A while back the Director of Publications for the National Association of Tax Professionals asked me to contribute to an article for the association’s quarterly TAXPRO JOURNAL, for which I had written in the past, on what would be my proposals for changing the Tax Code if I were running for president. I received the “proofs” last week.
* I begin by stating that I would repeal the dreaded Alternative Minimum Tax (AMT). I expect that this would be high on the list of most tax professionals.
*I would do away altogether with the “marriage tax penalty” by making the filing status “Married Filing Separately” equal in every way to that of “Single”. No longer would any tax benefits be unavailable to married taxpayers choosing to file single – and the Tax Rate Schedule (and corresponding Tax Tables) for MFS would be the same as the one for Single. The filing status would be renamed “Married, But Filing as Single”.
What I do not say in the article, an afterthought, is that I would probably reduce somewhat the “marriage tax benefit” so that the Tax Rate Schedule for MFJ is closer to that of Head of Household. I would probable balance this out by allowing a slightly higher personal exemption deduction, perhaps $500 or $1,000 more, for dependent children, similar to what NJ does on the NJ-1040 (the exemption for the taxpayer and spouse and age or blindness is $1,000 each while for dependents it is $1,500).
A couple choosing to file separately would be able to file a “2-column” Form 1040 (or 1040A) – so that they could report their individual items of income, deduction and credit separately, but end up with one net refund or balance due amount. This is similar to the way I remember the New York State income tax return to be when I first started out in the business.
* Another proposal, which I first put forward in 2002 when George W was first looking for ways to “stimulate” the economy, is to allow taxpayers to “carry back” as well as “carry forward” net capital losses in excess of the annual maximum deduction (which would now be annually adjusted for inflation) to apply against gains in prior years. I would probably have a three-year carry back period. I discussed this idea in detail in my post “Dear George”.
This idea came about because many of my clients had reported and paid a substantial amount of federal, and state, income tax on six-figure capital gains, most short-term, in 1999 and 2000, but when everything turned around in 2001 and 2002 they had six-figure realized capital losses. The bottom line was that over a 2 or 3 year period of investment activity they had a net capital gain of “0” or a minor net gain or net loss. But they had been highly taxed in the years they had gains – and were only able to deduct a maximum of $3,000 in the years they had losses, with the excess loss “carried forward”. Unless these taxpayers would have a big score in future years they would never be able to fully claim all of the losses in their lifetime.
I do believe that one of the reasons we ended the Clinton years with a budget surplus was because of the taxes paid on excessive capital gains during the “dot.com” boom.
* I would make all items of deduction indexed annually for inflation. If we are going to index some items we should index them all. As I point out in the article, I believe the $25 limit on business gifts has remained unchanged for as long as I have been doing taxes – over 35 years – and the $3,000 limit on deductible net capital losses has been the same for decades.
* One current inequities in the law is that a person who wins a legal settlement, award or judgment, except in the case of a claim for unlawful discrimination, must report the gross amount as income on Page 1 of the 1040, which increases AGI and adversely affects a multitude of deductions and credits, and deduct the associated legal costs as a miscellaneous itemized deduction subject to the 2% of AGI reduction. In these cases a person could be awarded $300,000 but only end up “in pocket” $100,000-$150,000 after the lawyer takes his chunk.
In the case of claims for unlawful discrimination the associated legal fees and court costs are allowed as an “above-the-line” adjustment to income, so that the AGI properly reflects the true economic reality. I would allow the same adjustment to income for the corresponding costs of all settlements, awards and judgments.
*I would permanently do away with the first George Bush’s “read my lips” taxes – the phase-out of personal exemptions and itemized deductions based on AGI. And I would also repeal the 2% of AGI reduction of miscellaneous itemized deductions.
