Ander's Market Theories

[AnderL]

Tac Reform Proposal: Kill AMT, some breaks and fat
President Bush's tax-reform panel is submitting two proposals Tuesday morning.
November 1, 2005: 11:19 AM EST
By Jeanne Sahadi, CNN/Money senior writer

I like it and I hate it. It's a mixed bag. There are some nice proposals that Wall Street will really like and encourages further investment in equity markets for a broader range of citizens but it's not enough. This does about as much to simplify tax code as rearranging the furniture to hide the refuse.

NEW YORK (CNN/Money) - The president's tax-reform advisory panel is submitting two final proposals Tuesday morning to the Treasury Department, both of which offer significant changes to the tax breaks people have come to expect -- as well as to the complexity and costs of filing that many have come to detest.

The question of who wins and who loses is always a big question whenever any changes to the tax code are proposed. Speaking on Bloomberg TV Tuesday morning, panel chairman Connie Mack, a former senator from Florida, urged taxpayers to "look at the entire package and not pick one portion of it to determine if it's good for them."

In the aggregate, taxpayers will be paying the same amount as they do under the current system, but on an individual basis you may end up paying more in some areas and less in others. The panel's mission was not to reduce taxes, but rather to make the tax code simpler, fairer and more growth-oriented.

Here are some of the key changes the panel is proposing that are common to both of their proposals:
Eliminate the alternative minimum tax

The AMT is a parallel tax system originally intended to ensure the wealthy pay their fair share of taxes by eliminating many of the deductions and credits they get under the regular income tax system.

But because the income-exemption levels have never been indexed to inflation, by 2010 the AMT threatens to catch more than 30 million taxpayers, mostly from middle-income households. The estimated cost of repealing the AMT is $1.3 trillion over 10 years.

The panel was instructed to come up with proposals that are revenue-neutral, meaning they would have to produce the same revenue as expected under the current system. As a result, the panel had to take a hard look at the tax breaks offered under the current system to see where they could make up for that lost revenue, while at the same time ensuring a new tax code was fairer and more growth oriented than the current one.

(For more on their mandate to make their proposals revenue-neutral, click here.)
Alter homeowners' tax breaks

The panel recommended lowering the mortgage interest cap, which is the amount of a loan on which home owners would receive a tax break for interest paid, from $1 million to the average regional housing price in the range of $227,000 to $412,000.

The deduction would be converted to a credit equal to 15 percent of interest paid on mortgages up to the interest cap. A credit is a dollar-for-dollar reduction of the taxes you owe, while a deduction only reduces your taxable income by a percentage equal to your top tax rate.

Generally speaking, the higher your mortgage loan and the higher your tax bracket, the more likely it is that you'll see less of a tax break than you would under the current system.

(See more on how changes could affect your tax bill.)
Reduce the marriage penalty

All tax brackets, family credits and taxation of Social Security benefits for couples would be double those of individuals. Under the current system, some two-earner married couples filing jointly end up paying more in taxes than two single taxpayers with the same income because of the way various deductions, creidts and tax brackets are structured.
Reduce tax breaks on employer-provided health insurance

When you work for a company, your employer typically foots a large portion of your health-insurance premiums. That money, which is not reported on your W2, is tax-free to you.

The panel recommended capping the amount of tax-free money that may be used to pay for health insurance to $5,000 for single coverage or $11,500 for family coverage.
Repeal the federal deduction of the state and local tax deductions

Under the proposals, taxpayers would no longer be allowed to deduct the state and local taxes they pay on wage income, investment income, and property.

Former Senator John Breaux of Louisiana, who is the panel's vice chair, on CNBC Tuesday morning explained part of the panel's reasoning this way: "If people in California want to pay extra taxes to have their trash picked up, people in Texas shouldn't have to subsidize it."
Reduce the number of tax brackets

Under the panel's first proposal, which is a streamlined version of the current income tax, the number of tax brackets would be reduced from 6 to 4. They would be: 15%, 25%, 30% and 33%.

Under their second proposal, which combines the income tax with a progressive consumption tax, there would be only three tax brackets: 15%, 25% and 30%.
Reduce investment taxes

In the panel's proposal to simplify the current income tax, dividends from domestic earnings would be tax-free as would 75 percent of the capital gains you receive. The other 25 percent of gains would be subject to your marginal (or top) tax rate.

The net effect is that your capital gains would be taxed at rates between 3.75 percent for those in the lowest tax bracket to 8.25 percent for those in the highest tax bracket. (For example, if you're in the 33 percent tax bracket and receive $100 in capital gains, $75 would be tax-free and $25 would be taxed at 33 percent, or $8.25. The net tax you'd pay on the full $100 is $8.25, or 8.25 percent.)

Under the existing code, dividends and long-term capital gains are taxed at 15 percent or less, but they are set to go higher after 2008.

Interest on everything except tax-exempt municipal bonds would continue to be taxed at individual rates as is the case in the existing tax code.

In the panel's second proposal, dividends, capital gains and interest would all be taxed at 15 percent.
Reduce and simplify tax-advantaged savings accounts

You might be forgiven for not being able to keep straight the differences between several types of IRAs, various types of 401(k)s, to say nothing of HSAs, FSAs, Coverdells and 529s.

The tax-reform panel is proposing to consolidate defined-contribution plans (e.g. 401(k)s) into one Save at Work Account with simple rules.

They also propose replacing all types of IRAs with one Save for Retirement Account that would have a $10,000 limit and would be available to all taxpayers. Currently, your income and your workplace savings options determine whether you're eligible to contribute to different types of IRAs and whether your contributions can be deductible.

Education savings plans like 529s and health savings plans like flexible spending accounts (FSAs) would all be consolidated into one Save for Family Account with a $10,000 annual limit. This account, which would be available to all taxpayers, could also be used for new home and retirement savings as well.
Simplify tax filing

The panel proposes creating a 1040 Simple that could fit on both sides of a 4 X 6 index card. The number of lines would be reduced from 75 on the current form to 32 on the proposed form. It would also reduce the number of schedules, forms and worksheets from 52 to 10.

The panel also proposes creating two new credits: one for family and one for work, each of which would take the place of a multitude of credits and exemptions currently in place.

See also: Tax-friendly places to live and state-by-state rankings Top of page




Find this article at:
http://money.cnn.com/2005/11/01/pf/taxes/tax_proposals/index.htm?cnn=yes