Bookmark this page
A deficit-slashing proposal by the National Commission on Fiscal Responsibility and Reform was released yesterday. Besides the section on Social Security I wrote about previously, it included a number of other tenets that could affect retirement and retirement planning. Some of them might even have a positive effect on our personal deficits.
The committee would:
- Establish three basic levels of taxation based on income: 15 percent, 25 percent and 35 percent. This is a standardization that could force some retirees to pay higher taxes, but most of us won't be that lucky.
- Eliminate the hated alternative minimum tax, or AMT, which increasingly has affected middle-income people -- even retirees. Then, the committee would get rid of the rules that trim deductions for high-income earners, referred to in tax accounting circles as Pease and PEP.
- Triple the standard deduction to $30,000 for a couple and $15,000 for an individual. For many people living in retirement without a lot of deductions, this could be a plus.
- Eliminate miscellaneous itemized deductions and deductions for state and local taxes. This could affect retirees negatively in high property tax areas.
- Limit mortgage deduction to exclude second residences, home equity loans and mortgages of more than $500,000. Let's hope there aren't too many retirees with mortgages greater than a half-million dollars or with mortgages on two homes.
- Limit charitable deductions to gifts greater than 2 percent of income after deductions. For better or worse, that would probably discourage people from donating items to organizations such as Goodwill -- or even giving used books to the library. Without a tax incentive, some of these items may end up at the landfill.
Overall, would these changes be burdensome to most retirees? Probably not. If they achieved the goals of reducing the deficit and simplifying taxation, then the changes would be a boon for most of us. Today, figuring out how to avoid paying excessive taxes on income from a combination of Social Security, pension and savings is so complex that many retirees pay more taxes than they would if they had smart tax advice. But why should retirees have to go in search of a sophisticated tax accountant?
Who knows where this proposal will lead. It won't even be presented to Congress unless 14 members of the bipartisan 18-member panel agree that the full range of proposals are worthy of recommendation. That's a high bar.
On the charitable deductions, I would REALLY hope that people that HAVE, do not donate to charities ONLY because they get a tax deduction. I am of the "have not so much" group. But I still try and give whatever I can. Every year when I get ready for Christmas, I clean out the kids toys. I give anything in good condition and with all the pieces to their daycare. I don't look for a tax deduction for it, I do it because they can use these items that were gently loved by my kids, so that MANY other kids can love them too! I can't give hundreds of dollars to organizations, but Idrop in spare change and dollar bills. Not for a tax deduction, but because even if my family is struggling, there are many others that are worse.
I hope people give because it's THE RIGHT THING TO DO".