On November 6, 2012, Americans will elect the
President who will serve for the next four years.
of the United States, he will play a major role
shaping tax policy and possibly reforming the entire
Tax Code. This special briefing, provided by CCH
key information for our clients, prospects and
referral partners to understand the tax policies of
President Barack Obama and Mitt Romney. To make the
information easy to understand we have provided only
the candidates position on individual taxes in this
article. In the future, we will address business tax
and other important items.
Income Tax Rates
Under current law, the 10, 15, 25, 28, 33, and 35
percent individual income tax rates, originally
enacted in 2001 and most recently extended by the
2010 Tax Relief Act, are scheduled to expire after
2012. The 10 percent rate would disappear entirely
and the remaining rates would be 15, 28, 31, 36, and
39.6 percent after 2012.
Obama has proposed to continue the Bush-era
individual tax rates for all but “higher-income”
individuals (which the White House broadly defines
as individuals with incomes over $200,000 and
families with incomes over $250,000). Under Obama’s
proposal, the individual income tax rates after 2012
would be 10, 15, 25, 28, 36, and 39.6 percent. The
inflation-adjusted rate brackets associated with the
Bush-era rates would also continue, except for
adjustment within the new 36 and 39.6 rates to
accommodate the $200,000/$250,000 threshold.
Romney has proposed to extend permanently the
current individual income tax rates of 10, 15, 25,
28, 33, and 35 percent.
Effective January 1, 2013, two new Medicare taxes
kick-in for higher-income individuals (generally
individuals with incomes over $200,000 and families
with incomes over $250,000). The Patient Protection
and Affordable Care Act (PPACA) imposes a 0.9
percent additional Medicare tax and a 3.8 percent
Medicare contribution tax. Although Romney has vowed
to repeal the PPACA, undoing these two taxes quickly
enough to apply to 2013 will prove challenging.
Under current law, qualified capital gains and
dividends are taxed at zero percent for taxpayers in
the 10 percent and 15 percent brackets and at 15
percent for all other taxpayers. This
investor-friendly treatment, originally enacted in
2003 and extended in the 2010 Tax Relief Act, is
scheduled to expire after 2012.
Romney has proposed to make permanent all of the
Bush-era tax cuts, including the reduced tax rates
on qualified dividends and capital gains. Romney has
also discussed exempting from tax all capital gains,
dividends and interest for individuals making less
than $200,000 a year.
Obama has proposed to tax dividends as ordinary
income for higher-income individuals (taxpayers in
the proposed 36 percent and 39.6 percent tax
brackets) after 2012. Capital gains would be taxed
at a 20 percent rate after 2012 for individuals with
incomes over $200,000 and families with incomes over
Certain large capital-gains transactions, as well as
plans for special dividends, have reportedly already
been set into motion for completion by year-end
2012. These taxpayers see the risk as too high to
defer dividends and capital gains recognition into
2013 or later. Many other investors are still on the
sidelines, waiting to either sell or hold depending
upon the results of the elections. The 3.8 percent
Medicare tax in addition to the capital gains rate
is also being factored into plans to sell before
2013. Some observers are lobbying for a $1 million
minimum on application of the 20 percent rate,
fearing a precipitous stock market selloff while the
economy remains fragile.
Marriage Penalty Relief
The 2010 Tax Relief Act extended marriage penalty
relief for married couples filing jointly (an
increase in the standard deduction and the 15
percent tax rate brackets to twice the amount
applicable to single individuals) through 2012.
Romney has proposed to extend all of the Bush-era
tax cuts, including marriage penalty relief.
Obama has proposed to extend the Bush-era tax cuts,
including marriage penalty relief, for individuals,
with the exception of a rate increase for single
taxpayers with incomes at or above $200,000 and
joint filers with incomes of $250,000 or more.
Child Care Tax Credit
Under current law, the $1,000 child tax credit,
originally enacted in 2001 and most recently
extended by the 2010 Tax Relief Act, is scheduled to
expire after 2012.
