By Lee McGowan, CFP, Senior Client Advisor, TFC Financial Management

In line with his campaign promises, President Obama has proposed funding an increase in spending on healthcare, education and the environment with higher taxes on the wealthy. Within days of the President outlining his budget "wish list" in "A New Era of Responsibility," two of his top economic advisors were on the hot seat, defending the proposal.

Treasury Secretary Timothy Geithner and White House Budget Director Peter Orszag, testifying separately before the House Budget Committee, were confronted by Republicans and Democrats alike. Although favorably reviewed by the Committee in general, the budget proposal met with opposition in several key areas.

What seems to be good news for wealthy taxpayers is that President Obama appears to be open to modifying his proposal. So, while we do not know what a wealthy taxpayer's responsibilities will be under the final budget, President Obama has shown his cards by unveiling "A New Era of Responsibility." Several key tax provisions of the plan and how they affect the wealthy taxpayer are listed below.

Higher Income Taxes, Dividend Taxes & Capital Gains Taxes

The Bush tax cuts of 2001 and 2003 lowered overall tax rates on income, qualified dividends and capital gains. The cuts were set to expire in December 31, 2010, which would have meant the highest income tax increase in history for the year 2011.

Under President Obama's proposal, the 2011 tax year will bring a "reinstatement" of 36% and 39.6% tax rates for those so-called "high-income" taxpayers earning over $250,000 (married) and $200,000 (single) while continuing the Bush tax cuts for lower-income taxpayers. Under current tax laws, the top brackets pay only 33% and 35%, respectively. What's more, under President Obama's new proposal, high-income taxpayers would also see an increase in capital gains and dividend tax rates, which are slated to rise from their current 15% to 20% in 2011.

Reduced Benefits from Itemized Deductions

While a contentious issue for both political parties, President Obama also proposes that high-income taxpayers forgo a portion of their itemized deductions and personal exemptions. Under the proposal, high-income taxpayers would be limited to a savings of 28% on their charitable deductions, mortgage interest, state income taxes and other, itemized deductions. That means that if a taxpayer falls in the 39.6% tax bracket and donates $100,000 to charity, rather than a tax savings of $39,600, he or she will be limited to a tax savings of just $28,000 under the terms of President Obama's proposal.

Estate Taxes

Under President Obama's "A New Era of Responsibility" proposal, this year's estate tax exemption of $3.5 million per person will remain intact, rather than reverting back to $1 million in 2011, as slated. In addition, the estate tax rate will remain at 45% versus the scheduled increase to 55%.

However, the proposed estate exemption is not as positive as Senator McCain once proposed-a $5 million exemption and a 15% rate-but it is more favorable for high net worth families who were slated to fall back to the $1 million exemption for 2011.

Expansion of Net Operating Loss (NOL) Carrybacks

President Obama's tax proposal also revives a provision that was dropped from the final stimulus package-expanding the NOL carryback beyond two years. If you are a small business owner who is suffering through the economic downturn, you may benefit from this part of his proposal by being able to carry net operating losses back to previous years, and receive a tax refund in the current tax year.

Carried Interest Taxed as Ordinary Income

Under President Obama's proposal, beginning in 2011, the share of profits that partnerships pay to their general partners will be taxed at ordinary income rates, rather than at the lower capital gains rates.

Debate over the treatment on taxation of carried interest has been a hot button issue for years. Some claim that taxing carried interest as ordinary income unfairly targets a particular industry-hedge funds. If carried interest is taxed at the higher rates for all types of partnerships including private equity and venture capital, what might be the unintended consequences?

Critics of the proposal say that the entrepreneurial spirit of the American investor will be damaged as a result of higher carried interest tax rates. A risky investment made by a general partner may open new doors, create opportunities-including new jobs-and should not be taxed in the same manner as wages. Will investment in new ventures be stifled as a result of the proposal, or does it create closure to a long-overdue tax loophole? The answer remains to be seen.

What's Next?

Many critics of President Obama's "A New Era of Responsibility" proposal are concerned that its tax provisions may further impair an already fragile housing market, reduce the amount of money raised by charities and unfairly raise taxes on small business owners. However, despite these issues, Democratic leaders have implied that they are likely to back most of the President's proposals in a blueprint to be submitted in April. Like it or not, it appears that wealthy taxpayers should be prepared to face the consequences of higher taxes in the coming years.