Tax Proposals' Tangled Web

The panel is suggesting changing this deduction to a credit. A credit is subtracted right from your total taxable income, so it's not phased out or limited based on income.

They're suggesting that the credit be 15% of the total mortgage interest paid, says Bob D.Scharin, editor of Warren, Gorham & Lamont/RIA's Practical Tax Strategies, a monthly journal written for tax professionals. So if you paid $10,000 in interest, you'd get a $1,500 credit. Of course, there's a cap. If your mortgage is more than $312,000, you'll have to walk through some formula to determine your actual credit. So it's not unlimited.

And note, this credit is just for your principal residence. So if you have a second home and are currently deducting the interest on that mortgage, you would no longer be able to do so under the new proposal.

Here is where the AMT irony comes in. The AMT doesn't allow deductions for state and local taxes or mortgage interest. So by removing these deductions, the panel is essentially throwing us all into the AMT anyway. They're not getting rid of it. They're just repackaging it.

And let's face it. As unjust as the AMT is currently, it can't just disappear. It would cost the Treasury $1.3 trillion over the next decade if it did. So an easier way to deal with this conundrum may be to just push us all into it. (Things that make you go hmmm.)

Hello, Perks

There is some good news.

The panel would like to move us from six tax brackets to four, with the highest tax rate hitting 33% vs. our current 35%. At this point, we're not sure of the income cutoffs for each rate bracket, so it's too early to know the actual benefits.

The panel also is recommending that Social Security benefits no longer be taxable and that dividends paid by U.S. corporations be tax-free to shareholders. Apparently, someone finally woke up to the obvious.