President's 2011 Proposed Budget Sets Wealthy at $190,650

The definition of a wealthy American acording to President Obama just keeps changing. In the 2008 Presidential race, then candidate Obama, stressed that those making under $250,000 would not see any tax increases. Well, folks, he lied. If you make $190,650 or more you are being targeted as "wealthy" in President Obama's 2011 Proposed Budget. The proposed budget is filled with numerous, significant, tax increases. Most of these tax changes take effect in 2011. The purpose of this article is to highlight what those tax increases are and how they will affect you personally, as well as other provisions in the budget, both good and bad.

Tax Increases in President's Fiscal Year 2011 Budget Proposal:

1. Tax brackets will increase from 36% to 39.6% for married couples with taxable income, after the standard deduction and two personal exemptions, of $231,300;
2. Tax brackets will increase from 36% to 39.6% for single individuals with taxable income, after the standard deduction and one personal exemption, of $190,650;
3. Reinstating the loss of itemized deductions for higher income taxpayers;
4. Reinstate the loss of personal exemptions for higher income taxpayers;
5. Limiting the benefit of itemized deduction to an effective tax rate of 28%, for taxpayers who are in the 36% or 39.6% tax brackets;
6. Increasing taxation of commodities dealers by taking away capital gains treatment on income realized from their investment transactions;
7. Punitive bank taxes imposed on the largest banking institutions to pay for TARP Losses incurred by the federal government. This bank tax would apply to all large banks, even if they did not take any TARP money.
8. No interest deduction for US corporations who borrow money that is then invested oversees;
9. Increasing capital gains tax rates from 15% to 20%;
10. Increasing taxation of dividends from 15% to 20%;
11. Bring back the marriage penalty on certain deductions;
12. Eliminating certain tax benefits for oil, gas and coal companies (no more intangible drilling expensing, enhanced oil recovery credits or percentage depletion deductions);
13. Repealing the LIFO accounting method for inventories;
14. Imposing a permanent.2% unemployment insurance surtax.

Tax reductions in President's Fiscal Year 2011 Budget proposal:

1. New Jobs tax credit of $5,000 for 2010 only;
2. Extend bonus first-year depreciation;
3. 0% capital gains tax rate on qualified small business stock held for at least five years. Effective for such stock acquired after February 17, 2009;
4. Removing company provided cell phones from the listed property category;
5. Extending the Making Work Pay Credit for 2010;
6. Making the American Opportunity Tax Credit for higher education expenses permanent;
7. Extending through 2011 the optional deduction for state and local general sales tax;
increasing the child and dependent care tax credit for families earning up to $113,000 a year;
8. Extending the 65% COBRA premium subsidy to cover workers involuntarily terminated before 2011;
9. Expanding the Saver's Credit to match 50% of a contribution up to $500 per individual ($1,000 for married couples);
10. Doubling the maximum credit to $1,000 per year for three years for small employers that establish a new retirement plan;
11. Making the Research and Experimentation Credit permanent.

Emergency Budget Changes on Cornwall House Sales

2010 has been a waiting game for the housing market. Pre-election many housing experts and prospective buyers were unsure how the economy was going to be affected by a possible change of government. The scrabble for power and subsequent compromises by our coalition government has continued this uncertainty. Now the Chancellor has delivered his emergency budget we have had time to review and analyse its effects. What are our predictions for the local housing market in Cornwall?

Capital Gains Tax

This has come through lower than expected, a relief for many top rate tax payers who own second homes. For the basic tax rate payer this tax remains the same as it was previously. At first glance this may appear generous but in reality the capital gains made on a property is likely to tip these tax payers into the higher tax paying category.

Overall this should not have a dramatic effect on the property market. The worst to be hit will be long term owners of second homes and rental properties who have gained substantial capital during their ownership.

A more worrying change is the open nature that the Chancellor has left for capital gains tax. Experts are suggesting that further increases could be expected in 2011. Many second home owners will need to analyse their options in detail now bearing this possible change in the future. They may consider it wise to cash in their assets now.

House Price Trends

The latest figures from the Land Registry have noted a small drop in house prices by 0.2% in May, the first drop that has been seen since April 2009. This is not reflected in all areas with Wales being the worst hit and the South East and London continuing to rise. In other regions such as the South West reports have noted that the housing market is continuing to look buoyant. Cornwall's average house price has changed from £175,541 (May 2009) to £190,556 (May 2010).

Cornish House Price Trends

Cornwall's house price trends tend to be distorted as a result of the high number of holiday homes in many of the areas. Historically this has inflated house prices above normal levels, leaving affordability a dream for many locals.

