The President is trying to broker a “grand bargain” combination of spending reductions along with certain tax increases. The proposals are designed to appeal to both liberals and conservatives on different points of interest. For example, Obama is offering to cut Social Security by changing what is known as the inflation index that is used for benefit hikes to a less general chained index. Many economists say the chained index better measures people’s spending patterns as prices rise. This would have the effect of lowering inflation adjustments compared with the current index.

However, this change would also effectively raise taxes on individuals and make it easier for them to move to higher tax brackets as their income goes up. All taxpayers will see an increased tax bill under this proposal. On the other hand, Obama has made it clear that these proposed Social Security cuts are part of an overall package, and the other side of that package is that he wants more taxes on those folks with higher incomes. He won’t agree to the Social Security cuts unless the Republicans accept the increased tax bill. These are the three biggest tax increases that he is proposing:

1. A 30% minimum tax on millionaires – Under this proposal, taxpayers with an adjusted gross income of over $2 million would have to pay a tax equal to 30% of their adjusted gross income, less a credit of 28% for charitable gifts. This would begin in 2014. There would also be a phase-in of this tax for people with adjusted gross incomes between
$1 million and $2 million.
2. Restrictions on taxpayers with large retirement plans – The essence of this proposal is that after this year, anyone with a total retirement plan valued at over $3.4 million would be restricted from making additional contributions that would be tax deductible.
3. Capping itemized deductions at 28% – the idea here is that beginning next year, if you are married filing joint with an income in excess of $225,000 (or single above $185,000) your itemized deductions could not be greater than 28% of adjusted gross income. Currently, Republicans don’t appear to be anxious to accept the President’s offer.

Below are some additional tax reforms that are expected but not yet law:

1. The Social Security wage base is expected to jump $2,100 from this year to next year making it $115,800 for 2014. In fact, it is estimated to continue increasing each year for the foreseeable future.
2. Tax return preparers – The IRS will not be bringing back its return preparer program this year. The Service stopped the program in January after Federal District Court held that the Service did not have the authority to mandate that tax return preparers who are not CPA’s, lawyers, or enrolled agents must pass a competency test and take continuing education. The Service then appealed to an appeals court who denied the IRS’s request to lift the injunction. The Service is still fighting this and seeking an expedited hearing in the appeals court, but that will not happen any sooner than the fall of this year, so the program will not be pursued in 2014.
3. If a tax return preparer does your tax return based on receiving a piece of your refund, don’t let him do it. There are rules that ban tax practitioners from charging their clients a contingent fee for preparing and filing refund claims with the IRS, and the Federal Court said those rules are constitutional. You should obviously pursue your refunds; just keep in mind that it is not legal for the return preparer’s fee to be based on the IRS accepting the claim.
4. Fewer audits this year – Because of the government sequester, the IRS will be doing fewer audits this year. (See my earlier blog regarding the government sequester and how it affects the IRS). The IRS did fewer audits in 2012 than it did in 2011 because of budget cuts. Because of the sequester and the IRS workers facing furloughs, the head of the IRS acknowledged that the 2013 audit rate will fall even lower.