he Senate Budget Committee approved its fiscal year 2011 budget resolution April 22, voting 12-10 to send the full Senate a package that would allow top individual income tax rates to rise in 2011 while allowing for $780 billion in middle-class tax cuts over five years.

The budget resolution provides room for an extension of the 2001 and 2003 tax cuts for individuals earning up to $200,000 ($250,000 for married couples filing jointly), and for a two-year extension of the estate tax at its 2009 levels, while assuming the permanent extension of the tax code Section 179 expensing provisions from the American Recovery and Reinvestment Act (Pub. L. No. 111-5).

But the resolution would also allow part of the 33 percent tax rate to rise to 36 percent in 2011, and the current top tax rate of 35 percent would be allowed to rise to its pre-2001 level of 39.6 percent.

Budget Makes Room for AMT, R&D Extensions

Republicans argued that allowing the top tax rates to rise in 2011 would hurt small businesses that pay taxes at individual income tax rates. Democrats countered that most small businesses in America do not earn enough money to qualify for the top tax rate.

In addition to the permanent extensions of the middle-class tax cuts, the budget resolution would provide budgetary room for a two-year extension of higher exemption levels for the alternative minimum tax, and an annual extension of a package of popular tax breaks that includes the research and development tax credit and the deduction for state and local sales taxes.

The only tax-related amendments adopted in the resolution were provisions that would create deficit-neutral reserve funds—essentially placeholders that allow lawmakers to shift money around in the budget if they can find additional offsets for their policy ideas.

Reserve Fund Amendments

The committee adopted two reserve fund amendments from Sen. Charles Grassley (R-Iowa). The first would delay any new health care-related taxes on low-income and middle-income households until Jan. 1, 2014, when the major policy provisions of the Patient Protection and Affordable Care Act (Pub. L. No. 111-148) become effective.

The second would return the threshold for claiming deductions for medical expenses to 7.5 percent of adjusted gross income, down from the 10 percent level established in the PPACA. Grassley's amendment also would reinstate the business deduction allocable to firms receiving a subsidy for Medicare Part D premiums for their retirees.

Senate Majority Leader Harry Reid (D-Nev.) has said he expects to bring the budget resolution to the Senate floor before the chamber leaves for its Memorial Day recess at the end of May.

Gustavo A. Viera, CPA