On February 26, 2014, David Camp (R-Mich.), Chairman of the House Ways and Means Committee, released his long-awaited plan to reform and simplify the Internal Revenue Code. The Tax Reform Act of 2014 would reduce the marginal tax rates on individuals and pay for the rate reduction by eliminating or further restricting a variety of popular deductions. Although Camp has vowed to push hard for tax reform before retiring at the end of this year, the political division of the current Congress makes passage unlikely. Accordingly, we will mention only some significant highlights and keep you informed of future significant developments.
For most taxpayers, Camp would fix the top marginal rate at 25 percent. For individuals with modified adjusted gross income in excess of $400,000 ($450,000 for married individuals filing a joint return), the highest marginal rate would be 35 percent. The current 20 percent income tax rate on long-term capital gain income would be replaced by a deduction of 40 percent of the gain amount with the balance of 60 percent being taxed at the regular rates. For taxpayers in the 35 percent bracket, this would increase the capital gain tax rate to 21 percent. The 3.8 percent Medicare tax would continue to apply on top of that. Qualified dividends, also currently taxed at a 20 percent rate, would be taxed in the same manner. The significant tax deductions and other benefits that would be eliminated or curtailed include the following:
- The deduction for state and local income taxes, sales taxes and taxes on real property would be eliminated.
- The maximum home mortgage on which the interest can be deducted would be reduced from $1,000,000 to $500,000 for debt incurred after 2014. Existing debt can be refinanced at the same principal amount prior to 2018, and interest will remain deductible on the current ceiling of $1,000,000. The deduction for interest on home equity loans of up to $100,000 would be eliminated.
- The ability to exchange like-kind property tax-free under IRC Section 1031 would be eliminated.
- The deduction for personal exemptions would be eliminated; however, the standard deduction would be increased, so even fewer taxpayers will need to itemize their deductions.
- The deduction for medical expenses would be eliminated.
- The deduction for personal casualty losses would be eliminated.
- Employees receiving Form W-2 salary income would no longer be permitted to deduct any business expenses they incur in connection with their jobs.
- The cost of having your income tax returns prepared would no longer be deductible.
A bit of good news is that the alternative minimum tax would be repealed, as would the current 2 percent floor on adjusted gross income for deducting miscellaneous itemized deductions, as well as the itemized deduction phaseout.
The above good news, however, is offset for many high-income taxpayers by another provision that would impose an adjusted gross income floor of 2 percent on charitable contributions. In other words, a taxpayer would receive a charitable contribution deduction only to the extent that his contributions exceed 2 percent of his adjusted gross income.
For many taxpayers, the loss of the above deductions would add more to their tax bill than the rate reductions would save them. We will keep you apprised of significant developments.