Official Tax Reform Panel Recommendations

Today, as planned, the Presidential Tax Reform Panel offered two final proposals that would simplify our currently bloated tax code yet still collect the same amount of tax revenue. I discussed it a few weeks ago when details of the proposals were leaked and many of the details turned out to be true. Elimination of the AMT and modifications to how mortgage interest can be deducted are the two hot button issues but elimination of the marriage penalty and alteration of investment taxation rules are pretty sizzling as well.

Eliminate AMT:
The Alternative Minimum Tax (AMT) essentially removes some tax deductions from the rich to ensure they pay their fair share, except what defines the rich isn’t inflation adjusted so now lots of people who aren’t considered rich are facing these taxes. (more on AMT)

Change Homeowners Mortgage Tax Break:
I discussed it a few weeks ago but reserved judgment until the hard numbers came out and it doesn’t look very promising. The deduction is replaced with a credit at 15% of interest and the range of home values eligible for that credit is between $227k - $410k. This bodes well for folks in the 15% tax bracket or less (with eligible homes) but not well for everyone else.

Eliminate Marriage Penalty:
This one never made sense in the first place (especially in an egalitarian society of gender equality!) but they just suggested to double everything for married couples compared to singles.

Reducing Investment Taxes:
This one gets a little confused. Proposal 1 only taxes 25% of your investment gains but at your marginal tax rate, which basically means you’ll be taxed between 3.75% and 8.25% on the whole thing. The second proposal says a tax of 15% across all investments.

Retirement and Savings Plan Changes:
All your retirement and savings plans will roll into one of three plans. All work related ones (401k’s, 403b’s, etc.) are Save at Work Accounts. All IRAs are Save for Retirement Accounts. All educational and health related accounts would fall into Save for Family Accounts. At least it simplifies things and might make a few more people save a little more.

Those five are the major items but there are a few others such as simplifying the filing of taxes (creating a 1040 Simple form that fits on a two-sided 4×6 index card), reducing the number of tax brackets, taxing employer health contributions, and some other deduction repeals. Those five items are the major headliners though.

If you’re interested in some light reading, check out the official report.

OTB