Obama has proposed to make permanent the $1,000
child tax credit.
Romney has proposed to make permanent the $1,000
child tax credit.
The Bush-era tax cuts enhanced the adoption credit
and the 2010 Tax Relief Act extended these
enhancements through 2012.
Romney has proposed to extend the Bush-era tax cuts,
including the enhanced adoption credit.
Obama has proposed to extend the enhanced adoption
The Patient Protection and Affordable Care Act
(PPACA) made additional enhancements to the adoption
credit, which expired after 2011. Obama has not
proposed to extend these enhancements and Romney has
proposed to repeal the PPACA.
Payroll Tax Holiday
After December 31, 2012, the current payroll tax
holiday is scheduled to expire. The employee-share
of OASDI taxes is scheduled to increase from 4.2
percent (in effect for calendar year 2012) to 6.2
percent (the employer share remains 6.2 percent).
Obama has not addressed the payroll tax holiday.
Romney has not addressed the payroll tax holiday.
The two-percentage point reduction in OASDI taxes
provided $2,201 in savings up to the Social Security
wage base of $110,100 for 2012. The Administration
reported that the average worker would increase
take-home pay by about $1,000 as the result of the
2012 extension. Sunsetting of the payroll tax
holiday, similar to sunsetting of the Bush-era tax
cuts, would effectively create a “tax increase” in
American Opportunity Tax Credit
The American Recovery and Reinvestment Act of 2009
enhanced and renamed the Hope education credit as
the American Opportunity Tax Credit (AOTC). The 2010
Tax Relief Act extended the AOTC through 2012. After
2012, the Hope credit, with its lower benefits would
Romney has not addressed the AOTC.
Obama has proposed to make permanent the AOTC.
The AOTC reaches up to $2,500 of the cost of
tuition, fees and course materials paid during the
tax year. The AOTC is based on 100 percent of the
first $2,000, plus 25 percent of the next $2,000,
with adjusted gross income phase-outs starting at
$80,000 for singles and $160,000 for joint filers.
The Hope credit was limited to the first two years
of post-secondary education. The AOTC may be claimed
for all four years of post-secondary education.
Higher Education Tuition Deduction
The above-the-line deduction for higher education
tuition and related expenses expired after 2011. The
maximum deduction was $4,000 for those with AGI up
to $65,000 ($130,000 for joint filers) and $2,000
for those with AGI up to $80,000 ($160,000 for joint
Obama has proposed to extend the higher education
Romney has not addressed the higher education
Federal Estate & Gift Tax
The 2010 Tax Relief Act set the maximum federal
estate and gift tax rate at 35 percent for decedents
dying in calendar years 2011 and 2012 with a $5
million exemption ($5.12 million adjusted for
inflation for 2012). For 2011 and 2012, the estate
of a surviving spouse may also be able to use the
unused portion of the deceased spouse’s estate tax
Obama has proposed to set the maximum estate tax
rate at 45 percent for decedents dying after
December 31, 2012 with a $3.5 million exemption
amount. Obama has also proposed to extend the
current rules for portability. The separate gift tax
exclusion would return to its 2009 level of $1
million under Obama’s proposal.
Romney has proposed to abolish the federal estate
and gift tax.
Absent Congressional action, the maximum estate and
gift tax rate in 2013 is scheduled to be 55 percent,
with a 5-percent surcharge applying to large estates
in excess of $10 million. The exemption amount is
scheduled to be $1 million. High net-worth taxpayers
may want to maximize gifts with the certainty of the
$5.12 million exclusion before the close of year-end
Do you have specific questions about the candidates’
individual tax positions? Wondering if you should
change your tax planning approach for the balance of
2012? If so, then contact us today! For additional
information, please contact
Yasar Bokhari, CPA,
at 516-248- 7361, or
click here to email Yasar.
In a brief
consultation he can address your situation and
determine the best way to proceed.
**Please note the information provided above is
accurate as of September 20, 2012. Any changes made
to either candidates position after this date are
not reflected in this article.