This year will mark the final year of many of President George W. Bush’s tax cuts from 2001 and 2003. Many deductions and tax cuts are set to expire this year and there’s a lot of talk about what Congress and President Obama will do. One plan that was thrown out about a month ago is the Wyden-Gregg Tax Plan, titled S. 3018 The Bipartisan Tax Fairness and Simplification Act of 2010.
It’s sponsored by Ron Wyden, Democrat Senator from Oregon, and Judd Gregg, Republican Senator from New Hampshire, and it was introduced in late February. You can read the text of the draft bill here  but here were the big takeaways I read. According to OpenCongress , the bill is currently in the Committee on Finance.
Reducing the Number of Tax Brackets
Today, there are six federal income tax brackets . The bill would trim them down to three – 15%, 25%, and 35%. Married filing jointly filers whose taxable income is under $75,000 would see a 15% tax rate, amounts between $75,000 and $140,000 would be taxed at 25%, and amounts over $140,000 would be taxed at 35%. For single filers, those earning under $37,500 are taxed 15%, amounts over $70,000 are taxed 25%, and the balance over $70,000 is taxed at 35%. It appears that the marriage penalty  is removed from the tax brackets.
It also eliminates the Alternative Minimum Tax, something Congress keeps pushing off with one year fixes.
Increased Standard Deduction
Today, the standard deduction is $5,700 for single filers, $11,400 for married filing jointly. The bill would increase the standard deduction for single filers to $15,000 and double that for married filing jointly. This would significantly simplify returns for a lot of filers as the standard deduction will probably be higher for most people. It’ll also save them time in tax preparation since taking the standard deduction often means a more simple return.
Retirement Savings Accounts
Take all of the IRAs, put them in a box, shake, and out pops a Retirement Savings Account. Add to that a Lifetime Savings Account and you have something that is likely to change the face of retirement saving in the years to come, much like Roth IRAs did a dozen years ago. At the core of it is the ability for families to save $14,000 a year for retirement in addition to any 401(k) programs they have access to. A lot of the bill involves working previous laws on IRAs and Roth IRAs so they comply, so we’ll hold off judgment on this nugget until things progress more.
Capital Gains Changes
Here’s where things get a little tricky… for your capital gains, there are a few changes that favor investment. 35% of your gains in assets held for more than 6 months but not more than 1 year and doesn’t exceed $500,000 plus 35% of any long term capital gain are not taxed (not included in gross income). What this ultimately means is that 35% of your long term gains are tax free, which for this purpose is extended to assets you held for more than 6 months, up to a certain amount ($500,000). This exclusion is also extended to qualified dividends.
There are many other changes in the bill, such as the Earned Income Credit, the Dependent Care Credit, and the Child Tax Credit to be made permanent, many involving businesses and small businesses. Here were are a few other sources you can review to get their take on it:
- Heritage Foundation 
- Two Page summary from Wyden  – hits all the high level points.
- Daily Kos  – Not a site I read often but has a good recap too.
- WSJ  – You might have to do the free WSJ trick  to read the article.
I’d really like to see something happen in terms of simplification and reform, I’m curious to see an analysis of the financial impact of change the tax laws this way and would need to see one before feeling strongly for or against it.
Any initial thoughts?
(Photo: kylerush )