Higher tax rates and limits on itemized deductions are two of several provisions in President Obama’s proposed budget that would have an impact on high-income taxpayers.

The FY 2013 budget proposal, released in mid February, includes a series of tax reform measures “to cut inefficient expenditures and move the tax system closer to observing the Buffett rule.” Named after investment icon Warren Buffett, the proposal would raise the tax rate for those earning more than $1 million annually. In addition, the budget would allow for the 2001 and 2003 tax cuts for high-earners to expire and for the return of the estate tax to levels set in 2009.

Among the provisions:

  • Bush-era tax cuts would expire at the end of 2012 for households earning above $250,000 and for single taxpayers earning more than $200,000
  • The estate tax exemption would revert to 2009 levels — specifically a $3.5 million estate tax exemption, a $1 million gift tax exemption, and a maximum tax rate of 45%
  • The Buffett Rule would be implemented to establish a tax rate of at least 30% for income above $1 million
  • The alternative minimum tax would be eliminated
  • Limits on itemized deductions would be reduced to a maximum of 28% for families with income over $250,000 or single taxpayers earning more than $200,000.

The proposed limits would apply to all itemized deductions as well as tax-exempt interest, retirement plan contributions, foreign excluded income, employer-sponsored health insurance, and other deductions. Other provisions would change the tax rate for hedge fund managers or private equity partners. The budget calls for carried interest — the profits earned by hedge fund or private equity managers — to be taxed as ordinary income, rather than as capital gains.

In addition, some tax rules governing corporations would also be changed. For example, the budget proposes to change the depreciation rules for corporate jets, allowing for that depreciation to be calculated over seven years, rather than the current five years. Also, several tax subsidies for oil and gas production would be repealed. While Congress is not expected to endorse the proposals, with tax reform on the table for political discussion, clients may be concerned about the implications of higher income and estate taxes in the future. There is a window of opportunity to implement tax-smart planning strategies this year while the current tax rate remains low. For more information about the Administration’s budget proposal, see the White House and Office of Management and Budget statements issued this week.