On February 14, 2011, President Obama unveiled the U.S federal government budget for fiscal year 2012, which includes steps to reduce the federal budget deficit by over $1 trillion over the next ten years. At roughly 2% lower than last year’s budget, it calls for the freezing of discretionary spending (outside of the Department of Defense) over the next five years and addresses fiscal issues around healthcare, Social Security, income taxes, and other areas.

Below are some key themes and specific proposals highlighted in the budget which affect personal finances, retirement, and taxes:

TAXES AND ESTATES

  • Allow the Bush-era tax cuts to expire after 2012 for higher-income households ($200,000 for individuals, $250,000 for couples)
    Comment: Although Congressional action is needed to enact changes to the future tax code, higher-income clients may want to consider accelerating income over the next two years allowing them to capitalize on a historically low tax environment, particularly since new taxes related to health-care reform (i.e., the Medicare investment surtax of 3.8%) will begin in 2013.
  • Provide relief from the Alternative Minimum Tax (AMT) for 2012, 2013, and 2014 and fund tax relief from the AMT by a 30% reduction in itemized tax deductions for higher-income households
    Comment: With no income phase-outs on personal exemptions or itemized deductions in place for 2011 or 2012, taxpayers should consult with their tax advisor to accelerate deductions in those tax years if there is a risk of reductions after 2012.
  • Revert the federal estate tax system to levels in place in 2009 ($3.5 million exemption amount with a maximum estate tax rate of 45%)
    Comment: With the recent increase in the estate tax exemption amount to $5 million through 2012, families with trusts should consult with their estate planning attorneys to determine if modifications are needed. Clients with wealth levels below the exemption amount still need to consider the basics such as having the proper documents in place and having a strategy to avoid the probate process.

RETIREMENT AND SOCIAL SECURITY

  • Reform Social Security to ensure longer-term solvency: The administration outlines several principles including no privatization of the system; no redution in benefits for future recipients; preserving benefits for current recipients; and providing for the most vulnerable citizens, such as low-income seniors
    Comment: Though the budget proposal does not define specific measures to improve the solvency of the system, it’s reasonable to review the plan outlined by the deficit commission’s report issued in December. The commission recommended a gradual increase in retirement ages for future recipients and increasing the taxable minimum amount to cover 90% of wages by 2050. The current Social Security wage base is $106,800, which represents 85% of total wages.
  • Require businesses that do not currently offer a workplace retirement plan to establish Automatic IRAs for their employees
    Comment: Though this new program would be phased in gradually and would not impact businesses with less than 10 employees, business owners without retirement plans in place should consult with their financial advisor to review the benefits of implementing a plan customized to their specific needs. Also included in the budget is a provision which increases the tax credit available to offset costs of establishing a retirement plan from $500 annually to $1,000.