President Clinton’s 1999 budget proposal contains the first balanced budget in thirty years. The proposal recommends $23 billion in tax cuts, which include tax reductions for environmental cleanup, child care, retirement savings and educational incentives. Revenue proposals made by Mr. Clinton include measures designed to increase taxes on corporate owned life insurance, and to curtail popular estate and asset planning techniques which reduce gift and estate taxes.
A child care credit proposal would increase the dependent care tax credit from 30 percent to 50 percent beginning in 1999. The 50 percent rate would be decreased by one percentage point for each $1,000 of AGI over $50,000.
A new employer child care credit would allow employers to claim a tax credit of 25 percent of qualified expenses for employee child care.
Mr. Clinton’s proposal also contains a mix of tax incentives to promote environmental improvement. The following tax credits would be allowed: (i) $3,000 to $4,000 for fuel efficient cars; (ii) $2,000 for rooftop solar systems; and (iii) $2,000 for energy efficient homes. The bill would also permit employees to elect to receive transit and “vanpool” benefits instead of wages.
Educational incentives relating to employer-paid educational assistance, currently set to expire in 1999, would be extended until June 1, 2001, and would be expanded to now include graduate level courses, as well as undergraduate courses.
The proposal also liberalizes rules relating to retirement savings. Under the proposal, an exclusion from income of up to $2,000 could be taken for contributions made to an IRA through payroll deductions. A new type of defined benefit pension plan would also be sanctioned for small businesses, i.e., the “Secure Money Annuity or Retirement Trust.” The SMART plan would complement existing defined contribution SIMPLE or SEP plans now available to small businesses. The budget proposal would also require that matching employer contributions to 401(k) plans be either fully vested after the employee had completed three years of service, or provide for incremental 20 percent vesting between years 2 and 6.
Budget proposals designed to raise revenue pose a frontal assault on three common estate planning techniques:
First, Mr. Clinton proposes to eliminate the Crummey power, which converts a gift of a future interest to one of a present interest, thereby enabling the donor to claim the $10,000 annual gift tax exclusion. (Gifts to minors under a uniform act would, however, continue to be deemed a gift of a present interest.)
Second, valuation discounts for minority interests in family limited partnerships that hold only marketable securities would be eliminated, by imposing an active business requirement.
Third, the gift tax exemption for qualified personal residence trusts (QPRTs) would be eliminated. Mr. Clinton’s rationale for the elimination of this exemption is the belief that the grantor’s retained interest is often overvalued because the grantor continues to pay insurance, maintenance and property taxes.
The proposal would also eliminate the corporate-owned life insurance (COLI) exception to the proration rules for contracts covering employees, officers or directors. A related proposal would tax the exchange of a life insurance or annuity contracts for variable contracts.
Multinational businesses would also be targeted for substantial revenue increases through new rules relating to foreign built-in losses, U.S. withholding of 80/20 corporations, and the prevention of tax abuse through controlled foreign corporations (CFCs).