Households earning between $250,000 and $400,000 a year would face limits on their tax breaks under President Barack Obama’s latest budget offer, increasing their tax bills even though they wouldn’t face higher rates, a person familiar with the negotiations said today.
Obama’s latest plan would begin phasing out personal exemptions and limiting itemized deductions at about $250,000 in annual income. Those limits, which would raise a combined $165 billion over 10 years, are among six separate tax increases for top earners in Obama’s plan. The other parts are rates on ordinary income, capital gains, dividends and estates.
“You raise their tax rates in a basically disguised fashion,” said Douglas Holtz-Eakin, a former director of the Congressional Budget Office.
Obama campaigned since 2007 on raising tax rates on married couples’ income exceeding $250,000 a year and individual income of more than $200,000. As part of an offer to House Speaker John Boehner yesterday, Obama raised that threshold to $400,000.
The person, who requested anonymity to discuss the private talks, said the $400,000 limit would apply to single and joint filers.
Taxpayers are allowed to take a personal exemption for themselves and all dependents, set at $3,800 this year. The exemption had been phased out for high-income taxpayers before the George W. Bush tax cuts brought it back.
The proposal is similar to one in Obama’s February 2012 budget plan that would begin phasing out the exemption and raise $42 billion over the next decade. Under that plan, about 563,000 households are in the 36 percent bracket that would be most affected by the personal exemption phaseout, according to an analysis by Senate Finance Committee Republicans.
The exemption phaseout is the smallest of the six parts of the George W. Bush-era tax cuts that Obama wants to eliminate for top earners. It has received little attention during the debate over averting tax increases and spending cuts scheduled to begin in January.
A phaseout of the personal exemption would have the largest proportional effect on people who earn less than $1 million a year, said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center in Washington.
“The guy who’s right above the point at which you’ve lost everything is in the same situation as the person who’s $10 million above that point,” Williams said.
Many taxpayers in the top brackets don’t benefit from the personal exemption because they must pay the alternative minimum tax, a parallel system that takes back the exemption.
The deduction limit would have effects all the way up the income scale. It would reduce the value of many itemized deductions for high-income taxpayers. It would stop affecting taxpayers when they lose 80 percent of their deductions, not at a certain income level.