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American Recovery and Reinvestment Act Provides Tax Breaks for Businesses and Individuals

Mar 2, 2009

On Feb. 17, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA). While approximately two-thirds of the nearly $800 billion stimulus act is focused on government spending initiatives intended to create jobs and jumpstart the economy, about one-third provides tax breaks for businesses and individuals.

Individual Income Tax Rates – The plan as put forth by the Obama campaign would increase the top two individual income tax brackets:  the 33% and 35% brackets would increase to 36% and 39.6%, respectively.

The Obama plan also would call for the restoration of the personal exemption phase-out and itemized deduction limitation for individuals earning more than $200,000 and families with incomes higher than $250,000.

This may be a rare situation where accelerating income into this tax year might be preferable to deferring to 2009 when the rates may be higher.

Long-Term Capital Gains and Dividend Tax Rate Increase - Higher income individuals will be paying more capital gains and dividend taxes under the Obama plan.  A 20% capital gains and dividend tax rate for taxpayers in the top two income brackets would be established to affect only individuals making more than $200,000 and families making more than $250,000.

For tax years 2008 through 2010, the Bush tax cuts had placed qualified dividend income and capital gains tax rates at zero percent for taxpayers in the 10% to 15% tax brackets, and 15% for taxpayers in the higher tax brackets.

Under these likely changes, it may be prudent to accelerate capital gains in 2008 and defer capital losses until 2009 and 2010.

Corporate Deductions and Tax Rates –  Obama has indicated support for a reduction in corporate income tax rates.  Currently, the U.S. corporate rates are among the highest in the world. To pay for the potential rate decreases, there will likely be reductions in certain tax deductions currently available; for example, the Section 199 manufacturing deduction may be repealed in full or in part. The President-elect appears to also support extending the $250,000 Section 179 limitation for 2009 and making the Research and Development Credit permanent. These changes, coupled with the potential for increasing individual tax rates, may make the C-corporation a viable entity alternative once again.

Estate Tax Changes - The current estate tax law excludes $3.5 million worth of net estate from taxation.  The maximum tax rate on estates is currently 45%.  The Obama plan supports the continuation of the $3.5 million exclusion amount and 45% top estate tax rate.  It is likely these will be made permanent and the scheduled repeal in 2010 will go away, as will the scheduled 2011 reinstatement of a $1 million exclusion and 55% top rate.

There are certainly other tax planning aspects to consider for 2009, in addition to what changes may come with an Obama Administration.  The tax team at Crosslin & Associates is ready to assist you with all of your tax planning needs.  Please contact Chuck Tomlin, Richard Winstead or any other member of the Crosslin tax team at (615) 320-5500. As always, we appreciate your business. 

Under requirements imposed by the IRS, we inform you that, if any advice concerning one or more U.S. federal tax issues is contained in this communication (including any attachments), such advice was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or tax-related matter addressed herein.