White House budget limits tax preferences

White House budget limits tax preferences

Limitations on tax deductions for high earners and a reduction in expected Social Security benefits are among many provisions in President Obama’s FY 2014 budget proposal.

The $3.77 trillion budget, released this week proposes more than $1 trillion in savings from spending cuts, entitlement reforms, and interest savings. Additional revenue from reforming the tax code will be required for deficit reduction, the document noted.


A number of tax-preference items would be subject to limitations, and additional tax reforms are proposed.

  • The proposal reduces the value of itemized deductions and other tax preference items to 28% for families with incomes in the highest tax brackets. The plan would limit the tax rate at which higher earners can reduce their tax liability to a maximum of 28%. The cap would apply to all itemized deductions, tax-exempt interest, employer-sponsored health insurance, retirement contributions, and selected above-the-line deductions.
  • The plan would prohibit individuals from accumulating more than $3 million in tax-preferred retirement accounts. The cap would apply to an individual’s total balance across tax-preferred accounts, to an amount that would fund not more than $205,000 in retirement income per year in retirement.
  • The “Buffett Rule” is also among the provisions, and would require those with an income of $1 million or more to pay a minimum of 30%, after charitable contributions, in taxes.
  • The estate tax exemption and tax rate would revert to 2009 levels, effective in 2018. In 2009, the estate tax exemption level was $3.5 million and $1 million for the gift tax exemption. The maximum tax rate was 45%. The proposal would also eliminate a number of loopholes that allow individuals to use advanced tax planning to reduce their estate tax liability.

The budget also proposes implementing a chained CPI calculation for Social Security benefits. Currently, the program uses the standard Consumer Price Index to determine cost-of-living increases in benefits. The chained CPI accounts for a consumer’s ability to substitute between goods in response to rising prices.The chained CPI grows slightly more slowly, and the change is expected to reduce deficits and improve Social Security’s solvency, according to the White House budget.

Individual investors, as well as small business owners, have been monitoring proposals that have an impact on tax planning, particularly the limits on tax preference items including itemized deductions and retirement contributions. In addition, it is unclear how the proposed cap on tax-preferred retirement accounts will affect advanced legacy planning strategies such as the stretch IRA.

The President’s budget proposal will now be among the differing budget blueprints passed by the House and Senate that will form the budget debate over the coming months. To read more about the President’s budget, visit the Office of Management and Budget. To download the budget, click here.

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