Tax reform panel unveils its report: Which ideas will really pass?

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in Small Business Tax,Small Business Tax Deduction Strategies

The first shot in Washington's tax reform battle was fired earlier this month when the President's Advisory Panel on Tax Reform issued its long-awaited list of tax-simplification suggestions.

Conventional wisdom has the 272-page document arriving DOA on Capitol Hill. But don't be
so sure.

The report does recommend monumental tax-law changes—such as the elimination of some "sacred cow" deductions—that will draw fire from insurers, homebuilders and other industries. But after experts had a few days to absorb the report's contents, many are applauding the ideas as exceedingly fair and grounded in economics, not ideology.

Outlook: Republicans will be looking for a popular issue to latch onto in 2006, and this tax-reform plan could be their ticket. While many of these recommendations will never be enacted, expect more-serious-than-expected debate next year. Here are the leading proposals in the report:

Fewer tax rates. The panel made two recommendations for simplifying current tax rates. The first calls for four tax brackets: 15, 25, 30 and 33 percent. The second plan would create three brackets: 15, 25 and 30 percent.

AMT killed off. The panel, as expected, called for elimination of the alternative minimum tax (AMT) for individuals. But it went one step further, proposing to repeal the corporate AMT, too.

New "family credit." Personal exemptions, the standard deduction and the child tax credit would be replaced by a single "Family Credit." The credit would be $3,300 for married couples; $1,650 for single taxpayers; $1,150 for dependent taxpayers; $1,500 for each child; and $500 for each other dependent.

Pretax insurance. Everyone would be able to buy health insurance with pretax dollars up to the amount of the average premium.

No state tax deduction. Deductions for state and local income taxes would be eliminated.

New capital gains treatment. One recommendation would tax all capital gains and dividends at 15 percent.

Limited mortgage deduction. The panel would replace the home mortgage interest deduction with a "home credit," which would equal 15 percent of mortgage interest paid (subject to limits based on average regional housing prices).

Consolidate retirement savings plans.
The panel wants to simplify the wide array of retirement savings plans available. Defined-contribution plans would be merged into "Save at Work" plans. All taxpayers would be able to participate in "Save for Retirement" accounts, which would replace IRAs and similar arrangements.

"Save for Family" accounts. Taxpayers would be able to invest in "Save for Family" accounts that can be used
to pay for higher education, medical expenses, home-buying and retirement.

Timeline: The Treasury Department will use the report to make its own suggestions to the President before year-end. Look for Congress to take up the issue in 2006.

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