Obama vs. McCain: Presidential candidates emphasize tax policies in campaign
Federal tax policy is one of the subjects the two candidates for president of the U.S. discuss most often. This article describes the tax policies of John McCain, the Republican Party candidate for president, and Barack Obama, the Democratic Party candidate.
Although McCain and Obama have outlined their tax policies, they have left many of the details, especially how they would pay for new tax breaks, unspecified. And, as with every political campaign, positions of the candidates may change. This article is based on what our office considers accurate, nonpartisan and unbiased information at the time of publication.
Individuals
McCain and Obama have put forward a large number of tax proposals impacting individuals. Many of their proposals are driven by the soon-to-expire tax cuts enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).
Individual income tax rates
Before EGTRRA, the individual marginal tax rates were 15, 28, 31, 36 and 39.6 percent. EGTRRA and subsequent legislation gradually phased in lower rates, which for 2008 are 10, 15, 25, 28, 33, and 35 percent. EGTRRA also created the 10 percent rate, which subsequent legislation expanded and accelerated. Because of EGTRRA's sunset provision, the pre-EGTRRA rates are scheduled to return after 2010.
McCain. McCain has endorsed making all of the lower individual income tax rates in EGTRRA permanent.
Obama. Obama has proposed making the 10, 15, 25, and 28 percent rates permanent while restoring the pre-EGTRRA rates of 36 and 39.6 percent.
Comment. Obama has also proposed excluding individuals age 65 and older from federal income tax liability if they earn $50,000 or less along with creating a new "Making Work Pay" tax credit of $1,000 for lower and middle-income families and $500 for lower and middle-income individuals to offset federal payroll taxes.
Personal exemptions
Personal exemptions are allowed for the taxpayer, spouse and each qualifying dependent. The personal exemption amount for 2008 is $3,500.
Obama. Obama has not discussed increasing the personal exemption amount.
McCain. McCain has proposed increasing the dependent exemption (but not the personal exemption for the taxpayer and spouse) by $500 each year beginning in 2010 until it reaches $7,000 (in 2016), at which time it would be once again indexed for inflation.
Pease Limitation
For 2008, single individuals begin to lose some of the value of certain itemized deductions when their adjusted gross income (AGI) exceeds $79,975 ($159,950 for married couples filing jointly). This is commonly referred to as the "Pease limitation." Beginning in 2008, taxpayers only lose one-third of the amount otherwise required under the phase-outs, down from two-thirds in 2006 and 2007.
McCain. McCain has proposed making all of EGTRRA's tax provisions permanent, including the phase-out of the Pease limitation.
Obama. Obama has proposed allowing the phase-out of the Pease limitation to sunset after 2010.
Personal exemption phase-out
The deduction for personal and dependent exemptions may be reduced or eliminated for higher income individuals. EGTRRA gradually reduces the exemption phase-out until it completely disappears for tax years beginning after 2009. However, because of EGTRRA's sunset rules, the exemption phase-out would return after 2010.
Obama. Obama has proposed restoring the phase-out for personal exemptions.
McCain. McCain has endorsed making the elimination of the personal exemption phase-out permanent.
Marriage penalty
EGTRRA and subsequent legislation increased the standard deduction and tax rate brackets for married couples filing jointly to twice the amount applicable to single taxpayers to help close the so-called marriage penalty. Marriage penalty relief is scheduled to sunset after 2010.
McCain. McCain has endorsed making all of EGTRRA's tax cuts, including marriage penalty relief, permanent.
Obama. Obama has indicated his support for making marriage penalty relief permanent.
Child tax credit
The current $1,000 child tax credit was first increased by EGTRRA and then accelerated by subsequent legislation. The child tax credit, which is not indexed for inflation, will remain at $1,000 until EGTRRA sunsets after 2010.
McCain. McCain has supported making the child tax credit permanent.
Obama. Obama has indicated his support for making the child tax credit permanent.
