How Obama's Budget Proposal May Increase Your Taxes Next Year

With new faces in Congress, President Obama knows his $3.73 trillion budget will be a hard sell. That's why he took his message to the airwaves this week, making TV appearances and issuing statements calling for "tough choices and sacrifices."

A top priority of Obama's budget plan is to hack away at the deficit, cutting it by $1.1 trillion over the next decade. Americans are concerned about the deficit -- since 2002, we've managed to dig a hole worth $1.65 trillion, an all-time record. That figure is so huge, it represents more in deficit spending than we currently have dollars circulating.

But Americans are also concerned about how they might be paying down the deficit via their taxes.Obama's proposal does include two-thirds of its deficit savings through spending cuts, including a five-year freeze on discretionary spending outside of security, which will save more than $400 billion over the next decade.

But the final third of deficit savings would come from tax increases. The tax deal that was negotiated in December 2010 was meant to be temporary -- most of the tax cuts in the deal are limited to two years. It's no surprise, then, that Obama opposes extending most of those cuts beyond 2012. His budget doesn't include making the 2001 and 2003 tax cuts for families earning more than $250,000 a year permanent; that means those high-income families would see a tax-rate increase in 2013.

Tied closely to the boost in rates is the return of the PEP (personal exemption phase-out) and "Pease" limitations. Under PEP, personal exemptions for high-income taxpayers were reduced as adjusted gross income (AGI) increased, while the Pease provision reduced itemized deductions at the top of the brackets. Obama's proposal would limit the amount that high-income taxpayers could claim for charitable contributions, mortgage interest, state and local tax payments and other itemized deductions.

Also on the chopping block: tax savings under the current federal and gift tax structure. In December 2010, Congress pushed through an increase in the personal exemption amounts for federal estate tax purposes that allows families to pass $3.5 million per person -- or $7 million per married couples -- without paying federal estate tax. The tax deal also decreased the corresponding tax rate to near historic lows, at a flat 35%. President Obama would eliminate those tax breaks on federally taxable estates by lowering the exemption amounts and increasing the tax rates.

Finally, Obama's budget would tackle certain corporate tax breaks. Among them is the elimination of tax cuts granted to oil, gas and coal companies. That would save individual taxpayers an estimated $46 billion over 10 years.

But don't start planning for tax increases (or spending cuts) yet. Both parties have voiced their dissatisfaction with the proposed budget. Democrats are angry over deep cuts in spending to social programs while Republicans claim the cuts aren't tough enough. Expect both parties to dig in their heels over the coming weeks as they try to strike a balance between reining in spending and holding the lid on taxes.