The President's Advisory Panel on Federal Tax Reform recommended changes Tuesday to simplify the tax code. Here's a look at how key proposals would affect taxpayers.
Q: Would there still be tax brackets?
Yes, but not as many. Currently there are six brackets ranging from 10% to 35%. The panel proposed two alternatives. Plan A would create four tax rates -- 15%, 25%, 30% and 33%. Plan B would establish three rates -- 15%, 25% and 30%.
Q: What happens with deductions?
A: Many itemized deductions would be eliminated, including deductions for property taxes, state income taxes, unreimbursed business expenses and professional dues. But limited write-offs for charitable contributions and some mortgage expenses would be available for everyone -- even people who don't itemize.
Q: How would charitable contribution deductions be limited?
A: Charitable contributions could be deducted only to the extent that they exceeded 1% of the taxpayer's adjusted gross income. In other words, a taxpayer with $50,000 in income could claim charitable contributions only if they exceeded $500 annually.
In current law, taxpayers get write-offs for charitable contributions only if they itemize deductions. Under the proposals, itemizing would not be necessary.
Q: What about mortgage interest deductions?
A: Mortgage interest write-offs would be calculated as credits rather than deductions. Under the proposals, the mortgage interest credit would be figured by multiplying the interest paid by 15%. However, the credit would be subject to limits that would vary by region. Borrowers would be able to get credit for loans of up to $227,000 in low-cost areas and $412,000 in high-cost areas.
Q: How much of a difference would that make in taxes paid?
A: Some homeowners would pay thousands of dollars more in taxes. For example, take a California homeowner who currently pays about 25% of his income in taxes and has a $500,000 mortgage at a 7% annual interest rate. That homeowner would pay about $4,800 in additional income tax each year, said Clint Stretch, director of tax policy at Deloitte & Touche in Washington.
Q: What about other deductions, such as for retirement accounts?
A: Today's cacophony of tax-favored retirement accounts and college savings accounts would be replaced by accounts that would not offer upfront deductions but would promise future tax-free income.
Q: What about personal exemptions and standard deductions?
A: They would also be replaced by credits. These credits are calculated to give the same net tax benefit to individuals as they provide under current law. The calculation would just be simplified.
Q: What happens with the alternative minimum tax?
A: It would be eliminated. This parallel tax system was established in the 1970s to ensure that high-income filers paid at least some tax. But because of factors including rising income and home prices, more and more middle-income filers have been drawn into the system in recent years -- drawing protests from people who say the tax was never intended for middle-class Americans.