreciated Property – Under existing law, appreciated property owned by an estate generally is not subject to tax at death. Because most property receives an increase in basis to fair market value, the children or other heirs may receive the property and sell with little or no capital gains tax. The White House proposal is to tax the estate appreciated property. The difference between the cost of the property and the fair market value at death, if it exceeds $100,000 per person, would be taxed at 28%. There would be a separate exclusion for a personal residence of $250,000 per person. Clothes, furniture and most other personal items would be excluded from the tax.

3. Large Bank Tax – Banks with assets over $50 billion would pay a tax each year of 0.07% on their liabilities. This tax would discourage banks from large amounts of borrowing that could create financial risk if there is an economic downturn.

Proposed Tax Reductions

1. Second Earner Credit – For couples with incomes below $120,000, there would be a $500 spousal credit. The credit would be 5% of the first $10,000 in earnings for the lower-paid spouse.

2. Child Care Credits – The credit for 50% of qualified child care expenses up to $6,000 would potentially save $3,000 in tax. With the increase in the child care credit, the child care flexible spending accounts would no longer be permitted.

3. College Credit – The American Opportunity Tax Credit (AOTC) would be increased to $2,500 per year for up to five years. $1,500 of the AOTC would be refundable. A non-traditional student could qualify for one half of these amounts under a new AOTC provision.

Editor’s Note: The White House proposals are quite different from the strategies recommended by the House and Senate taxwriters. The Republican response to the State of the Union Address was given by Sen. Joni Ernst (R-IA). She suggested that the preferred plan will be to lower tax rates in order to increase employment. She also urged the President to cooperate with the House and Senate to pass tax reform in 2015.

Congress Responds to White House Tax Proposals


Following the State of the Union Address, the leaders of the Senate Finance Committee and the House Ways and Means Committee commented on the White House tax proposals.

Sen. Orrin Hatch (R-UT) is chairman of the Senate Finance Committee. He commented, “Tonight, the President missed a real opportunity to put forward a bold economic vision that meets the demands of the American people and puts an aggressive jobs agenda center stage. Rather than outlining pro-growth policies that would provide more opportunity for hard-working families and job creators that have been left behind in the Obama economy, the President slipped back into the role of Campaigner-In-Chief.”

The Ranking Member of the Senate Finance Committee is Sen. Ron Wyden (D-OR). He emphasized the importance of increasing middle-class wages in his statement. Wyden stated, “On taxes and trade, education and energy, the proposals the President outlined tonight should be seen as good and serious starting points. My hope is these can be a catalyst for bipartisan, common-sense discussion that move us ahead in solving the country’s challenging problems.”

House Ways and Means Chairman Paul Ryan (R-WI) indicated that it will be necessary for the President and Congress to find “common ground” in order to move forward. Ryan commented, “At the same time, I found the President’s tax proposals to be misguided. A $320 billion tax hike is the last thing we need. What we really need is to make our tax code simpler, flatter, and fairer, so we can create more jobs.”

The Ranking Member of the House Ways and Means Committee is Sander Levin (D-MI). He responded, “The President’s tax proposals focus right where we need to – creating opportunity for middle-class families and those struggling to join the middle-class. By seeking to address economic inefficiencies, including in our capital gains structure, and targeting these revenues toward investment in education and support for working parents, the President’s proposals would address the key issue of wage stagnation for most families and strengthen our nation’s road to recovery.”

Treasury Secretary Lew Promotes Corporate Tax Reform


On January 21, Treasury Secretary Jacob Lew spoke at the Brookings Institute in Washington. He was hopeful that corporate tax reform could be achieved in 2015. Secretary Lew suggested there is a “50-50” chance for a successful bill this year.

Lew has been in contact with Senate Finance Committee Chairman Orrin Hatch and House Ways and Means Committee Chairman Paul Ryan. Lew stated, “While our views on individual tax reform may be far apart, there is a broad set of business tax reforms on which we should be able to agree.”

Speaking to the media on the same date, Chairman Ryan indicated he is willing to explore a business tax compromise. Ryan commented, “I would like to think that there is perhaps an area for common ground there. We are going to try to explore it and see if we can find something.”

When asked whether the business reform could involve tax increases, Ryan responded, “We are not going to raise taxes. But can we find some tax reform that helps all businesses create more jobs? I would like to think the answer is yes.”

The White House and Republican corporate tax reform plans have in the past exhibited some “overlap.” The White House has proposed reducing the number of itemized deductions for corporations and lowering the top 35% rate to 28%.

Applicable Federal Rate of 2.0% for February -- Rev. Rul. 2015-3: 2015-5 IRB 1 (23 Jan 2015)


The IRS has announced the Applicable Federal Rate (AFR) for February of 2015. The AFR under Section 7520 for the month of February will be 2.0%. The rates for January of 2.2% or December of 2.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2015, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.

Published January 23, 2015

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