Taxes Blog

Finance Blogs » Taxes Blog » Deficit commission revised tax changes

Deficit commission revised tax changes

By Kay Bell ·
Thursday, December 2, 2010
Posted: 3 pm ET

The National Commission on Fiscal Responsibility and Reform, which is generally referred to as the debt panel or simply the commission (because its official name is too long and the acronym doesn't flow), is continuing its effort to get Congress to consider comprehensive changes to how it, and the United States, operate.

On Dec. 1, the panel released its final recommendations for addressing U.S. fiscal problems. This latest version is very similar to the draft that commission co-chairs released a month ago.

It's unclear, however, whether 14 of the 18 commission members will support the plan. That supermajority vote is required to force Congress to officially consider the proposal.

Why the uncertain support? Some of the panel members are sitting members of Congress. And the plan calls for doing away with many tax breaks that potential voters like.

Here are some of those potentially sticky individual tax change highlights.

  • Condense the six existing income tax brackets into just three: 12 percent, 22 percent and 28 percent.
  • Eliminate itemized deductions so that everyone claims the standard deduction.
  • Instead of the mortgage interest tax deduction, offer a 12 percent tax credit to all taxpayers. This would apply to primary residences only and only to mortgages of up to $500,000.
  • Tax all capital gains and dividends at ordinary income tax rates rather than at special, usually lower capital gains tax rates.
  • Instead of itemized charitable donations, allow a 12 percent tax credit to all taxpayers who donate amounts that total more than 2 percent of their adjusted gross income.
  • Eliminate the alternative minimum tax, or AMT.

 Of course, achieving this type of system would also mean doing away with more than 150 other existing tax breaks that show up on U.S. Treasury books as losses.

Why such dramatic changes? According to the report:

The current individual income tax system is hopelessly confusing and complicated. Many taxpayers are required to make multiple computations to see if they qualify for a number of benefits and penalties, and many dole out large sums of money to tax preparers. Meanwhile, other taxpayers underreport their income and taxes, hoping to avoid the audit lottery. In short, the Commission has concluded what most taxpayers already know, the current income tax is fundamentally unfair, far too complex, and long overdue for sweeping reform.

But does Congress have the stomach for such changes? Maybe for some of them -- the AMT is a constant thorn in lawmakers' and taxpayers' sides, and attempts are regularly made to expand the charitable giving tax laws beyond itemizing taxpayers.

A lot of the changes, however, will be problematic, not just for Congress, but for taxpayers.

Yes, we hate the annual hassle of filing taxes, but we've become accustomed to tax breaks that benefit us. Can you say mortgage interest deduction?

So before lawmakers will agree to any of these tax changes, they have to be sure that taxpayers (aka voters) are on board, too.

In addition to tax information on Bankrate, get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
empty nest mom
December 07, 2010 at 11:33 am

If I take most of the money out of my 401K to pay for my child's college I have to pay any penalties? and if so what kind of penalties?