Several tax provisions in President Obama’s proposed federal budget for fiscal year (FY) 2010 have garnered significant criticism on Capitol Hill since the Obama administration released the budget. Obama’s proposed budget would cost $3.5 trillion, make major long-term changes to individual and business tax, and includes proposals to limit tax deductions for mortgage interest and charitable contributions for higher-income taxpayers, in addition to long-term plans that raise tax rates from their current level for higher-income individuals.

Tax hikes

The Obama Administration’s budget would establish a $600 billion reserve fund for overhauling the health care system, to be partially funded by tax increases on higher income taxpayers. These are taxpayers with adjusted gross incomes (AGI) over $200,000 for individuals and $250,000 for married couples filing jointly. Specifically, the budget proposes to raise the highest tax rates to 36 and 39.6 percent after the 2001 Bush tax cuts expire at the end of 2010.

The proposed tax increase on individuals has been met by lawmakers on Capital Hill and small businesses with significant criticism since many small businesses such as limited liability companies, S corps, and partnerships pay income tax at the individual level. According to some lawmakers, under Obama’s proposed budget, small businesses would face a 45 percent tax hike. But Treasury Secretary Timothy Geithner has asserted that 97 percent of small businesses would not see a tax increase.

The budget would also limit itemized deductions to 28 percent for high-income taxpayers, including the mortgage interest, real estate tax and charitable deductions. The budget also proposes a 20 percent rate on capital gains and dividends, again, on high-bracket taxpayers after 2010. Obama has also proposed to reinstate the personal exemption phase-out.

Permanent tax cuts

Obama has also proposed making the following tax incentives, which are currently temporary, permanent:

— Making Work Pay credit of $400 for individual wage earners and $800 of married taxpayers;

— An enhanced child credit;

— American Opportunity Tax Credit (formerly the Hope education tax credit); and

— An expanded earned income tax credit (EITC).

Mandatory retirement savings enrollment

The budget’s proposed mandate for all small businesses to automatically enroll their employees in either a 401(k) or IRA established by the employer also create concern among lawmakers during a time when businesses cannot afford to make matching contributions.

Obama has stressed that his budget proposals are continuing to be fleshed out, and that the Administration is willing to be flexible in making changes.