Two Tax Plans: Take your pick

rayboyusmc · Sep 26, 2008

Election Day is less than six weeks away, and the economy is once again a front-burner issue. Not surprisingly, the political rhetoric about taxes is heating up.

Sen. John McCain, the Republican presidential nominee, is campaigning on a strong antitax platform. That includes extending President Bush's income-tax cuts, raising the exemption for dependents and cutting the corporate income-tax rate.

Sen. Barack Obama, the Democratic nominee, is calling for higher taxes on high-income Americans -- families making more than $250,000 a year and singles making more than $200,000. But he is also proposing tax cuts for lower- and middle-income households.

Sen. McCain stepped up his attack this week when he said that the Obama plan's "billions of dollars in higher taxes would kill jobs." An Obama aide responded that "Sen. McCain's tax policy is an exercise in unprecedented fiscal recklessness" that would "explode the deficit."

The government's historic rescue of the financial markets will be so costly that it could itself severely deepen federal budget deficits, thus increasing the chances of higher taxes in coming years no matter what happens in the November elections, some investment advisers say.

Whatever the case, below is an updated summary of both candidates' major proposals affecting individuals, advice from financial advisers and examples of how each plan might affect individual taxpayers at various income levels. The examples were calculated by tax specialists at Deloitte Tax LLP in Washington, which has also issued a new report comparing the candidates' tax plans.

"Taxpayers should not expect either of these candidates to get everything they are proposing," says , managing principal of tax policy at Deloitte. Congress "will have its own ideas, and the economic as well as the budget realities of 2009 will shape the new administration's actions." Even so, many taxpayers and investors may find the still-evolving proposals to be useful for planning purposes.

Dueling plans. Both Sen. McCain and Sen. Obama have proposed lower overall taxes, but their plans differ sharply from each other.

Sen. McCain wants to permanently extend the current federal income-tax rates. He also wants to retain the top rate of 15% on long-term capital gains and qualified dividends. He has called for gradually increasing the dependent exemption amount. And he has proposed raising the basic federal estate-tax exclusion to $5 million while cutting the top rate, now 45%, to only 15%. The exclusion, now $2 million, is scheduled to rise to $3.5 million next year. (However, transfers from one spouse to another are typically tax-free.) Sen. Obama would make that $3.5 million exclusion permanent, along with the 45% top rate.

"It's unlikely that Congress will let the full repeal of the estate tax take place as scheduled in 2010," says , principal federal tax analyst at CCH, a unit of Wolters Kluwer. Instead, many tax advisers expect a compromise that includes raising the estate-tax exclusion to somewhere in the $3.5 million to $5 million range and cutting the top rate.

Sen. Obama has proposed lower taxes for most taxpayers, but higher taxes for those with the highest incomes. Staffers say his plan wouldn't raise taxes -- including income, capital-gains, dividend and payroll taxes -- on couples with adjusted gross income of less than $250,000 a year or individuals making under $200,000. Sen. Obama has called for raising the top ordinary income-tax rate, now 35%, to 39.6%. He also has proposed raising the current 33% rate to 36%. But he would leave the other income-tax rates unchanged.

Sen. Obama wants to raise the top long-term capital-gains rate on stocks, bonds and other securities (as well as the rate on qualified dividends), now 15%, to 20% for households with income of more than $250,000 or individuals over $200,000. He hasn't said what he would do about the top capital-gains rate, now 28%, on sales of art and collectibles.

He also favors higher Social Security taxes on high-income workers, but not for many years -- and he hasn't disclosed details. He also has called for expanded targeted tax breaks for many groups, including retirees, according to the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.

The senator says his plan will cut taxes for 95% of workers and their families. That includes new and expanded breaks for many workers, retirees, homeowners, savers and students. On his Web site, he says his plan represents a "net tax cut" since the relief for middle-class families exceeds the revenue raised by his tax increases for upper-income taxpayers.

One big question about the Obama proposals is when they would take effect. , the candidate's economic-policy director, says only that none of the changes would be retroactive to 2008. On the alternative minimum tax, Sen. Obama would "continue the current AMT patch and index it to inflation," says Mr. Furman.

Advisers to the two senators say their candidates generally favor legislation to curb the rapid growth of the alternative minimum tax. Congress appears likely to pass a temporary stopgap measure that would prevent a surge in the number of people hit by the AMT for this year. If Congress doesn't act, about 26 million people will owe more for this year because of the AMT, up from only about four million last year. Sen. McCain "would like to ultimately eliminate it, but it obviously has to be done in a phased fashion," says , the senator's senior policy adviser.

Total repeal of the AMT is considered highly unlikely, at least anytime soon. Proposals to eliminate the AMT "are politically popular but prohibitively expensive," the new Deloitte report says.

For more details of both plans, see summaries published by several sources, including Deloitte (A Familiar Call for Change | Tax | Article - Deloitte LLP), CCH (CCH INCORPORATED), the Tax Policy Center (Tax Policy Center home) and Grant Thornton (Tax policy outlook under the next president: Comparing the two candidates' tax platforms - Grant Thornton LLP).

What investors can do now. Some investment strategists, worried by the prospect of big federal budget deficits, expect higher taxes in coming years no matter who wins the White House, especially because the government's historic rescue operation is likely to mean much larger budget deficits. That, in turn, could greatly increase the attractiveness of tax-exempt municipal bonds.

"I think munis look very attractive," says , president of Yardeni Research, an investment strategy consultancy based in Great Neck, N.Y. "With the credit crisis, the yields on these securities on a tax-adjusted basis are extremely compelling." He urges investors to focus on high-quality bonds, since many state and local governments have been going through budget woes of their own.

Some high-income investors may be wondering whether to sell stocks that have gone up sharply in value over the years to take advantage of the current 15% capital-gains tax rate. Investment advisers say they're urging investors not to make investment moves solely because of tax reasons. But someone planning to dump a highly appreciated stock soon for investment reasons might consider doing it this year.

Selling this year could be a smart move for an investor with a highly concentrated position in one stock or who owns a private business and was thinking of selling part or all of it soon anyway, says , director of research for Bernstein's Wealth Management Group in New York, a unit of AllianceBernstein LP.

But in most cases, investors would be well-advised to sit tight and resist the temptation to rush out and make investment moves today based on bets on how the election will turn out or what will happen with taxes next year. Even if it were possible to know the election results, nobody knows when any capital-gains tax changes might become effective or what the new rate will be.

For most people with well-diversified portfolios, the benefit of selling now "is not substantial enough," says Mr. Singer -- unless you're convinced that the capital-gains rate will surge to 25% or higher next year.
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How Your Taxes Will Fare Under Obama, McCain: Financial News - Yahoo! Finance

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Two Tax Plans: Take your pick

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