The Tax Club Report

In January of 1790, President George Washington addressed Congress at the nation’s capital, which at the time was New York City.  He decided that with America still in its infancy, the beginning of the year was an ideal time to discuss what Congress should do in the years ahead. He read from seven pages about political topics, such as immigration and the standard of currency. Though it was not called the “State of the Union Address” until 1934, President Washington had begun a tradition that presidents still honor today.

Since that time, the State of the Union speech has obviously become longer than seven handwritten pages, and so it can be difficult to understand what particular goals are being suggested. Last week, President Barack Obama gave the 220^th State of the Union address in Washington, DC, in which he mentioned taxes several times. But with other topics being covered, most people were discussing jobs and healthcare by the next day. So what new tax legislation did Obama suggest? And how does it affect our daily lives? Let’s break it down.

1. “If these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need.”
   “A modest fee” refers to a tax. The President is recommending that we tax the largest firms to regain some of the taxpayer money that went into the bailouts. Admitting that the Troubled Asset Relief Program and other government assistance to financial institutions are as popular as a root canal, he said that these bailout programs were necessary to save the economy. Taxing those institutions that benefited from these bailouts would go a long way to recouping some of the taxpayer’s money used to rescue them in their time of need.
2. “Let’s also eliminate all capital gains taxes on small business investment, and provide a tax incentive for all large businesses and all small businesses to invest in new plants and equipment.”

  It seems that President Obama is suggesting that the capital gains tax rate for small business investment should be “0”, no matter what the income is. The purpose of this proposal is to encourage people to invest their hard-earned money in small business stocks and spur a lackluster economy to life. A capital gain is the money a person makes when they purchase something at one price and then sell it for more money. Traditionally, people are taxed for that money. An example of this would be a person buying an object for $50, and then selling it for $150. If that capital gain is short term, i.e, sold and bought within that year, then that person can be taxed over 35% for the profit. Obviously, going to 0% would be a big difference.

The President’s statement on providing a tax incentive for businesses to invest in new plants and equipment refers to extending the liberal write-offs of capital equipment that expired at the end of last year. These provisions allowed a Section 179 deduction in the year of purchase and a special depreciation allowance of 50 percent in the year of acquisition for capital investments.

1. “And, yes, it means passing a comprehensive energy and climate bill with incentives that will finally make clean energy the profitable kind of energy in America.”

When you hear somebody on Capitol Hill use the word “incentive”, then there is a good chance they are talking about taxes. It is very likely that President Obama is suggesting that either consumers of clean energy and/or those who manufacture clean energy products will have tax incentives such as credits.

1. “Let’s take that money and give families a $10,000 tax credit for four years of college and increase Pell Grants. And let’s tell another 1 million students that when they graduate, they will be required to pay only 10 percent of their income on student loans, and all of their debt will be forgiven after 20 years.”

This suggestion is pretty straightforward. If you or your dependent goes to college, you can get tax credits. Like the clean energy incentives mentioned above, the student tax credit would be another incentive for people to invest in their own education. Deductions and credits are the two most popular tax incentives. Unlike a deduction, which reduces your taxable income, a tax credit is a literal, dollar-for-dollar reduction on how much you owe in your taxes.

1. “We will not continue tax cuts for oil companies, for investment fund managers and for those making over $250,000 a year. We just can’t afford it.”

President Obama is supporting extending tax cuts to those with income under $250,000.  On January 1, 2011, the tax cuts enacted under President Bush will expire, so it was expected that President Obama would mention his stance on their status during this speech. The current Administration favors the reinstatement of the pre-2001 36 percent and 39.6 percent tax brackets on income and the increase of the top tax rate on capital gains and dividends from 15 percent to 20 percent. This proposal is expected to increase income taxes for about 5 percent of all taxpayers with most of the increase geared towards those earning more than $250,000.

Of course, as enlightening as it is to see the direction that any branch of our government wants to head, the recommendations that a president makes in the State of the Union Address are just that – recommendations.  We can’t be sure of which goals the rest of our government will support or implement. If you have any questions about taxes or require a free tax consultation, please contact us at (866) 840-1829.

Tags: politics, President Obama, Taxes

This entry was posted on Thursday, February 4th, 2010 at 1:27 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.