American Jobs Act

President Obama has outlined several tax changes he has proposed that Congress implement as part of a larger package designed to spur job creation. Here's an overview of the tax changes that Obama has urged Congress to consider. Please note that introduced bills often change as they make their way through Congress. Obama estimates that the various provisions in the American Jobs Act would cost about $447 billion.

Temporary Reduction in the Social Security Tax Rate

Obama proposes to reduce the rate of the Social Security tax from 12.4% to 6.2% for the year 2012, with employers paying 3.1% and employees paying 3.1%. Employers would be eligible for the rate reduction on the first $5 million of compensation. Self-employed persons would likewise pay only 6.2% instead of the normal 12.4% for the Social Security portion of the self-employment tax, with the deduction for half the self-employment tax. Self-employed persons would be subject to the same limit of $5 million of compensation as other employers.
By contrast, for the year 2011 there's a one-time reduction in the Social Security tax from 12.4% to 10.4%, with employers paying 6.2% and employees paying 4.2%.

28% Tax Rate Limit on Itemized Deductions, Some Above-the-Line Deductions and Some Tax Exclusions

Obama proposes to limit to 28% the impact of all itemized deductions and the following adjustments to income and exclusions from income:

the self-employed health insurance deduction,
section 199 domestic production activities deduction,
deduction for qualified performing artists,
moving expenses,
Archer MSA deduction,
Student loan interest deduction,
tuition deduction,
HSA deduction,
exclusion for Municipal bond interest,
cost of employer-provided health insurance, except for flexible spending accounts, and
the foreign earned income exclusion.

The limitation works by increasing either the regular income tax or the alternative minimum tax to act as an offset against the deductions. Instead of a tax deduction, adjustment or exclusion achieving a tax savings at the taxpayer's highest tax rate, such as 35%, the value of the deductions would be limited to, at most, 28%. The difference between the tax savings at a taxpayer's highest rate and the 28% limit is added to either the income tax or alternative minimum tax. The limitations would take effect in 2013 for taxpayers having adjusted gross income over:

$250,000 for married filing joint,
$225,000 for head of household,
$125,000 for married filing separately, and
$200,000 for single filers.

Tax Credit for Increasing Payroll

Employers would be eligible for a federal tax credit based on increasing their wage and salary compensation. The credit for year 2011 would be worth 6.2% of wages paid during the last three months of 2011 less wages paid in the last three months of 2010. The credit for year 2012 would be worth 3.1% of wages paid during all of 2012 less wages paid during all of 2011. There are limitations for large employers with $5 million or more of payroll and for employers with zero payroll expenses in 2010 or 2011.

Expanded Work Opportunity Tax Credits

Employers would be eligible for an expanded Work Opportunity Credit for hiring unemployed veterans with maximum tax credits ranging from $2,400 to $9,600. Obama also proposes increasing the work opportunity credit for employers who hire persons who have been unemployed for more than 6 months to $4,000 (currently the maximum credit is $2,400).

Extension of 100% Bonus Depreciation

The American Jobs Act would extend for one additional year the ability of businesses to deduct 100% of the cost of new equipment. Bonus depreciation is set at 50% of the cost of new equipment purchased before September 8, 2010 and at 100% of cost for equipment purchased after September 8, 2010 and before January 1, 2012. Obama proposes to extend the 100% bonus depreciation for equipment purchased before January 1, 2013.

Delay in Mandatory 3% Withholding for Government Contractors

Federal and state agencies are required to withhold tax at a rate of 3% on payment made to contractors. This provision was scheduled to start in 2011, but the IRS has delayed its implementation until 2013. Obama proposes to further delay the withholding mandate by one year until 2014.

Carried Interest to be taxed as Ordinary Income, subject to Self-Employment Taxes

Carried interest, which is currently taxed as capital gains and can qualify for the preferred long-term capital gains tax rate, would be taxed as ordinary income and subject to the self-employment tax starting in the year 2013.