President Obama's budget plan is very clear: Tax hikes are on the way. Not right away (thank goodness), during economic downturn, but in 2011, when Obama figures the economy will have recovered. The targets: HIGH INCOME EARNERS AND BUSINESSES. For upper income earners, here's what's on tap:

(*) Higher tax rates. Obama's biggest tax hike reinstates the 36% and 39.6% income tax brackets for married filers making over $250,000 and singles who make more than $200,000 beginning in 2011. Since the tax brackets are based on taxable income and not earnings, Obama is en essence substituting 36% and 39.6% tax rates for the current 33% and 35% tax brackets (and it may go higher if they pass health reform). Lower brackets would not be affected.

(*) A bigger hit to capital gains and dividends. The current 15% maximum rate would rise to 20% for filers who are above the 28% tax bracket, effective in 2011.

(*) Continued phaseout of personal exemptions and itemized deductions: Set to lapse after 2009, both of these tightenings would be reinstated by Obama beginning in 2011, but only after taxpayers who are in the two highest tax brackets. These hikes are sure bets. Senate Republicans won't be able to stop them because Democrats will load them onto a budget bill, which cannot be filibustered.

(*)Tax increases are coming as part of health care reform as well. Obama's key proposal: LIMIT ITEMIZED DEDUCTIONS FOR HIGH INCOME EARNERS.
-He wants to cap at 28% the rate at which itemized deductions reduce tax liability, starting in 2011.That would make them less valuable to filers in the top two brackets. This would hit all itemized deductions, including donations and mortgage interest. The extra revenue would cover half the cost of expanding health insurance coverage. Good news, is that he's proposal will meet with a lot of oposition, specially from the Blue Democrats. Taxwriters are apprehensive about the potential impact of the proposal on limiting tax deductions on charitable giving and mortgage deductions. But other tax hikes will take place as lawmakers tackle health issues: Taxing upper income earners on the value of employer provided insurance, for example.

(*) Obama also wants to tap businesses for more revenue...To "help reduce the deficit", by:
-Eliminating use of the LIFO (last in-first out) inventory valuation method, beginning in 2012.
-Raising taxes on investment fund managers paid with a share of the profits. They would have to pay tax at ordinary income rates instead of capital gain rates.
-Requiring companies that pay rents to issue 1099 forms to their landlords.
-Ending some breaks used by oil and gas firms, including the deduction for domestic production and the ability to expense (write off) their intangible drilling costs.
LAWMAKERS WILL OK THESE IDEAS, although they may get watered down a bit, before they become law.

(*) Businesses can forget about a corporate tax rate reduction. Two years ago, the Ways and Means Committee chairman tied a cut in the top rate from 35% to 30.5% to set a business tax hikes. Obama took the tax increase but not the rate cut.

BENEFIT PLANS: The 2010 Medicare Part B premium is projected to rise to $104.20 a month. This will mainly affect upper income earners..married with AGI (adjusted gross income) above $170,000 and single over $85,000, who pays a stiff surtax on top of the basic Part B premium. Lower income folks who are already on the rolls, will continue to pay $96.40 a month.

QUALIFIED PLANS: After tax payins to a 401(k) plan can be converted to a Roth IRA tax free, IRS says in a private ruling. The after tax contributions can be pulled out in a lump sum and rolled over to a Roth IRA without triggering an income tax bill. This is a much more liberal rule than when converting an IRA after tax payings to a Roth IRAS.

(*) If you lost money on a corrective distribution from a 401(k) plan, take note: YOU CAN CLAIM THE LOSS ON YOUR 1040. Many people who had excess pay-ins, returned from 401(k) plans in 2008 got back much less than they originally paid because of the market decline. if you are in this boat, you'll receive a 1099-R form showing the full amount of the excess deferral, which you report on lines 16a and b of the 1040. You then show the investment loss as a NEGATIVE number on line 21 of the 1040, and write "Loss on Excess Deferral Distribution" on the dashed line to the left.

MEDICALS: Meals and lodging provided with long term care services can be deducted as medical expenses if the person is in the facility for medical reasons, IRS says privately. That includes someone needing constant nursing home care...an Alzheimer's patient who can't do tow or more daily living activities.

