The Presidential Election and Taxes

One of the questions that I am asked a lot by clients these days is what is the potential tax effect of the November presidential election.

The only honest answer I can give is that it depends and offer my speculation on what might potentially happen. So let's take a look at the current law and what changes might occure.

THE CURRENT LAW:
Some of the big changes President Bush made over the years are the lowering of the capital gains rate to 15%, taxing certain dividends at 15%, and lowering the marginal tax rates across the board. Other more subtle changes included the elimination of the marriage "penalty" and raising the Section 179 limitations which allow small businesses to expense up to $250,000 of capital equipment rather than depreciating it over several years. Under the Bush administration Corporate taxes have remained essentially unchanged and our top corporate tax rate is higher than every other industrialized nation except for Japan. Many of the Bush tax cuts sunset in 2010 if congress takes no action to extend the cuts.

WHAT IF SENATOR OBAMA WINS?:
Senator Obama is on record that he would likely raise the top marginal tax rate from 35% to 39.6%. He has also talked of raising the capital gains rate to at least 20%. It is expected that he would use tax revenues from these hikes in order to offer a $1,000 tax credit to families with earnings less than $100,000. Senator Obama has been mum on other tax issues. There is a fear that he might raise the FICA taxes, but nothing formal has been proposed to date.

WHAT IF SENATOR McCAIN WINS?:
Senator McCain has reversed course and is on record as wanting to extend the Bush tax cuts. In other words, if McCain wins and he can get congressional support no major changes would be expected in the tax laws. If anything I would expect McCain to possibly push for lower corporate tax rates in order to get our rates in line with the rest of the world, but he's been pretty quiet on that issue.

ANALYSIS:
I believe that the tax situation right now is about as good as it is going to get for small business owners. Given the current political winds a McCain win at best will only hold the line on the current tax situation. An Obama win likely will cause at minimum a rise in the top marginal tax rates and a rise in the capital gains tax. So if I have an option of showing income in 2008 or 2009 I'd want it recognized in 2008 as I believe there is a good chance that the same income will be taxed at a higher rate next year.