Obama's Budget Proposal

We got a first look at President Obama's proposed budget this past weekend. There are good and bad things in it. And a couple of really bad things.

An earlier post questioned what would happen with the estate tax, assuming it was retained and didn't expire as the Bush Administration had proposed. As expected, the Obama Administration intends to keep the estate tax. But there is a silver lining: the exclusion will remain at $3.5 million instead of reverting to $1 million as it was under President Clinton. Small business owners wanted a complete repeal, but the $3.5 million exclusion should ease some of their pain.

Also a good point is an annual adjustment to keep the Alternative Minimum Tax (AMT) from biting more people whose incomes have crept up due to cost of living increases. That's a good thing.

Tax rates in general will increase. The highest marginal rate is increasing from 35% to 39.6%. That's bad. And along with that is the ultimate "marriage penalty". These higher rates kick in at $200,000 for an individual, but $250,000 for a married couple.

Some really bad news and a surprise is the proposal to limit deductions at 28%. What this means is if you are in the higher tax brackets, a $1,000 charitable contribution, for example, is only worth $280 (28%) instead of the $396 (39.6%) of your tax bracket. This comes as a surprise and attacks a very sacred cow, that of the deductibility of mortgage interest. For years tax policy has encouraged home ownership by allowing a deduction for mortgage interest. Now that and all deductions would be limited.

It's important to remember that these are all just proposals. The President's budget has to be approved by Congress and there could be a fight to get it through.