Child and dependent care credit
The child and dependent care credit, which is nonrefundable, is a percentage of the amount of work-related child and dependent care expenses a qualifying taxpayer paid to a care provider. The credit can reach as high as 35 percent of qualifying expenses.
Obama. Obama has proposed making the child and dependent care credit refundable and enhancing it to reach as high as 50 percent of qualifying expenses.
McCain. McCain has not addressed the child and dependent care credit.
Federal estate tax
EGTRRA gradually reduces the federal estate tax rates and totally repeals the federal estate tax for 2010. EGTRRA also gradually increases the exemption amount. After EGTRRA sunsets, the pre-EGTRRA tax rates and exemption amount ($1 million) return. The top marginal estate tax rate is 45 percent for 2008 and 2009.
McCain. McCain has proposed a 15 percent federal estate tax rate and a $5 million exemption amount.
Obama. Obama has proposed a 45 percent federal estate tax rate and a $3.5 million exemption amount. It appears unclear at this time whether the rates will be progressive and at what level the 45 percent rate would apply.
Alternative minimum tax (AMT)
Nearly 40 years ago, Congress created the AMT to prevent a small number of very wealthy individuals from evading taxation. Today, largely because the AMT was not indexed for inflation, tens of millions of taxpayers are potentially liable for the tax. However, Congress has kept the AMT from encroaching on middle income taxpayers by enacting so-called "patches," which increase the AMT exemption amounts and allow taxpayers to use most nonrefundable personal credits to offset AMT liability.
McCain. McCain has endorsed higher AMT exemption amounts and allowing taxpayers to use most of the nonrefundable personal credits to offset AMT liability. McCain has also indicated his support for "phasing out" the AMT but has not provided details of how the federal government would pay for the loss of AMT revenues.
Obama. Obama has proposed extending the 2007 AMT patch and raising the exemption amounts for inflation.
Dividends and capital gains
Qualified dividend income and capital gains tax rates for 2008 through 2010 are zero percent for individuals in the 10 and 15 percent tax brackets, and 15 percent for individuals in the higher tax brackets. When the lower rates sunset in 2011, the capital gains tax rate will increase to 10 percent for taxpayers in the 15 percent tax bracket, and 20 percent for taxpayers in higher brackets, while qualified dividend income will lose its preferential tax treatment (and dividend income will once again be subject to ordinary income tax rates).
Obama. Obama has proposed increasing the maximum tax rate on capital gains to 20 percent. One variation on the proposal has the 20 percent rate increase applicable only to families with incomes of more than $250,000 ($200,000 for individuals).
McCain. McCain would maintain the lower tax rates for both qualified dividends and long-term capital gains, ranging from zero to 15 percent.
Retirement savings
The Internal Revenue Code includes numerous tax incentives to encourage individuals to save for retirement. One of these incentives is the nonrefundable saver's credit. In addition, the Pension Protection Act of 2006 enhanced the ability of employers to provide automatic enrollment in retirement plans, like 401(k)s.
McCain. McCain has not addressed the saver's credit or automatic enrollment. However, he has discussed alternatives for retirement savings, such as creating personal accounts for younger employees.
Obama. Obama has proposed expanding the saver's credit and making it refundable and has indicated his support for automatic enrollment in 401(k)s, IRAs and similar arrangements.
Education tax incentives
Beginning in 2008, the maximum amount of the nonrefundable Hope scholarship credit is $1,800 (100 percent of the first $1,200 and 50 percent of the next $1,200) per eligible student for qualifying higher education expenses.
Obama. Obama has proposed making the Hope credit a 100 percent refundable credit for the first $4,000 of qualified higher education expenses.
McCain. McCain has not addressed education tax incentives.
Earned income tax credit (EITC)
The EITC is a refundable federal income tax credit targeted to lower-income taxpayers. When the EITC exceeds the amount of taxes owed, it generates a refund to those who claim and qualify for the credit.
McCain. McCain has not addressed the EITC.
Obama. Obama has proposed expanding the EITC to cover more families and children and boosting the phase-out threshold for married couples filing jointly.
