Even before President-elect Barack Obama is sworn in as the 44th president of the United States in January, his transition team and congressional leaders will be working on ways to stimulate the economy and provide taxpayers with some relief to cope with the most challenging economy in more than 80 years.
With Democrats controlling both houses of Congress, lawmakers are likely to approve a new round of economic-stimulus checks during an expected lame-duck session, says Clint Stretch, director of tax policy for Deloitte Tax. But more-comprehensive changes , such as boosting income-tax and capital-gains rates on the wealthiest Americans, may have to wait until the economy strengthens, Stretch predicts. Growing federal budget deficits will make it difficult to fulfill many expensive campaign promises. And Congress will have significant influence over whatever proposals are ultimately enacted into law.
No one knows for sure what might happen during a post-election session of Congress, but there are three likely targets for quick action: a new round of stimulus checks for taxpayers to grease the wheels of the economy, a move to suspend income taxes for the growing number of Americans collecting unemployment benefits, and temporary changes in tax rules affecting retirement-plan distributions.
During his campaign, Obama proposed adding a refundable tax credit of up to $500 per person ($1,000 per family) to offset payroll taxes on the first $8,100 of wages. That credit could be made retroactive to January 1, 2008, and is a likely vehicle to deliver another round of economic-stimulus checks, says Stretch.
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Temporarily eliminating the annual required minimum distributions from IRAs for Americans 70 and older was one of the few proposals on which Obama and Republican presidential candidate John McCain agreed. Both said it was unfair to force seniors to sell investments in the current bear market in order to fulfill their annual distribution requirements by December 31. Although suspending mandatory withdrawals would allow some investors to avoid selling stocks hammered by the market, it would help only those people who could afford to skip their annual required minimum distribution. Seniors who need the money will have to tap their IRAs regardless of whether they are required to do so. Obama has suggested that withdrawals up to the amount that would normally be required under minimum-distribution rules should be tax-free.
Obama also proposed that workers, many of whom are grappling with job losses and home foreclosures, be allowed to tap up to $10,000 of savings in their 401(k) or similar workplace-based retirement plan penalty-free in 2008 and 2009. Withdrawals would still be subject to the usual federal and state income taxes. Under current law, workers can borrow up to half of the balance in their 401(k) or similar workplace-based retirement plan up to $50,000. In some cases, they can qualify for a hardship withdrawal, subject to taxes and early-distribution penalties. You can't borrow from an IRA, but you can take early withdrawals that will be taxed and penalized. Roth IRA contributions (but not earnings) can be withdrawn any time tax-free and penalty-free.