More On Tax Planningfrom The Advisor's Professional Library
- Long Term Care Insurance: Premiums While premiums for qualified long-term-care insurance may be deductible as medical expenses there are exceptions to this general rule. Learn how to avoid unnecessary tax liabilities.
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
With the debt ceiling lifted, another curtain is raised in Washington as a bipartisan joint committee meets to draft deficit reduction legislation before year end—as part of the Budget Control Act President Barack Obama signed Wednesday.
Under the terms of the debt ceiling budget deal, Congress must pass another $1.5 trillion in deficit reduction by the end of this year or face pre-agreed automatic spending cuts.
A newly released briefing by tax software provider CCH predicts sweeping tax reform legislation the likes of which have not been seen since the 1986 tax reform. In its analysis of recent legislative and tax proposals by Republicans and Democrats, the White House and a bipartisan deficit commission, the Illinois-based tax, accounting and audit information provider argues that fundamental changes in the nation’s tax law may be the only way to bridge the divide between Republicans who want to cut taxes and Democrats seeking to raise revenue.
“Changes made under the general banner of tax reform can have the advantage of gaining support from both ends of the political spectrum,” CCH said. The result is likely to be a heavy emphasis on reducing or eliminating so-called “tax expenditures,” essentially deductions, credits and other tax benefits written into the tax code.
CCH outlines various proposals currently on the table, beginning with Obama’s oft stated objective of excluding higher-income individuals—those individuals earning above $200,000 a year or families earning above $250,000—from an extension of the Bush-era tax cuts currently due to sunset after 2012. The White House also seeks elimination of oil and gas preferences, a research tax credit and extension of a payroll tax cut.
While the president has offered few ideas on deficit reduction to date, CCH reports far more specific proposals from the Gang of Six, which included three Democrat and three Republican senators. The Gang of Six’s plan, released July 19, offered $3.7 trillion worth of deficit reduction over 10 years. The Congressional Budget Office has never scored this plan, and CCH describes its details as “sparse,” but points out that the Gang of Six proposal is the only bipartisan plan to address both spending cuts and tax reform, making it a likely starting point for the work of the new joint committee.
The Gang of Six proposes lowering individual tax rates, as a means of generating future growth; it envisions three brackets with rates as low as 8, 14 and 23%. The proposal also calls for elimination of the Alternative Minimum Tax, or AMT. To pay for these tax cuts, the Gang of Six intends to eliminate various tax expenditures including the home-mortgage interest deduction and deductions for charitable contributions and for medical expenses.
The Gang of Six would keep the child tax credit and earned income credit (EIC) at some unspecified level. This latter proposal should be particularly contentious, as the President has called for extending the EIC while some in Congress have proposed eliminating it altogether. The Gang of Six also proposes to lower corporate income taxes and abolish a voluntary long-term care and disability program within the President’s signature health-care reform. Finally, the Gang of Six would alter the way inflation is calculated in federal benefits, which would bring in $59 billion in revenue over 10 years; altogether, its tax reforms would account for $1 trillion of its estimated $3.7 trillion in deficit reduction.
The House Republican Study Committee’s plan is relatively simple, proposing to repeal the President’s health care reform package, which would eliminate $677 billion in additional spending over 10 years in one fell swoop. CCH believes this proposal is unviable as long as Democrats maintain control of the Senate.
The most specific of all proposals currently on the table is that of the bipartisan National Commission of Fiscal Responsibility. The proposal calls for cuts in discretionary and mandatory federal spending, but also achieves 20% of its $4 trillion deficit reduction in tax reform—$1.1 trillon of which is in savings from elimination of tax expenditures.
The proposal would reduce or eliminate the tax-free treatment of contributions to health care plans and deductions for home mortgate interest; accelerated depreciation; capital gains; and the EIC. The commission’s plan also reduces individual rates to as low as 8, 14 and 23% and proposes other reforms such as limiting the charitable tax deduction to amounts over 2 percent; repealing state and local tax deductions as well as itemized deductions. The commission would also reduce the corporate tax from 35% to 26%.
The entire tax briefing can be accessed on CCH’s site.