02/28/2010
Show of hands, please – how many people out there are NOT in favor of simplifying tax law? Ah, just as I thought, not one hand went up. Not even mine and I make my living on the complications of tax law. We haven’t seen a real effort in Congress to simplify tax law in my adult lifetime [which includes Carter-Reagan-Bush-Clinton-Bush-Obama—did I leave out anyone?]
In fact, even the massive tax overhaul of 1986 under Reagan’s watch, introduced a plethora of complex and mysterious laws that left many of us scratching our heads. And when explaining the current set of law to clients, I often hear myself saying such things as, “You can do THIS but only if you do THAT unless of course you’ve done XYZ under a full moon in April.” Good grief.
So along come two guys in the Senate, Ron Wyden (D-Oregon) and Judd Gregg (R-New Hampshire) and they cook up a plan dubbed Bipartisan Tax Fairness and Simplification Act of 2010. I’ve read it and I actually think it is a hopeful first step toward fixing a very broken system. At least for some people.
You can read all about it in layman’s language at http://wyden.senate.gov/issues/Legislation/wyden-gregg/index.cfm. Here are a few interesting (and very simplified) highlights and lowlights (IMHO):
For individuals:
• Eliminate Alternative Minimum Tax – YAY!
• Increase standard deduction to around $30,000, thus eliminating itemizing deductions for a large percentage of American taxpayers – YAY!
• Simplify the tax reporting form for wage earning people (ie simple tax returns) to one page – YAY! (see a sample on the web site noted above)
• Promote personal savings by allowing everyone to put up to $14,000 into tax advantaged accounts – YAY!
• Create three tax brackets for individuals – 15%, 25%, 35% — NEUTRAL — I’m not really sure yet what this means since we have graduated tax brackets now (that is, some of your income is taxed at 0%, some at 15%, some at 25% etc etc so that we have an “effective” rate rather than a flat rate)
• Apply medicare taxation to employees of state and local governments – YAY! But…doesn’t go far enough…what happened to including the members of Congress??? • Exclude 35% of capital gains income from taxable income – YAY!
For businesses:
• Deduct equipment and inventory in the current year – no more depreciation of equipment or capitalization of inventory for TINY businesses (less than $1M in annual revenues) – YAY!
• Initiate a flat 24% corporate tax (C corps) – hmmmm. That is not going to make some companies very happy since they are now taxed at only 15%.
To get the good stuff (tax relief and simplification), what do we give up?
• Eliminate the exclusion of foreign earned income from US taxable income for both individuals and corporations
• Eliminate the business deduction for cafeteria plan benefits, fringe benefits and awards (so will companies continue to offer those benefit packages????)
• Eliminate the moving expense deduction
• Eliminate miscellaneous itemized deductions (like investment management fees, union dues, home office deduction for employees, tax preparation fee)
• Eliminate several tax advantaged positions for companies and investors in oil and gas and other extractive industries
• Reduce the deduction for interest expense for business taxation—to supposedly discourage companies from borrowing “too much” money….hmmm.
There is little hope that the bill will pass without various special interest groups disemboweling it, so, I don’t think we are going to get simplification any time soon…but at least someone in the Senate is thinking about it. And keep in mind that the vast majority of our clients do NOT have simple tax returns because you have businesses, a variety of stock option plans, and complex investments – all things that were not addressed in this rather, shall I say it?, simple bill.
But…if there is only one thing that survives out of this bill, let’s hope it is the repeal of AMT. That alone would simplify everyone’s lives!