While I did not address the issue in my proposals for the article, several of the other contributors mentioned increasing, or doing away with, the phase-out ranges for various tax benefits, stating (1) it discourages ambition and (2) it discriminates against residents of certain high cost-of-living states (like California and those in the northeast). I would most likely do away with all phase-outs of deductions, credits, etc based on income. If an item has merit as a deduction or credit it should apply to all taxpayers. If you want to increase the tax on “high income” individuals that just raise the rate!
If there must be a phase-out or cut-off I would opt for one much higher cut-off MAGI amount (no more bothering with phase-outs) for all tax benefits – say $150,000-200.000 for an individual taxpayer (including Married Filing As Single) and $300,000-$400,000 for a joint return.
I would certainly, as a fellow tax professional suggested, remove all of the income and “employer plan covered” restrictions on deductible IRA and contributions and ROTH contributions.
* One minor item that irks me is that the standard mileage allowance deduction for using your car for doing volunteer or charity work is not set by the IRS along the same lines as the SMA for business, medical and moving use – but is set by Congress. Except for a recent increase restricted to driving related to Hurricane Katrina relief, this number, currently only 14 cents per mile, has not been raised in years. It should be the same as the allowance for medical and moving travel.
*I ended my list of presidential tax proposals by calling for a Federal Tax Amnesty Program similar to the type of program that has been successfully used by many of the states to raise tax revenue quickly. I discuss this in my post “Tax Amnesty”. I also said I would call for reinstating the “President’s Advisory Panel on Tax Reform” and take their findings seriously.
There are two additional proposals that I did not include in the article but probably should have –
(1) Do away with the deduction for depreciation of real property. I discussed this idea in detail in the post “Here Is Something to Think About” last year. I suggest that you go back and read that post in full to see what I am talking about. I was very disappointed that I did not get many comments on the topic at the time from my “peers”.
(2) I would also do away with “refundable” tax credits, such as the ones for Earned Income Credit and the Child Tax Credit. I would actually take a long, hard look at the Earned Income Credit, which is really a welfare program. You can read my thoughts on the EIC here.
So there you have it – the proposals of the Flach for President tax plank (click here for more details on some of the above). What do you think about my ideas – and what tax changes would you propose if you were running for the White House?
* I begin by stating that I would repeal the dreaded Alternative Minimum Tax (AMT). I expect that this would be high on the list of most tax professionals.
*I would do away altogether with the “marriage tax penalty” by making the filing status “Married Filing Separately” equal in every way to that of “Single”. No longer would any tax benefits be unavailable to married taxpayers choosing to file single – and the Tax Rate Schedule (and corresponding Tax Tables) for MFS would be the same as the one for Single. The filing status would be renamed “Married, But Filing as Single”.
What I do not say in the article, an afterthought, is that I would probably reduce somewhat the “marriage tax benefit” so that the Tax Rate Schedule for MFJ is closer to that of Head of Household. I would probable balance this out by allowing a slightly higher personal exemption deduction, perhaps $500 or $1,000 more, for dependent children, similar to what NJ does on the NJ-1040 (the exemption for the taxpayer and spouse and age or blindness is $1,000 each while for dependents it is $1,500).
A couple choosing to file separately would be able to file a “2-column” Form 1040 (or 1040A) – so that they could report their individual items of income, deduction and credit separately, but end up with one net refund or balance due amount. This is similar to the way I remember the New York State income tax return to be when I first started out in the business.
* Another proposal, which I first put forward in 2002 when George W was first looking for ways to “stimulate” the economy, is to allow taxpayers to “carry back” as well as “carry forward” net capital losses in excess of the annual maximum deduction (which would now be annually adjusted for inflation) to apply against gains in prior years. I would probably have a three-year carry back period. I discussed this idea in detail in my post “Dear George”.
