Excerpts from Kiplinger Tax Letter 1/27/06:
The Democrats have proposed their own tax reform package called the Fair, Flat Tax Act.
The Proposal Points:
1) A Flatter Tax Bracket, with married filers paying 15% of the first $25,000 of taxable income, 25% on income on the next $95,000, and 35% on income over $120,000. The tax rate for singles would be half of the above, therefore eliminating the so-called “marriage penalty”.
2) A much higher Standard Deduction: $30,000 for married couples, and $15,000 for single taxpayers.
3) Elimination of the Alternative Minimum Tax
4) Mortgage Interest Deductions and Charitable Donation deductions to be preserved, however interest on second homes would be eliminated
5) A tax credit of 10% for state income taxes rather than the current deduction.
6) Current 2% of net income threshold before misc. deductions are allowed would be eliminated
7) Capital Gains would be treated like ordinary income, thus significantly increasing the tax rate on capital gains. It is not clear whether the current favorable exclusions of gains for the sale of a personal residence would be maintained.
8) Other tax increases would be implemented including longer depreciation periods, fewer tax free employee benefits, a flat 35% tax on corporations, significantly decreased tax benefits for health care expenses, elimination of flexible spending accounts, taxation of damage awards for physical injuries and workers compensation, and others.
The tax reform debate thus appears to be heating up and may become a major issue for 2006.