In presenting President Bush with two options to streamline the tax code, his handpicked advisory panel promises that most taxpayers can expect to pay Uncle Sam about what they pay today.
Even though Bush and Congress will change the panel’s plans, it’s worth looking at the winners and losers the two options would create now that tax experts have put the pencil to both proposals.
Robert McIntyre of Citizens for Tax Justice, a Washington think tank known for using a computer model to pick apart tax plans like the one nonpartisan congressional analysts use, noted that both options favor investment income over paychecks:
_ The panel’s Simplified Income Tax Plan eliminates taxes on dividends, capital gains and a trio of savings accounts that shelter virtually all investment income in return for scrapping tax-deferred savings plans for retirement, health care and the like.
Wages, interest and other income would fall under four tax brackets _ of 15, 25, 30 and 33 percent _ down from today’s six. But the proposal eliminates the bottom rate of 10 percent on taxable income of less than $15,100 for couples, $7,550 for singles, and top rate of 35 percent on taxable income above $336,550, regardless of marital status.
_ Its “Growth and Investment” Tax Plan would create those same tax-sheltered savings accounts and tax other investment income from dividends, capital gains or interest taxed at 15 percent. Wages and other income sources would be taxed at rates of 15, 25 and 35 percent.
Pamela Pecarich, head of the American Institute of Certified Public Accountants’ tax-reform task force, added that a central concern for Congress and the White House isn’t part of the panel recommendations: how long taxpayers would have to “transition” to fundamental tax-code changes. Both plans would:
_ Cap the home interest deduction _ currently $1 million _ to mortgage loans as small as $227,000 in low-cost areas like Memphis or Knoxville, Tenn., and as high as $412,000 in high-cost areas from California to New York to Florida. Tax breaks for second homes and home-equity loans would be eliminated.
_ Do away with the write-off for state and local taxes.
_ Allow charitable deductions only to the extent they exceed 1 percent of income.
_ Collapse the standard deduction, personal exemptions and child tax credit into a single “Family Credit” based on family size.
These changes are part of the $1.3 trillion price for killing the Alternative Minimum Tax, a parallel system enacted to catch the wealthy that’s poised to hit people making as little as $75,000.
To cushion the change, “transition rules are needed in the name of fairness,” Pecarich said. “People rely on the tax code to order their financial lives.”
Despite the unknowns, senior tax analyst Bob Scharin of RIA’s Practical Tax Strategies, a professional tax journal, has sketched contours of how the two plans could affect individuals by tax status, income and investment sources.
He and RIA outlined the following five scenarios:
_ Customer service associate (single, no children).
Income: $30,000 in wages.
Write-offs: $3,000 deductible contribution to an Individual Retirement Account and the standard deduction with no home mortgage and minimal charitable contributions.
Current tax bill: $2,455.
Simplified Income Tax Plan: $2,850.
“Growth and Investment” Plan: $2,850.
_ Married full-time computer programmer and part-time graphic artist (no children).
Income: $150,000 combined wages; $1,000 interest income, $1,000 dividends and $5,000 long-term capital gains.
Itemized deductions: $18,000 mortgage interest (with home principal below the regional cap); $15,000 mortgage interest on vacation house, $2,000 home-equity loan interest, $15,000 real estate taxes, $10,000 state and local income taxes, $5,000 miscellaneous deductions that exceed 2 percent of income and $4,000 charitable gifts.
Current tax bill: $15,406.
Simplified Income Tax Plan: $23,643.
“Growth and Investment” Plan: $24,321.
_ Married full-time teacher and lawyer (two children).
Income: $150,000 wages; $1,000 interest income; $1,000 dividends; $5,000 long-term capital gains and $6,000 contribution to employer-provided before-tax flexible spending accounts.
Itemized deductions: $10,000 mortgage interest (with mortgage below the regional cap), $3,000 real estate taxes; $6,000 state income taxes and $4,000 charitable contributions.
Current tax bill: $21,568.
Simplified Income Tax Plan: $21,843.
“Growth and Investment” Plan: $22,521.
_ Married executive and non-employed spouse (two children).
Income: $500,000 wages; $10,000 interest income, $20,000 dividends and $200,000 capital gains.
Itemized deductions: $50,000 mortgage interest on an $800,000 home loan in a region where mortgages would be capped at $400,000 debt; $20,000 real estate taxes, and $35,000 charitable contributions.
Current tax bill: $155,645.
Simplified Income Tax Plan: $142,748.
“Growth and Investment” Plan: $151,140.
_ Divorced lawyer (no children).
Income: $250,000 wages; $150,000 interest income and $500,000 capital gains.
Itemized deductions: $20,000 mortgage interest (loan principal below regional cap), $6,000 real estate taxes; $40,000 state income tax and $50,000 charitable contributions.
Current tax bill: $179,174.
Simplified Income Tax Plan: $142,683.
“Growth and Investment” Plan: $163,350.
(Contact Mary Deibel at DeibelM(at)shns.com.)