October 20, 2005

Summary of Tax Panel's Suggested Reforms

From a CNN article--"Tax reform panel offers two proposals"----a summary of some of the Tax Reform Panel's key recommendations for reforming the tax code (benefits-related recommendations are bolded):

  • Cut the number of income tax brackets from six to four – 15 percent, 25 percent, 30 percent and 33 percent.
  • Eliminate the marriage penalty.
  • Revamp capital gains taxes so that stocks and dividends would only be taxed at the individual level, not the corporate one, too.
  • Eliminate deductions for state and local taxes.
  • Limit the home mortgage deduction.
  • Expand the capital gains exclusion on home sales from $500,000 to $600,000 for couples.
  • Cap the amount of tax-free money an employer could pay for a workers' health insurance plan to $11,500 for families. Anything paid above that threshold would be treated as taxable income to the worker.
  • Reduce the variety of tax-advantaged retirement and health savings plans to just three types: "save for retirement" accounts, which would replace IRAs and deferred compensation plans; "save for work" accounts, which would replace employer-provided retirement savings plans like 401(k)s; "save for family" accounts, which would replace health savings, medical savings and flex-spending accounts.
  • The simplified plan would also abolish the alternative minimum tax (AMT), a move estimated to cost the federal government $1.2 trillion in revenue over 10 years.

More details about the savings account proposals from SmartMoney.com here. Excerpt:

The plan also seeks to revamp the myriad of tax-preferred savings accounts into three basic accounts. New "save for work" accounts would replace employer-provided savings plans such as 401(k) plans. All workers would be automatically enrolled into these plans.

New "save for retirement" accounts would replace all current individual retirement accounts, Roth IRAs, deferred compensation plans and tax-free buildup of life insurance and annuities. These would be structured like Roth IRA accounts, with a maximum $10,000 contribution a year. Taxpayers could only withdraw from it on retirement after the age of 58 and on death or disability.

New "save for family" accounts would replace health savings, medical savings and flexible spending accounts. These would have a $10,000 contribution limit with withdrawals limited for education, health expenses, purchase of a new home or retirement. Individuals could also withdraw $1,000 a year without penalty.

Read more about the recommendations here at RothCPA.com. The TaxProf Blog has compiled reaction to the recommendations here and here.

Posted by B. Janell Grenier at October 20, 2005 11:08 PM