Health benefits
A majority of Americans are covered by employer-provided health benefits. Code Sec. 106(a) generally excludes from an employee's gross income employer-provided coverage under an accident or health plan.
Obama. Obama would preserve the current income tax exclusion for employer-provided health benefits. He has also indicated support for targeted health care tax credits, largely to help lower-income individuals and also for a small business health care tax credit to offset the cost of providing health benefits.
McCain. McCain has proposed treating employer-provided health benefits as taxable compensation to the employee for federal income tax purposes. He has also proposed creating a refundable tax credit of $5,000 for families and $2,500 for single individuals to offset the loss of the exclusion.
Social Security taxes
Social Security is funded by payroll taxes. However, workers pay Social Security tax only on the first $102,000 of their annual incomes for 2008.
McCain. McCain has not addressed the Social Security payroll tax cap. He has discussed various alternatives for retirement savings, such as creating personal accounts for younger employees.
Obama. Obama has proposed a payroll tax of four percent (two percent each from employer and employee) on wage income of higher-income individuals (such as over $250,000).
Businesses
Obama and McCain have also proposed corporate tax reform. Their proposals, among other things, would lower the U.S. corporate tax rate and make the research tax credit permanent.
Corporate tax rate
Currently, the U.S. has the second highest corporate income tax rate among industrialized nations. The current top corporate income tax rate is approximately 39 percent.
Obama. Obama has proposed lowering the corporate income tax rate to 35 percent and broadening the corporate income tax base.
McCain. McCain has proposed gradually lowering the corporate income tax rate from 35 percent to 25 percent, as well as broadening the corporate income tax base.
Research tax credit
Qualifying taxpayers may claim a tax credit of 20 percent for research and experimentation expenses above a certain base amount. The research tax credit is a nonrefundable credit. The research tax credit expired at the end of 2007.
McCain. McCain would expand the research tax credit and make it permanent.
Obama. Obama has indicated support for making the research tax credit permanent.
Small business depreciation and expensing
Congress has relied several times over the past few years on enhanced Code Sec. 179 small business expensing and accelerated depreciation to stimulate economic growth, most recently in the Economic Stimulus Act of 2008. It is likely that lawmakers will continue these incentives in the future.
Obama. Obama has not addressed small business expensing and depreciation.
McCain. McCain has proposed an immediate, but temporary, first-year deduction of the full cost of 3- and 5-year business equipment purchased between 2009 and 2013, during the year in which the equipment is placed in service. McCain has also proposed eliminating the interest deduction for expensed equipment.
Domestic production activities deduction
Code Sec. 199 allows a deduction for qualifying manufacturing activities. When fully phased in by 2010, the deduction will equal nine percent of the less of qualified production activities for the year or taxable income for the year.
McCain. McCain has endorsed repealing the Code Sec. 199 deduction.
Obama. Obama has indicated support of repealing the Code Sec. 199 for oil and gas companies.
Energy
Congress has used the Tax Code several times in recent years to encourage consumers and businesses to make energy-efficient purchases and conserve energy. Many of the tax incentives, however, are temporary.
McCain. McCain has proposed an end to ethanol subsidies and has discussed a temporary federal gas tax holiday. In addition, McCain has also proposed a tax credit for buying zero emission cars.
Obama. Obama has proposed expanding and extending renewable energy and conservation tax incentives and repealing tax incentives for oil and gas companies. Additionally, he has discussed energy rebates for individuals to help offset the cost of home heating.
Possible revenue raisers
Both candidates have described possible revenue raisers:
Obama. Some of Obama's proposals for tax offsets include:
*Taxing "carried interest" - profits paid to compensate hedge-fund managers-- as ordinary income;
*Codifying the economic substance doctrine; and
*Requiring information reporting of basis for gains.
McCain. Some of McCain's revenue raisers include:
*Corporate base broadening;
*Reduction in certain business tax preferences; and
*Eliminate oil/gas "loopholes."
If you have any questions about the policies listed here, or want to know more about how they affect you or your business, please contact Dan Duncan, Principal, at 630-285-0215.
