November Elections and Your Taxes…The Possibilities are on the Table

In Florida Tax Issues, Tax Planning by Daniel Friedel

With the results of the November elections still looming, taxpayers are left with an uncertain tax future as Bush’s tax cuts remain in a state of uncertainty.  Although legislative action to extend or modify the Bush-era taxes seem non-existent, the President still refuses to throw tax reform out the window.

With a month and a half left before our tax code reverts back to the pre-Bush era, Obama’s debt panel released (3) new tax reform options:

The co-chairmen of President Obama’s National Commission on Fiscal Responsibility and Reform released a discussion draft in advance of its final report to be issued on December 1.  The report presents three tax reform options:

Option 1: The Zero Plan

  • Consolidate the tax code into three individual rates and one corporate rate
  • Eliminate the AMT, Pease, and PEP
  • Eliminate all $1.1 trillion of tax expenditures
  • Dedicate a portion of savings to deficit reduction and apply the rest to reduce all marginal tax rates
  • Add back in any desired tax expenditures, and pay for them by increasing one or all of the rates from their zero expenditure low

Option 2: Wyden-Gregg Style Reform Individual Tax Reform

  • Repeal AMT, PEP, and Pease
  • Establish 3 rates – 15%, 25% and 35%
  • Triple standard deduction to $30,000 ($15,000 for individuals)
  • Repeal state & local tax deduction, cafeteria plans, and miscellaneous itemized deductions
  • Limit mortgage deduction to exclude 2nd residences, home equity loans, and mortgages over $500,000
  • Limit charitable deduction with floor at 2% of AGI
  • Cap income tax exclusion for employer-provided healthcare at the amount of the actuarial value of FEHBP standard option
  • Modify and repeal several other tax expenditures
  • Dedicate portion of savings to deficit reduction Corporate tax reform * Reduce corporate tax rate to 26%
  • Permanently extend the research credit
  • Eliminate and modify several business tax expenditures, including:
  • Domestic production deduction
  • LIFO method of accounting
  • Energy tax preferences for the oil and gas industry
  • Depreciation rules
  • International tax reform including a territorial system

Option 3: Tax Reform Trigger

  • Call on Finance and Ways & Means Committees and Treasury to develop and enact comprehensive tax reform by end of 2012
  • Put in place across-the-board “haircut” for itemized deductions, employer health exclusion, and general business credits that would take effect in 2013 if reform is not yet enacted
  • Haircut would limit proportion of deductions and exclusions individuals could take to around 85% in 2015. Similarly, corporations would only take some proportion of their general business credits
  • Set haircut to increase over time until tax reform is enacted