The 12 members of the bipartisan “super panel” appointed by Congress are meeting to try to whittle down the national debt to a manageable level. And you can bet tax reform is on the table.
Alert: Virtually every tax code provision is up for debate. The committee is expected to leave no stone unturned in its efforts to resolve the debt crisis.
What tax reform proposals can we expect to emerge from these closed-door meetings? Here are six:
1. Individual: Currently, individual income is taxed under a graduated rate structure with six brackets ranging from 10% to 35%. Unless Congress takes action, the bottom rate will revert to 15% while the top rate will jump to 39.6%, beginning in 2013. A few ideas floating around our nation’s capital—including proposals by the White House Deficit Commission and the Congressional “Gang of Six”—would use a simplified three-bracket structure with a top tax rate below 30%.
2. Corporate income tax rates: Similarly, corporate income is currently taxed under an eight-bracket structure, with a bottom rate of 15% and a top average rate of 35%. One recent proposal would cut right to the chase: a flat tax rate of 26% on all corporate income regardless of the amount of earnings.
3. Capital gains and dividends: Under current law, the “Bush tax cuts” for capital gains and dividends are scheduled to expire after 2012. Beginning in 2013, the tax rate for long-term capital gains will increase from 15% to 20% (from 0% to 10% for low-income taxpayers), while qualified dividends now taxed at a maximum 15% tax rate will be subject to tax at ordinary income rates (scheduled to be as high as 39.6%). The panel could preserve the Bush tax cuts or modify the rate changes.
4. Itemized deductions: For many years, several “sacred cows” like tax deductions for mortgage interest, charitable donations and state and local income taxes have essentially survived intact. But no deduction is safe in this economic environment. The panel will likely consider imposition of adjusted gross income (AGI) “floors” comparable to those already limiting medical and miscellaneous expense deductions. Small consolation: It’s unlikely these deductions will be eliminated altogether.
5. Alternative minimum tax (AMT): The AMT has vastly exceeded its initial intent to ensure that the upper crust doesn’t get off tax-free. Despite annual bumps on the AMT exemption amounts, millions are snared each year by this “stealth tax.” Some in Congress favor higher exemption amounts, but others favor a complete repeal.
6. LIFO accounting: The Last-In, First-Out (LIFO) method of inventory accounting has long been used to lower business tax bills. In effect, you treat the last items acquired (the most expensive during when costs are inflating) as the ones you sold, allowing you to report less taxable income for your company. Repeal of the LIFO method has been proposed several times before, but this time it might not escape the ax.
Tip: Tax reform could include both winners and losers for individuals and small business owners. Stay tuned.
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