BUYING A CAR: IRS takes a pro-taxpayer view on the sales tax deduction on new vehicles: Buyers can deduct the sales tax paid on more than one vehicle this year, IRS official said. Although this break applies only to the tax on the first $49,500 of the cost of a vehicle purchased after Feb 16, 2009 and before Jan 1, 2010 IRS will apply this cap to each individual car purchased. So if you buy two cars for a total of $30,000 a piece, total sales tax paid on the vehicle qualifies for the tax break.
Buyers living in states with no sales tax can claim this break, IRS says. They can deduct other related fees imposed by states and municipalities if the levies are assessed on purchasing a vehicle and are based upon the vehicle's sales price.

BUSINESS TAXES: IRS suffers a setback in its attack on large executive pay packages. A bonus of 5% of a closely held firm's pretax net income is a reasonable, even though that meant the CEO got an extra $17 million, an Appeals Court says. For the year, the firm's return on equity topped its two publicly traded competitors, and the CEO was a one man dynamo who rarely took a vacation. In the Court's view, his total pay wasn't out line with the rich compensation packages for the CEOs of his competitors. It rejected the Tax Court's ruling that the majority of his bonus was a nondeductible dividend (Menard 7th Cir.). Although the case involved a year before the top rate on dividends fell to 15%, the firm still would have saved more tax by deducting the bonus than the executive would have saved had it been a dividend.

TAX PREPARERS: Regulations of unlicensed tax return preparers is moving closer to reality. The Service (IRS) is establishing a task force to review problems with preparers and offer options by year-end. Among the likely recommendations: Registrations of any preparers who aren't CPA's, lawyers or enrolled agents. Minimum education and training requirements. Tougher IRS punishment of misconduct by preparers. If IRS needs authority to implement its plans, the commissioner will push Congress to give it him so the agency can get going. IRS officials won't need much time. They've studied Oregon's program, which is seen as a model for preparer regulation.

REAL ESTATE: Real Estate Agents can claim a special tax break on their rental losses. Their losses are exempt from passive loss rules, The Tax Court says. But the exemption applies only to agents who spend more than half their time and at least 750 hours per year, materially involved in real estate...the same rule that applies to landlords, developers and brokers. The Service said that agents were not covered, BUT THE COURT disagreed! (Agarwal, TC Summ. Op 2009-29). In this case, the agent who was audited was not licensed as a real estate broker.

ENFORCEMENT: The IRS will do more random employment tax audits than it first planned: About 6,000 exams will be done over the three years, up from 4,500 originally, with the first audits to start in November. The Revenue Service's primary aim is to update return selection formulas and estimates of the tax gap. The IRS intends to tell agents to keep an eye out for employers violating workers classification rules, (DETERMINE IF AN EMPLOYEE IS TRULY AND INDEPENDENT CONTRACTOR), as well as the tax rules for employee fringe benefits and executive compensation. Examiners will also look for S CORPORATIONS that pay their owners little or no salaries, passing through profits to their shareholders as dividends to save on payroll taxes (THE IRS HAS TO ESTABLISH WHAT A REASONABLE SALARY IS).

One area already being targeted for extra scrutiny: Backup withholding. IRS is concerned that many companies don't comply with rules that require them to start backup withholding on contractors who provide an invalid tax ID number or don't even supply one (THAT'S WHY EMPLOYERS NEED TO GET VERIFICATION OF SS NUMBERS, OR EIN, AND COMPLETE W-9 AND I-9 FORMS). The IRS will audit 100 firms that sent 1099's with no tax ID numbers, or incorrect numbers, and or failed to file FORM 945 to report backup withholding.

COMMENTS: Based on the above, and because of our current tax climate (FISCAL RESPONSIBILITY) and because the pendulum has swon towards more taxation and regulations, because of the irresponsibilities of the previous administration. So, The IRS is going to be mandated more than ever before to enforce the tax laws as they interpret them to be... And with a Democratic Congress, Senate filibuster proof and a Democratic President, taxpayers are in for a bumpy ride, the likes we have not seen since FDR.... To help you survive the new climate for the next 4 + years (or more), we can only give you two suggestions:
STAY PLUGGED IN TO US... Meaning keep up with our newsletters, and whatever else we might send you. We are doing this for your benefit. And..
KEEP UP WITH ALL REQUIRED RECORDS, on a daily basis, like your life depended on it.