Typical family would get tax cut in Obama budget

[February 28, 2009]  WASHINGTON (AP) -- A typical American family would get a tax cut under President Barack Obama's budget proposal, and their low-income neighbor would fare even better.

Their wealthier counterparts, however, would face some steep tax increases, starting in 2011.

Families making as much as $50,000 would owe no federal income taxes, as long as they have at least two children, according to an analysis by Deloitte Tax LLP. Others making as much as $150,000 would see big tax cuts, especially if they have children in college.

The budget outline unveiled Thursday continues Obama's policy of targeting tax cuts for middle- and low-income families. In the presidential campaign, Obama promised tax cuts for the middle class, and he delivered some temporary relief in the economic stimulus package enacted this month.

Most of the tax cuts for individuals in the stimulus package would be made permanent in Obama's budget proposal. They would be offset by tax increases on businesses and on couples making more than $250,000. Single filers making more than $200,000 would also be hit with a tax increase.

At the other end of the spectrum, millions of Americans who don't make enough money to pay federal income taxes would receive government payments at tax time through refundable tax credits.

A typical family of four making $50,000 a year would receive a payment of $40, according to the Deloitte analysis. Before the stimulus package was enacted, that same family would have owed $760 in federal income taxes.

A similar family making $35,000 a year would get a payment of $4,100, an increase of $1,200. The median household income was $50,233 in 2007, according to the Census Bureau.

The stimulus package provided most working couples with a new tax credit of up to $800 for 2009 and 2010 - single filers get up to $400. Obama's budget proposal would make the credit permanent for families making less than $190,000 and individuals making less than $95,000.

An expanded $1,000 child tax credit would be made permanent, as would an expanded $2,500 tax credit for college expenses. Families making up to $160,000 a year would be eligible for the full college credit.

Obama "did what he said he would do in the campaign," said Clint Stretch, Deloitte's managing principal of tax policy. "And he had a surprise hit for those on the high end."

Obama promised during the presidential campaign to eliminate tax cuts for the wealthiest Americans, which was enacted under former President George W. Bush. Obama's budget proposal would allow them to expire in 2011, increasing the top income tax rate for couples making more than $250,000 from 35 percent to 39.6 percent.

The budget proposal also would enact new limits on itemized tax deductions for those same couples, including deductions for charitable donations, mortgage interest and state and local taxes. The tax increases would be delayed until 2011, when the economy will presumably be improved.

The deductions are valuable to millions of Americans - even more so to people in high tax brackets. Without the new limits, a taxpayer in the proposed 39.6 percent tax bracket could save $396 in taxes from a $1,000 reduction in taxable income. Obama wants to limit deductions to the 28 percent bracket, meaning the same taxpayer would save only $280, said Timothy Speiss, a partner at the New York-based accounting firm of Eisner LLP.

Homebuilders and charitable groups have come out against the proposed limits, and even some Democrats in Congress have raised concerns.

Speiss noted that the limits would apply only to high-income families.

"The argument is going to be that it's not terribly dramatic because we're only talking about the top 5 percent of earners," Speiss said.

Under Obama's budget proposal, a typical family of four making $300,000 a year would see their federal income taxes increase by $1,100, while a similar family making $500,000 would get an $11,300 increase, according to the Deloitte analysis. Single filers with no children would be hit with even bigger tax increases.

The analysis took into account typical deductions for families with high incomes, Stretch said.

Obama's budget proposal would provide a long-term fix for the Alternative Minimum Tax, sparing more than 20 million taxpayers from significant tax increases. The tax was enacted 40 years ago to make sure wealthy taxpayers pay at least some tax. But it was never indexed to inflation, so it would hit many middle-income taxpayers without an annual fix by Congress.

Obama's proposal would spare Congress from dealing with it each year, but most taxpayers won't notice the change.

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[Associated Press; By STEPHEN OHLEMACHER]

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