This idea came about because many of my clients had reported and paid a substantial amount of federal, and state, income tax on six-figure capital gains, most short-term, in 1999 and 2000, but when everything turned around in 2001 and 2002 they had six-figure realized capital losses. The bottom line was that over a 2 or 3 year period of investment activity they had a net capital gain of “0” or a minor net gain or net loss. But they had been highly taxed in the years they had gains – and were only able to deduct a maximum of $3,000 in the years they had losses, with the excess loss “carried forward”. Unless these taxpayers would have a big score in future years they would never be able to fully claim all of the losses in their lifetime.
I do believe that one of the reasons we ended the Clinton years with a budget surplus was because of the taxes paid on excessive capital gains during the “dot.com” boom.
* I would make all items of deduction indexed annually for inflation. If we are going to index some items we should index them all. As I point out in the article, I believe the $25 limit on business gifts has remained unchanged for as long as I have been doing taxes – over 35 years – and the $3,000 limit on deductible net capital losses has been the same for decades.
* One current inequities in the law is that a person who wins a legal settlement, award or judgment, except in the case of a claim for unlawful discrimination, must report the gross amount as income on Page 1 of the 1040, which increases AGI and adversely affects a multitude of deductions and credits, and deduct the associated legal costs as a miscellaneous itemized deduction subject to the 2% of AGI reduction. In these cases a person could be awarded $300,000 but only end up “in pocket” $100,000-$150,000 after the lawyer takes his chunk.
In the case of claims for unlawful discrimination the associated legal fees and court costs are allowed as an “above-the-line” adjustment to income, so that the AGI properly reflects the true economic reality. I would allow the same adjustment to income for the corresponding costs of all settlements, awards and judgments.
*I would permanently do away with the first George Bush’s “read my lips” taxes – the phase-out of personal exemptions and itemized deductions based on AGI. And I would also repeal the 2% of AGI reduction of miscellaneous itemized deductions.
While I did not address the issue in my proposals for the article, several of the other contributors mentioned increasing, or doing away with, the phase-out ranges for various tax benefits, stating (1) it discourages ambition and (2) it discriminates against residents of certain high cost-of-living states (like California and those in the northeast). I would most likely do away with all phase-outs of deductions, credits, etc based on income. If an item has merit as a deduction or credit it should apply to all taxpayers. If you want to increase the tax on “high income” individuals that just raise the rate!
If there must be a phase-out or cut-off I would opt for one much higher cut-off MAGI amount (no more bothering with phase-outs) for all tax benefits – say $150,000-200.000 for an individual taxpayer (including Married Filing As Single) and $300,000-$400,000 for a joint return.
I would certainly, as a fellow tax professional suggested, remove all of the income and “employer plan covered” restrictions on deductible IRA and contributions and ROTH contributions.
* One minor item that irks me is that the standard mileage allowance deduction for using your car for doing volunteer or charity work is not set by the IRS along the same lines as the SMA for business, medical and moving use – but is set by Congress. Except for a recent increase restricted to driving related to Hurricane Katrina relief, this number, currently only 14 cents per mile, has not been raised in years. It should be the same as the allowance for medical and moving travel.
*I ended my list of presidential tax proposals by calling for a Federal Tax Amnesty Program similar to the type of program that has been successfully used by many of the states to raise tax revenue quickly. I discuss this in my post “Tax Amnesty”. I also said I would call for reinstating the “President’s Advisory Panel on Tax Reform” and take their findings seriously.
There are two additional proposals that I did not include in the article but probably should have –
(1) Do away with the deduction for depreciation of real property. I discussed this idea in detail in the post “Here Is Something to Think About” last year. I suggest that you go back and read that post in full to see what I am talking about. I was very disappointed that I did not get many comments on the topic at the time from my “peers”.
(2) I would also do away with “refundable” tax credits, such as the ones for Earned Income Credit and the Child Tax Credit. I would actually take a long, hard look at the Earned Income Credit, which is really a welfare program. You can read my thoughts on the EIC here.
So there you have it – the proposals of the Flach for President tax plank (click here for more details on some of the above). What do you think about my ideas – and what tax changes would you propose if you were running for the White House?
.
TTFN
TTFN
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