What the Federal Budget Means to You | Prousalis & Papantonakis, P.C.

It’s that time of year again. With 2010 just underway, executive budgets are being proposed on both the state and federal levels. And in this economy, almost everyone is paying attention to what is put in and left out of the 2,000 pages that will run our nation for the fiscal year 2011. President Obama’s recent announcement that there will be a national spending freeze to reduce the current deficit brings additional attention to his proposed budget, with many wondering exactly where these cuts will take place. One year after a stimulus package with a $787 billion price tag few will soon forget, the White House announced plans to trim back spending this year in order to bring the deficit down to what economists would call a sustainable amount, which most experts argue is 3% of national gross domestic product (GDP).

The $3.8 trillion budget is based off statistics assuming the unemployment rate to average out at 9.3% and the nation’s GDP to increase by 3.8% over the next year before the 2011 fiscal year would begin. It accounts for some kind of healthcare plan to be implemented, and contains $50 billion worth of job-creating measures. President Obama hopes to create a bipartisan fiscal commission by executive order to oversee the goals outlined in the recent budget proposal.

A large part of the 2011 budget is dedicated to tax cuts – ones already in place that will become permanent, ones that will soon be phased out, and ones that the White House hopes to finally get through Congress after proposing last year in the stimulus plan. These tax cuts, totaling $53 billion in cost, aim to help get families back on their feet by keeping middle class tax cuts in place while simultaneously reducing the national deficit with revenue from ending tax cuts that are considered nonessential.

Among those programs the White House hopes to keep intact are the “Make Work Pay,” “American Opportunity,” low-income and child-care tax credits. “Make Work Pay,” created under the stimulus plan, aims to add a few dollars to workers’ paychecks every pay period and is to be extended for a year under the new budget proposal. The “American Opportunity” Tax Credit was also created under stimulus legislation and expanded the Hope Scholarship tax credit for 2009 and 2010 to increase higher education allowance to $2,500 from $1,800 in previous years. President Obama is looking to make this increased tax credit permanent, but this would increase the deficit by an estimated $75.4 billion in the next ten years.

A low-income tax credit extension would mean continuing the Earned Income Tax Credit that the stimulus had already temporarily extended. This provides very low-income families with three or more children the opportunity to claim a credit equal to 45% of their qualifying earnings, with a maximum credit of $5,657. When the president extended the credit through the stimulus bill last year, he increased its value from 40 to 45% and now looks to make this increase permanent, costing the country $15.2 billion over the next decade. The child-care tax would allow families earning less than $85,000 a year to claim nearly twice their current qualifying child and dependent care tax credit, adding an estimated $12.6 billion to the deficit in the same time span. Additionally the administration has expressed interest in protecting the middle class from being subject to the “wealth” tax permanently.

At the same time, phasing out certain tax cuts is also an administration priority. Doing so is likely to be viewed favorably by Congress because it will allow for revenue to fund the many items that are sure to be on both the House and Senate budget proposals. Among the tax cuts set to end under the President’s 2011 budget are those for high-income households, defined as individuals making over $200,000 or couples earning over $250,000 annually. The President would also limit itemized deductions for high-income households by capping them at 28%, an idea that died in Congress last year after several lawmakers argued that it would discourage charitable donations.

Finding the balance of which tax cuts to keep in place and which to let expire is only one aspect of the president’s 2011 budget, but it may be the one that most directly affects you as a taxpayer and homeowner. As the House and Senate release their budget proposals in the months to come, the tax cut debate will surely continue and the programs and expenses that need additional funding will be itemized as well. It is important as a taxpayer to follow the budget process and understand how these changes will affect you.