Finance & Enjoyment Blog

2009 is shaping up to be active and perhaps even baffling year. The following paragraphs outline some of the key activities that seem to support this forecast. Our team of tax professionals at KKB will be following these and other changes as they occur.        

Recently Nancy Pelosi, Speaker of the House of Representatives, said the House would have its version of healthcare reform out by July 31, 2009, yet no mention was made about how it would be funded. 

The most pressing tax issue for 2009 is the existing estate tax exemption. On January 1, 2009 the exemption increased from $2,000,000 per individual to $3,500,000. Under current law, the estate tax would be eliminated in 2010 and then reappear January 1, 2011 with a $1,000,000 exemption. There is little support for complete elimination of the estate tax. President Obama has already recommended extending the $3,500,000 exemption through 2010, but stopped short of any change beyond 2010. Conceivably the exemption could revert to $1,000,000 in 2011.

During the 2008 presidential campaign, President Obama pledged that individuals with incomes below $250,000 would not have their taxes increased. Recently the Treasury Department issued some guidance. Beginning in 2011 the highest tax rate would increase from today’s 35% to 39.6%. The second highest rate would be 36% and would apply when individuals’ income exceeded $250,000. This 36% rate would apply to couples with taxable income of approximately $235,000 which is $250,000 of income reduced by the standard deduction of $11,000 and two personal exemptions of $3,500 each. Currently the maximum 35% rate doesn’t begin until taxable income (married filing jointly) exceeds approximately $373,000, a difference of approximately $138,000.

Also, released by the Senate Finance Committee are their suggestions for paying for health care reform. Their suggestions will be controversial. The biggest change is on restricting the exclusion from income of employer provided health insurance. Some guidelines proposed are (1) taxing health care benefits which exceed the Federal Employee Health Benefit Program, (2) limiting the exclusion to employees whose adjusted gross income doesn’t exceed a threshold level (e.g. $400,000 for joint files, $200,000 for others), (3) some combination of (1) and (2), (4) converting the exclusion to some sort of tax deduction or credit (this was proposed by John McCain in the election and criticized by President Obama) and (5) limiting the exclusion to a percentage of the employer’s premium.

Another change proposed is to modify health savings accounts. The tax declaration would be limited to the deductible under the health care plan and increasing the penalty tax from 10% to 20%.

Flexible spending accounts couldn’t reimburse non-prescription drugs and the 7.5% of AGI threshold for deducting medical expenses on individual income tax returns would be increased.

 


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