If the president's advisory panel on federal tax reform wanted attention, they would've beenbetter off walking down Pennsylvania Avenue in their underwear. But they kept their pants on, and instead suggested the removal of our favorite tax deductions and called for the end of the alternative minimum tax system to get themselves in the news. The panel had its final public meeting Tuesday, and the results are out there to rilethe crowd. "They're just trying to see where the wind is going to blow," says David Lifson, CPA,chairman of the New York State Society of CPAs' Committee on Tax Reform. And while the current proposal isn't going to blow away completely, it's far from finished --even though the panel is supposed to issue a report with final recommendations by Nov. 1. Thehodgepodge panel, composed of two ex-senators, a retired congressman, a bunch of professors and the former IRS commissioner, seemed to miss the boat on the original intent of the panel -- simplification of the tax code. Granted, the tax code equates to roughly 7,500 letter-size pages, so the panel has signed up for quite a task. That's why many would argue that it would just be easier to throw the tax code in the recycle bin and start over. Instead, the panel came up with two different proposals, neither of which makes life much simpler. The first proposal is supposed to make the income tax less complicated by lowering rates a bit, getting rid of the AMT and scrapping many reductions and credits. The second suggests using a consumption-type levy in place of an income tax. At this point, most tax pros are focusing on the first plan, because the proposal to eliminate the income tax would require a complete overhaul of the system, and it's hard to believe Congress would ever vote on such a move.
Both plans provide generous new tax breaks for investments and savings, including creating newsavings accounts that would let you put away a heap of money tax-free. Neither plan is going to work in its current form because of insufficient details andpolitical posturing. But here are some of the suggested changes from the first plan that are getting the most attention.
The panel is suggesting changing this deduction to a credit. A credit is subtracted right fromyour 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.)
Quite frankly, taxing those measly Social Security checks is unfair anyway. And on thedividend front, the corporations issuing dividends already have paid tax on that money before theydistribute it. Thus, those dividends are currently "double-taxed" because you pay tax again when youreceive them. So those two suggestions should be no-brainers. On the capital gains front, the panel is looking to take us back to pre-1986. Basically,instead of applying a flat rate on capital gains, like the current long-term rate of 15%, thepanel suggests using a capital gains exclusion of 75%. That would mean 75% of your gains would betax-free and you would owe ordinary income tax on the remaining 25%. So currently, if you have $1,000 in long-term capital gains, you owe $150 (15%) on that money.Under the new proposal, you would owe ordinary income tax on $250 (25%). Using the highestproposed rate of 33%, that would bring your tax bill to $82.50. "So the investing folks become the biggest winners here," notes Scharin. And the investing community generally means the wealthier Americans, and you know what happens when someone suggests a tax break for the rich. Granted, you can't please everyone, but the current system is just too complicated, and right now, the middle class is getting hammered. The panel would do best to stop the politicking and try to focus on helping all hard-working Americans.