Draft Tax Reform Act Of 2014 - Part 1

Camp Releases Tax Reform Plan to Strengthen the Economy and Make the Tax Code Simpler, Fairer and Flatter

Plan Closes Loopholes to Lower Tax Rates for Families and Job Creators

This was from the press release for the Draft Tax Reform Act of 2014. I looked at the draft legislation and it only runs to 979 pages. We know our legislators/staff are assiduously flogging through this so they can be ready to make knowledgeable votes when the time comes. If you want to read it, you’ll find it here.

Me, I gave up! I turned instead to the discussion draft section-by-section summary. This is only 182 pages with 11 pages of content. You can read it here.

First, I skimmed through to add up all the items scored by Joint Committee on Taxation (JCT). There are 173 items increasing “revenue” (i.e. tax) and 33 decreases. The time scale for the “revenue” and outlays is 2014 to 2023. Here’s a table setting out the tax increases and decreases:

 

So it scores positive for tax payers but the “devil is in the detail”. In this article I’ll look at the highlights (or lowlights) for reform affecting individual taxpayers. This takes us through page 48. I’ll cover other parts later but this is where the big items are.

Subtitle A - Individuals

Sections 1001 to 1003:  Will yield tax savings of $498.7B. Tax brackets are reduced from seven to three but income levels will be indexed to “chained CPI” not CPI. When the price of items become too expensive, the theory is that people will substitute with cheaper options. This is “chained CPI”. Obviously, it is too easy to spot the manipulations behind the CPI, therefore, it’s time to bring in a more opaque index.

Subtitle B - Families

Six various deductions and credits for families will reduce to three. Standard deduction, additional standard deduction, personal exemptions (taxpayer/spouse), personal exemptions for children and dependents, child tax credit and head of household filing status all disappear. They consolidate into three larger benefits: larger standard deduction, additional deduction for single parents and enhanced child/dependent tax credit.

Section 1101: Larger standard deduction of $22,000 joint filers and $11,000 individual and the additional deduction for single parents. Tax savings $578.3B.

Section 1102: Increased/expanded child tax credit. Tax savings $277.9B.

Section 1103: Modified earned income tax credit. Tax savings $160.8B.

Section 1104: Offsetting above there’s the repeal of personal exemptions at a tax increase of $859.1B.

Subtitle C - Education

Section 1201: Reform of American Opportunity Tax Credit (AOTC) at a tax increase of $29.4B

Section 1204: Repeal of deductible interest on educational loans. Tax increase $13B.

 

Subtitle D – Individual Credits

Section 1301: Repeal of dependent care credit. Tax increase $20B

Section 1302: Repeal of adoption credit. Tax increase $4.7B

Section 1308: Repeal of the plug-in electric drive motor vehicles. Tax increase $5B

 

Subtitle E – Deductions, Exclusions and Other Provisions

Section 1401:  The capital gain exclusion on the sale of a residence will now require living in the property five years out of eight (rather the two out of five). Can only use this exclusion once every five years and there is a phase out of the exclusion of $2 for every $1 over a modified adjusted gross income of $500,000 ($250,000 single). Tax increase $15.8B

The aggregate tax increase of the following changes to Schedule A items (Sections 1402-1406, 1408, 1409, 1414 &1415) is $853.7B

Section 1402: A staggered decrease in the amount of mortgage interest that can be deducted. The size of the loan on which interest is deductible reduces from $1M to $500,000 by 2018. There’s no indication of any type of indexing.

Section 1403: Charitable deductions will get an extension of time to file until April 15^th of the following year. There are too many changes to this deduction to go into now but you’ll get the flavor of what is in the minds of the tax writers when you read the following:

“The provision recognizes that Americans typically contribute to churches, community organizations and other public charities out of generosity, not for a tax benefit, which only higher income individuals generally claim under current law.”

 

All the following are repealed:

Section 1404: Expense an employee could claim over and above those reimbursed by the employer.

Section 1405: Deduction for state and local income taxes and property taxes.

Section 1406: Casualty losses.

Section 1408: Tax prep.

Section 1409: Medical expenses over 10% of AGI.

Section 1414: 2%-floor on miscellaneous deductions.

Section 1415: “The Pease Limitation” reducing the overall limit on itemized deductions.

Section 1411: Alimony payments no longer deductible by payor or included in income for the payee. Tax increase $5.5B

Section 1412: Moving expense deduction – repealed. Tax increase $8B.

The following fringe benefits or elements thereof become taxable:

Section 1417: Employee awards. Tax increase $3.4B

Section 1420: Qualified transportation. Tax increase $39B

Subtitle F – Employment Tax Modifications

Section 1501: Changes to the calculations Self Employment Contribution Act (SECA). Tax increase $5.1B

Section 1502: SECA extension/clarification for general and limited partners, plus LLCs and shareholders of S Corps. Tax increase $15.3B.

Section 1503: Exemption of certain foreign workers from FICA repealed. Tax increase $7.7B.

Section 1504: Exemption for certain students from FICA changes. Tax increase $13B.

Subtitle G – Pensions/Retirement

Sections 1601 – 1603: Income eligibility limits for Roth IRAs are eliminated and new contributions to traditional IRAs and non-deductible IRAs are prohibited. Inflation adjustments to Roths are frozen until 2024, when they will be based off the frozen number. Tax increase $14.8B.

Section 1613: Elected deferrals of income in company plans – only half will be allowed to go into traditional accounts, the remainder has to go to a Roth. Not applicable for companies of less than 100 employees. Tax increase $143.7B

Sections 1620 – 1624: Inflation adjustments to a myriad of Defined Benefit/Contribution Plans are frozen until 2024. Tax increase $63.4B.

 

Title II - Alternative Minimum Tax - Repeal

Section 2001: Tax savings for individuals $1331.8B

Corporations $110.2B.

I find it interesting, but not surprising, that the precursor to AMT, the Minimum Tax of 1969, was meant to capture tax on 155 people but subsequently was allowed to morph into this beast which cut swaths through the middle class. However, that’s where the money is. So now our legislators probably want our gratitude for doing something that they should have done years ago but, at the same time, use the opportunity to offset their lost “revenue” by closing “loopholes”.