Federal Tax Reform: Advisory Panel's recommendations would overhaul tax system.Less than a year after its formation, the President's Advisory Panel on Federal Tax Reform released its report Nov. 4, recommending fundamental changes to the federal tax code. The report is in the hands of the U.S. Treasury U.S. Treasury Created in 1798, the United States Department of the Treasury is the government (Cabinet) department responsible for issuing all Treasury bonds, notes and bills. Some of the government branches operating under the U.S. Treasury umbrella include the IRS, U.S. Department for review and analysis. The panel unanimously adopted the report and recommendations. In its opening, the panel noted: "We have lost sight of the fact that the fundamental purpose of our tax system is to raise revenues to fund government." The recommendations are an attempt to get back to that basic goal by: * Simplifying recordkeeping and tax preparation for individuals and business; * Raising essentially the same revenue as would be raised if the current system were continued without change; and * Eliminating some of the social engineering aspects of the tax law. Early press accounts of the report noted such high-profile issues as a phasing out of deductions for state and local taxes; a sharp curtailment Curtailment The act of contracting or reducing operations of a company in the hope of bringing it financial or operational stability. This management technique is often used when a company has grown too fast and is unable to effectively manage its operations. of home mortgage interest rate deductions; and the elimination of the Alternative Minimum Tax. The full report is available at www.taxreform panel.gov. Every tax practitioner should review this 272-page report, as well as the AICPA's tools for evaluating tax reform plans available at www.aicpa.org/taxreform. Recommended Changes The panel is recommending two alternatives: the Simplified Income Tax Plan (SIT) and the Growth and Investment Tax Plan (GIT). The difference between the two essentially relates to how business is treated. The panel cautions that the recommendations are not designed to be enacted piecemeal piecemeal patchy, e.g. necrosis of the liver in which groups of hepatocytes are separated by small groups of inflammatory cells and fine, fibrous septa following extension of the inflammatory process beyond the limiting plate. , but must be enacted in total for the tax proposal to work effectively. Both plans call for elimination of the Alternative Minimum Tax and a reduction in the number of tax brackets Tax Bracket The rate at which an individual is taxed due to a particular income level. Notes: Each income class is taxed at a different level. Generally, the more you make the more you are taxed. . Both plans also repeal the personal exemption Personal exemption Amount of money a taxpayer can exclude from personal income for each member of the household in calculation of a tax obligation. personal exemption See exemption. , standard deduction The name given to a fixed amount of money that may be subtracted from the adjusted gross income of a taxpayer who does not itemize certain living expenses for Income Tax purposes. and child tax credit to be replaced with a family credit available to all taxpayers ($3,300 for married couples; $2,800 for unmarried taxpayers with child; $1,650 for unmarried taxpayers; $1,500 for dependent taxpayers; additional credit of $1,500 for each child and $500 for each dependent). These deductions would be available to all taxpayers, not just to those who itemize To individually state each item or article. Frequently used in tax accounting, an itemized account or claim separately lists amounts that add up to the final sum of the total account on claim. . Some of the other recommended changes include: * Elimination of marriage penalty. * Elimination of earned income tax credit The United States federal Earned Income Tax Credit (EITC) is a refundable tax credit that reduces or eliminates the taxes that low-income married working people pay (such as payroll taxes) and also frequently operates as a wage subsidy for low-income workers. , which would be replaced with a "Work Credit" and coordinated with the Family Credit. * Home mortgage interest deduction Mortgage interest deduction A federal tax deduction for interest paid on a mortgage used to acquire, construct, or improve a residence. replaced with a deduction equal to 15 percent of mortgage interest paid; available to all taxpayers; mortgage limited to average regional price of housing (limits ranging from about $227,000 to $412,000). * State and local taxes no longer would be deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). . * Elimination of employer incentives for employee health insurance premiums, to be replaced by individual incentives for taxpayers who may purchase health insurance with pretax pre·tax adj. Existing before tax deductions: pretax income. pretax adj [profit] → vor (Abzug der) Steuern dollars up to the amount of the average premium (estimated to be $5,000 for an individual and $11,500 for a family). * Health savings plans would be replaced with "Save for Family" accounts ($10,000 annual limit); covering education, medical, new home costs and retirement saving needs; available to all taxpayers; refundable Saver's Credit would be available to low income taxpayers. * Dividends received from U.S. companies paid out of domestic earnings would be excluded under the SIT plan, but would be taxed at 15 percent under the GIT. * Capital gains would be taxed at 15 percent under GIT, but the SIT proposal would exclude 75 percent of corporate capital gains from U.S. companies (tax rate would vary from 3.75 percent to 8.25 percent on the remainder). * Social Security benefits would be subject to a simple deduction. Married taxpayers with less than $44,000 in income or single taxpayers with less than $22,000 would pay no tax on Social Security benefits, indexed for inflation. Proposed Changes for Businesses Under the SIT plan, small business would be taxed at individual rates (the top rate has been lowered to 33 percent). GIT would tax sole proprietors at individual rates (the top rate is 30 percent) and other small business would be taxed at 30 percent. Both plans propose elimination of complex tax accounting issues. Recordkeeping would be a simplified cash-basis accounting under SIT and a business cash flow tax under GIT. Investment expensing (except for land and buildings under the SIT plan) would be allowed for small business rather than the accelerated deprecation dep·re·cate tr.v. de·pre·cat·ed, de·pre·cat·ing, de·pre·cates 1. To express disapproval of; deplore. 2. To belittle; depreciate. rules required by the current system. Large businesses would be subject to either a 31.5 percent (SIT) or 30 percent (GIT) tax rate instead of the current eight tax brackets allowed. The GIT plan would allow expensing for all new investment while the SIT proposal would allow for a simplified accelerated deprecation. Interest paid by a large business (except for financial institutions) would not be deductible and interest received would not be taxable (except for financial institutions). Both plans would repeal the AMT See vPro. for large business. Probably the most startling star·tle v. star·tled, star·tling, star·tles v.tr. 1. To cause to make a quick involuntary movement or start. 2. To alarm, frighten, or surprise suddenly. See Synonyms at frighten. part of both plans is that they foresee a day when taxpayers can prepare their own taxes on a simple one-page form and the costs of recordkeeping and compliance are virtually eliminated. Bruce C. Allen is CalCPA's director of government relations. |
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