Whilst it is too early to fully see the effect of this recent budget, Cornwall's changes will be accentuated due to the high percentage of second homes. There may well be a healthy number of second homes coming onto the market in the area, helping to balance the housing stock in the region. This will mainly be affected by second home owner's long term interpretation of capital gains tax changes and how this fits in with their personal circumstances. We will have a truer picture towards the end of the summer as to how the trends will continue in 2010.

We hope continued stability will hold on in the South West, fuelling confidence in 'normal' house selling and purchasing. Confidence in this kind of market will help developers, buyers and sellers plan their housing needs and for financial institutions to keep lending for those all too important mortgages.

Australian Federal Budget - Tax and Superannuation Changes

The Australian Treasurer, Wayne Swan, delivered the 2010-2011 Australian Federal Budget on 11 May 2010. In this article I will concentrate only on the taxation and superannuation matters that will be of more general interest. I will not cover all of the changes. Also, I will not repeat announcements that were part of the Government's response to the Henry review.

The key announcements I will discuss are: (1) An increase in the Low Income Tax Offset (2) An increase in the level of net medical expenditure necessary to obtain a tax rebate (3) An optional standard deduction for work related expenses and cost of managing tax affairs (4) A 50% discount in relation to the earning of certain interest income (5) A change in the way that Capital Gains Tax applies to earn-out arrangements (6) A permanent reduction to the superannuation co-contribution rate. (7) GST changes to the margin scheme and the financial supplies threshold. Here are the details:

Low Income Tax Offset

From the 1st of July 2010 there will be an increase from $1,350 to $1,500 of the Low Income Tax Offset. Due to this, a person that earns up to $16,000 will not have to pay income tax.

Net Medical Expenditure Threshold

Currently, if a taxpayer has net medical expenditure of $1,500 or more, a tax offset can be claimed for 20% of the expenditure above the threshold. From 1 July 2010 the threshold will be raised to $2,000, thus making it more difficult to make a claim. Also, in following years, the threshold will be indexed in line with the Consumer Price Index.

Optional Standard Deduction

In a big win for millions of taxpayers, from 1 July 2012, there will be an optional standard deduction in lieu of claiming work-related expenses and the cost of managing a person's tax affairs. This will only apply to individual taxpayers. The optional standard deduction amount will be $500 in the year ending 30 June 2013. In the year ending 30 June 2014, this amount will be $1,000. The standard deduction is optional as taxpayers will still have the ability to claim actual expenditure.

50% Discount for Interest

To encourage savings, from the 1st of July 2011, there will be a tax discount of 50% on up to $1,000 of interest earned. So if a person has $20,000 in the bank that is earning 5% interest, the whole amount of this interest will be eligible for the discount. This will also mean that some individuals and families will become eligible for Government assistance or be able to obtain larger Government assistance with such things as the Family Tax Benefit, Child Care Benefit and so forth.

Capital Gains Tax and Earn-Out Arrangements

There is going to be a change to an annoying part of the Capital Gains Tax law that relates to the sale of a business where there is an earn-out arrangement. An earn-out arrangement is used to adjust the sale price of a business depending on how it trades after the business changes hands. Typically there will be a set amount paid for the business plus a contingent amount based on trading over, say, the next 12 months. So, for example, a purchaser of a business may agree to pay a certain percentage of the gross margin of a business as further consideration for the purchase of the business.

Under the current interpretation of the law, the earn-out component is a separate asset from the underlying business. This causes a number of problems, including the inability to apply the small business CGT concessions to the earn-out component of the purchase price of the business. The Government will change the capital gains tax law so that the earn-out component of the sale price will be treated as consideration for the underlying business and not consideration for a separate right created by the contract of sale.

This change will apply from the date the law receives Royal Assent. There will be transitional provisions in certain cases from 17 October 2007.

Matching Rate for the Superannuation Co-Contribution System

The Government has announced that it will permanently keep the matching rate for the superannuation co-contribution system at 100%. Further, the maximum co-contribution will be set at $1,000.

Goods and Services Tax Changes

Turning to GST, the Government has announced that there will changes in the way the margin scheme operates. These changes will apply from 1 July 2012. There is not much detail as to how these changes will operate but the changes will be designed to address a number of problems with the current law.

Finally, the threshold below which businesses need not be concerned with making financial supplies will be increased by 3 times from $50,000 to $150,000 of input tax credits. This change will have effect from 1 July 2012.

Wishing you easier business

John M. Jeffreys