President's FY 2012 proposals: Higher taxes on wealthy, limited tax breaks for

businesses

Roadmap
Every federal budget proposal is just that: a proposal, or a list of recommendations from the
White House to Congress. Ultimately, it is for Congress to decide whether to fund a particular
government program and at what level. The same is true for tax cuts and tax increases. The
final budget for FY 2012 will be a compromise. Nonetheless, President Obama's FY 2012
budget is a helpful tool to predict in what direction federal tax policy may move.

Individuals
In his FY 2012 budget, President Obama repeats his call for Congress to end the Bush-era tax
cuts for higher-income individuals (which the president generally defines as single individuals
with incomes over $200,000 and married couples with incomes over $250,000). The top
individual income tax rates would increase to 36 percent and 39.6 percent, respectively, after
2012. For 2011 and 2012, the top two individual income tax rates are 33 percent and 35
percent, respectively. The president also proposes to limit the deductions of higher income
individuals.

Additionally, the president wants Congress to extend the reduced tax rates on capital gains and
dividends, but not for higher-income individuals. Single individuals with incomes above
$200,000 and married couples with incomes above $250,000 would pay capital gains and
dividend taxes at 20 percent rather than at 15 percent after 2012.

The president's FY 2012 budget, among other things, also proposes:

● An AMT patch (higher exemption amounts and other targeted relief) after 2011;
● A permanent American Opportunity Tax Credit (enhanced Hope education tax credit)
after 2012;
● A permanent enhanced earned income credit;
● A new exclusion from income for certain higher education student loan forgiveness;
● One-time payments of $250 to Social Security beneficiaries, disabled veterans and
others with a corresponding tax credit for retirees who do not receive Social Security;
and
● A temporary extension of certain tax incentives, such as the state and local sales tax
deduction and the higher education tuition deduction, for one year.

Some of the proposals in the president's FY 2012 budget impact how individuals interact with
the IRS. Many taxpayers complain that when they call the IRS, the wait times to speak to an
IRS representative are so long they hang up. The president proposes to increase the IRS's
budget to hire more customer service representatives. The president also proposes to allow the
IRS to accept debit and credit card payments directly, thereby enabling taxpayers to avoid third
party processing fees.
Businesses
The tax incentives for businesses in the president's FY 2012 budget are generally targeted to
specific industries. One popular but temporary business tax incentive would be made
permanent. President Obama proposes to extend permanently the research tax credit. The
president also proposes to permanently abolish capital gains tax on investments in certain small
businesses.

Other business proposals include:

1. Employer tax credits for creating jobs in newly designated Growth Zones;
2. Additional tax breaks for investments in energy-efficient property;
3. More funds for grants in lieu of tax credits for specified energy property;
4. One-year extensions of some temporary business tax incentives, such as the Indian
employment credit and environmental remediation expensing;
5. Modifying Form 1099 business information reporting; and
6. Extending and reforming Build America Bonds.

The president's FY 2012 budget does not include a cut in the U.S. corporate tax rate. Any
reduction in the U.S. corporate tax rate is likely to come outside the budget process. The
president has spoken often in recent weeks about reducing the U.S. corporate tax rate but he
wants any reduction to be revenue neutral; that is, the cost of cutting the U.S. corporate tax rate
must be paid for. President Obama has discussed closing some unspecific tax loopholes.

IRS operations
President Obama proposes a significant increase in funding for the IRS. Most of the money
would go to hiring new revenue officers and boosting enforcement activities. The White House
predicts that investing $13 billion in the IRS over the next 10 years will generate an additional
$56 billion in additional tax revenue over the same time period.

Estate tax
Late last year, the White House and the GOP agreed on a maximum federal estate tax rate of
35 percent with a $5 million exclusion for 2010, 2011 and 2012. In his FY 2012 budget, the
president proposes to return the federal estate tax to its 2009 levels after 2012 (a maximum tax
rate of 45 percent and a $3.5 million exclusion). President Obama also proposes to limit the
duration of the generation skipping transfer (GST) tax exemption and to make other estate-tax
related changes.

Revenue raisers
The White House and Congress are both looking at ways to cut the federal budget deficit. Taxes
are one way. The president's FY 2012 budget proposes a number of revenue raisers, especially
in the area of international taxation and in fossil fuel production.

International taxation. The president's budget proposes to reduce tax incentives for U.S.-
based multinational companies. One goal of this strategy is to encourage multinational
companies to invest in job creation in the U.S. The president's FY 2012 budget calls for, among
other things, to limit earnings stripping by expatriated entities, to limit income shifting through
intangible property transfers, and to make more reforms to the foreign tax credit rules. If
enacted, all of the proposed international taxation reforms would raise an estimated $129 billion
in additional revenue over 10 years.

LIFO. President Obama proposes to repeal the last-in, first-out (LIFO) inventory accounting
method for federal income tax purposes. Taxpayers that currently use the LIFO method would
be required to write up their beginning LIFO inventory to its first-in, first-out (FIFO) value in the
first tax year beginning after December 31, 2012. This proposal would raise an estimated $52.8
billion over 10 years.

Fossil fuel tax preferences. The Tax Code includes a number of tax incentives for oil, gas and
coal producers. President Obama proposes to repeal nearly all of these tax breaks for oil, gas
and coal companies. These proposals would raise an estimated $46.1 billion over 10 years.

Financial institutions. President Obama proposes to impose a financial crisis responsibility fee
on large U.S. financial institutions. The fee, if enacted, would raise an estimated $30 billion in
additional revenue over 10 years.

Carried interest. The president's FY 2012 budget proposes to tax carried interest as ordinary
income. This proposal would raise an estimated $14.8 billion in additional revenue over 10
years.

Insurance company reforms. Insurance companies are subject to specific and very technical
tax rules. President Obama proposes to overhaul the tax rules for insurance companies. If
enacted, these reforms would raise an estimated $14 billion over 10 years.

These are just some of the revenue raisers in the president's FY 2012 budget. All of them will
be extensively debated in Congress in the coming months. Our office will keep you posted on
developments. If you have any questions about the president's FY 2012 budget proposals,
please contact our office.

Certified public accountants and consulting firm located in Troy, Michigan. This data is
distributed for informational purposes only, with the understanding that Doeren Mayhew is not
rendering legal, accounting, or other professional advice.