House Ways and Means Com. Chm. Dave Camp (R-MI) has now released his vision of a revamped tax code.
His plan lowers tax rates on individuals and businesses while trimming or eliminating a batch of tax breaks.
Passage of tax overhaul is still a long way off. Tax reform isn’t on President Obama’s must-do list, and Senate leaders don’t plan to take action this year.
Nonetheless, Camp’s proposal is worth eyeing.
It illustrates the tough choices that will be required if income tax rates are to be significantly reduced.
Start with the tax brackets. There’d be two listed brackets...10% and 25%. The 10% one would run to $71,200 for couples, $35,600 for singles. Above that, 25%. The brackets would be indexed to inflation using a less-generous formula than now.
Camp’s plan also eliminates the special tax relief for filing as a head of household. But a 10% surtax on high-incomers would create a 35% bracket. It kicks in on modified AGI over $450,000 for couples and $400,000 for singles. Modified AGI is AGI plus tax-exempt interest, the value of employer provided medical coverage, self-employeds’ medical premiums, 401(k) deferrals, tax free Social Security benefits, excluded foreign earned income and HSA payins, less donations and any income from domestic manufacturing. So taxpayers caught in this 35% bracket are stuck with paying a 10% levy on many items that currently are deductible or tax free.
Standard deductions would rise more than 75%...to $22,000 for married filers and $11,000 for singles. Singles with a child could claim as much as $5,500 more.
Higher child tax credits, too...$1,500 per dependent under 18, then $500.
But personal exemptions for filers and their dependents would be repealed.
Capital gains and dividends would get a different preference...a 40% exclusion for long-term gains and dividends of domestic companies. Thus, the basic tax rate on them would be 6% for folks in the 10% bracket, 15% for those in the 25% bracket and 21% for taxpayers in the 35% bracket. The 3.8% Medicare surtax would remain for upper-income taxpayers, boosting their maximum rate to as much as 24.8%. In addition, the 40% exclusion would not apply to gains from sales of collectibles.
Also, the alternative minimum tax would be permanently repealed.
High-incomers would face a pair of hidden taxes under Camp’s proposal:
The tax they save while they’re in the 10% bracket would be recaptured via a 5% surtax once modified AGI tops $300,000 for couples and $250,000 for singles. The standard deduction would phase out by $20 for each $100 of modified AGI over $517,500 for couples and $358,750 for singles. Itemizers would lose a portion of their itemized deductions, up to the equivalent amount of their standard deduction.
Camp takes a chain saw to many itemized deductions on Schedule A. The write-off for state and local income taxes would be eliminated. Also, only property taxes incurred in business or investment activities could be deducted.
The mortgage interest deduction would be nicked. Under current law, itemizers can deduct the interest they pay on as much as $1 million of mortgages used to buy, build or substantially renovate a primary residence and a second home, and on up to $100,000 of home equity debt. Camp would reduce the $1-million cap to $500,000 (in four $125,000 annual increments) and nix the deduction for interest on home equity loans, starting with loans taken out in the year after the bill passes.
Deductions for charitable donations would get a haircut. Only the amount in excess of 2% of a filer’s adjusted gross income would be allowed. And for donations of appreciated property, the write-off in most cases would be limited to the asset’s basis.
The percentage-of-income ceilings for very large gifts would be trimmed a bit as well. However, one easing would give filers the option of treating donations that are made between Jan. 1 and April 15 as if they had been made in the previous tax year.
Several other big write-offs would go away: Medical expenses. Alimony, although the payments would be tax free to recipients. Employee business expenses.
Personal casualty losses. Moving expenses. And fees paid for tax return preparation.
On fringe benefits, employee achievement awards would be taxed as income.
The exclusion for employer-provided housing would be limited to $50,000.
No more tax free flights for airline employees who sit in otherwise open seats.
Tax free employer-provided parking and transit passes would be capped at $250 and $130, respectively. Reimbursements for bike commuters would be taxed.
A single tax credit would be provided for education, with a quicker phaseout. The maximum credit would remain $2,500, but it would phase out for married couples with AGI between $86,000 and $126,000 and singles with AGI from $43,000 to $63,000.
Other education tax breaks would be repealed: The tuition and fees deduction. Interest deductions on education loans. Tax free EE bond interest for education costs.
The exclusion for up to $5,250 of non-job-related education paid for by employers. (Payments for job-related education would remain tax free.) Also, tuition reductions for employees of educational institutions and their families would be taxable income.
And some popular tax credits would be nixed: The dependent care credit, the adoption credit and various credits for energy efficient home improvements, electric vehicles, hybrid cars, geothermal heat pumps and solar electric property.
Even the home sale exclusion doesn’t escape unscathed under Camp’s plan.
For joint return filers, the $500,000 exemption starts to phase out dollar for dollar when income tops $500,000. For singles, the phaseout of the $250,000 exemption begins at $250,000 of income. Also, the requirements to qualify for the exclusion would be tighter. Filers must have owned and used the home as their primary home for five out of the previous eight years before the sale...up from two years out of five.
Traditional IRAs would be frozen. No new payins could be made to them, whether deductible or nondeductible. Instead, contributions would go to Roth IRAs.
The good news is that the income restrictions on Roth payins would be eliminated. And deductible 401(k) payins would be reduced. Up to 50% of the payin limit could be placed in a traditional 401(k). Any excess would have to go into a Roth 401(k). Inherited retirement accounts would have to be emptied within five years, except that life expectancy payouts would be OK for surviving spouses, the disabled or chronically ill and any folks less than 10 years younger than the account owner.
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