In the State of the Union Address, President Obama included several tax proposals. He stated his hope that high-income earners pay larger taxes in the future. The President also proposed a substantial number of major tax changes for businesses with international operations.

He restated the "Buffet rule" that asks high income individuals to pay at least as high a rate as that paid by middle-income earners. The President noted, "Right now, because of loopholes and shelters in the Tax Code, a quarter of all millionaires pay lower tax rates than millions of middle-class households."

The White House proposes that those with incomes over $1 million pay a minimum tax rate of 30%. Taxpayers with incomes over $1 million also will have new limits on deductions for mortgage interest, healthcare expenses, qualified retirement plan contributions and childcare.

Many of the proposals for businesses were outlined in a White House press release on January 25. These major changes are designed to encourage U.S. companies to maintain their U.S. operations and increase employment here rather than overseas.

1. Overseas Plants – There would not be deductions for moving plants overseas. In addition, there would be a 20% tax credit against the cost of moving jobs from overseas back to the United States.
2. Manufacturing – Those manufacturers who purchase equipment would be able to expense 100% of those purchases. This option also existed in prior years and is expected to encourage building factories in the U.S. rather than abroad.
3. Major Job Losses – Areas that have experienced a closing of a military base or a major factory could qualify for a new investment credit of up to $2 billion. This credit creates incentives for building new plants or factories in depressed areas.
4. Minimum Tax – Corporations could be subject to a new minimum tax on their overseas jobs and profits.

Congress Responds to the White House

Following the State of the Union Address, members of both parties responded to the proposals by President Obama. Understandably, the Democratic Members tended to support his proposals while the Republican Members chose a different route.

Ways and Means Ranking Member Sander Levin (D-MI) supported the President's incentives for manufacturing. With an understandable desire to encourage greater manufacturing in his home state of Michigan, Levin stated, "The President articulated an action plan that sets our priorities in the right place – middle-class opportunity, tax fairness and a 'Make it in America' manufacturing policy."

Sen. Jim Webb (D-VA) focused on the proposal to raise taxes on capital gains and dividends. He noted, "But as we begin to move forward and restore economic fairness, we need to fix the tax formula for capital gains and dividends which are passive income. The rate on capital gains is as low as it's been in a very, very long time." He continued that it is essential "to raise revenues in order to fix our economic situation" and restated his desire to increase the capital gain and dividend rate above the current 15%. In prior years, the capital gains rate has been 20% or even higher.

Sen. Orrin Hatch (R-UT) is the Ranking Member of the Senate Finance Committee. He expressed concern that the proposals by the President would "hit small business" and reduce the number of new jobs. Hatch stated, "Real effective tax reform is long-past due and is something both political parties agree must happen. We must reform our tax code in a way that generates economic growth and prosperity by generating more taxpayers - not higher taxes."

House Ways and Means Committee Chair Dave Camp (R-MI) also echoed the importance of reducing unemployment through job creation. He noted, "Instead of focusing on tax reform that can create jobs, the President spent his time talking about how he intends to take more money away from employers, investors and savers in order to create new carve-outs for the few industries and projects favored by his administration. That is nothing more than the usual Washington game that has led to a tax code already littered with lobbyist loopholes."

Payroll Tax Cut Debate Continues

The Payroll Tax Cut Conference Committee held its first meeting on January 24. Sen. Max Baucus supported both the extension of the payroll cut and an inclusion of tax extenders such as the IRA Charitable Rollover in the bill. He indicated, "In December, along with the payroll tax cut, Congress passed a two-month extension of unemployment insurance, health extenders and a provision to make sure seniors have access to their doctors. And we have an opportunity to extend other provisions that expired at the end of 2011, commonly known as tax extenders."

However, Ways and Means Committee Chair Dave Camp (R-MI) suggested that he did not feel the tax extenders could be included. He noted that the extenders were not included in the original bill, H.R. 3630. As a result, he stated that including the tax extenders in a payroll tax bill would be "outside the scope of the conference."

The contentious debate will be over the method of paying for the 10-month extension of the 2% payroll tax cut for employees. The Democratic proposal continues to be a surtax on incomes over $1 million.

The Republican Conference Committee members offer a multiple strategy solution. This includes a reform of the unemployment program, freezing the pay of members of Congress and federal workers, reductions in Social Security overpayments and reduced tax fraud on various tax credits.

Editor's Note: Friends of many charities continue to hope that the IRA Charitable Rollover will be extended for the year 2012. While members of Congress anticipate the tax extenders will be passed, Majority Leader Harry Reid (D-NV) has stated that if the tax extenders (and IRA Charitable Rollover) are not attached to the payroll tax cut bill, it is not likely they will be passed until after the November election.

Applicable Federal Rate of 1.4% for February – Rev. Rul. 2012-7; 2012-6 IRB 1 (19 Jan. 2012)

The IRS has announced the Applicable Federal Rate (AFR) for February of 2012. The AFR under Sec. 7520 for the month of February will be 1.4%. The rates for January of 1.4% or December of 1.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2012, pooled income funds in existence less than three tax years must use a 1.8% deemed rate of return. Federal rates are available by clicking here.