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Despite these uncertainties,
certain personal tax issues are at the forefront of the debate on the
surplus. These include
individual rate reductions, marriage penalty relief, pension reform,
estate tax reform, alternative minimum tax (AMT) relief, and a renewed
attack on tax shelter transactions.
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Individual
Rate Reductions - The most simple and direct way to
cut individual income tax burdens is by changing existing provisions
such as income tax rates, the personal exemption, the standard
deduction, or the child credit. A
nearly Despite these uncertainties, certain personal tax issues are at
the forefront of the debate on the surplus.
These include individual rate reductions, marriage penalty
relief, pension reform, estate tax reform, alternative minimum tax
(AMT) relief, and a renewed attack on tax shelter transactions.
by creating new credits or deductions.
The 2001 tax bill will likely contain a combination of existing
and new provisions. If,
after looking at the post-election scene, you conclude that a rate
reduction affecting your marginal (top) income tax rate is possible,
you should carefully consider the ideas for deferring tax income or
accelerating deductions contained in the following chapters.
You may be able to shift income into a lower tax rate year.
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Marriage
Penalty Relief - Virtually every member of Congress
would agree that the “marriage penalty” in the current tax law
should be reduced or eliminated.
The marriage penalty is a complex subject because marriage does
not increase every couple’s tax liability, as many marriages create
“bonuses” rather than penalties.
Marriage penalties and bonuses generally arise from three
sources: the tax rate tables, phase-outs for benefits that are based
on income, and credits or deductions set at fixed amounts per return.
The most direct way to reduce these penalties and bonuses is to
reduce income tax rates. Other
popular alternatives, such as a second earner deduction or an
increased standard deduction, have limited effects.
The typical taxpayer would not need to consider these
possibilities in their year-end tax planning.
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Pension
Reform - Retirement savings reform gained
broad bipartisan support during 2000 and will remain a priority in
2001.
Perhaps the most important
elements of the reforms being considered are increases in the
limitations on individual retirement account (IRA) and 401(k)
contributions. For
traditional and Roth IRAs, the contribution limits would increase from
$2,000 to $5,000 over a phase-in period.
The proposals would also relax contribution deduction limits
(based on adjusted gross income) by moving the current $52,000 level to
$80,000 over a phase-in period. The
limits on elective deferrals such as 401(k) plans would eventually be
increased to $15,000.
These
potential increases should have little impact on your year-end planning.
If they are enacted, however, these changes will require a review
of your overall retirement planning strategies.
Your IRA or 401(k) could become a more significant element of
your plan.
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Estate
Tax Reform - There is a growing consensus that
the estate and gift tax must significantly be reduced, if not
eliminated. Pressure for
estate tax relief comes from many sources.
Many believe the estate tax is a deterrent to savings and an
impediment to the continuity of family-owned small businesses. Historically, the top estate tax rates have roughly mirrored
the top income tax rates. However,
when President Reagan reduced income tax rates in 1981, the estate tax
rate remained at 55 percent.
At the same time, an explosion in housing costs created
significant estates for many individual homeowners.
Additionally, the entrepreneurial economy of the 1990s created
a new generation of small business owners.
While many advocate a full repeal of the estate tax, their
staunchest opponents will concede that a substantial increase in the
personal exemption and a reduction in the top rates are necessary.
If the estate tax is repealed or substantially reduced, you
will want to review your estate plan in light of those changes.
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Individual
AMT - The
Treasury Department estimates that without a modification to current
law, the number of taxpayers required to pay AMT will balloon from 1.3
million taxpayers in 2000 to 13.4 million in 2010.
The reason for this projected spike is that the exemption
amount used to calculate AMT liability is not indexed for inflation.
Another problem is that AMT taxpayers cannot claim a personal
exemption as they do under the regular income tax, which adversely
affects large families. Fixing
this problem by indexing the AMT and adding personal exemptions would
cost $112 billion over the next ten years. Even with a $2.2 trillion on-budget surplus, this is a
significant amount of revenue. Politicians
are not motivated to support such a high-cost solution because the
payback for such support would be minimal:
virtually all of the 12 million who are likely to become new
AMT taxpayers are currently unaware of their plight.
Pressure will build on tax writers as more constituents become
affected by the AMT. The
AMT creates serious traps for taxpayers with certain types of
deductions, such as those for rental activities, state taxes, and
investment fees. Be sure
to review how it may adversely affect your own situation.
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Tax
Shelters - The use of
tax shelters has come under the increased scrutiny of members of
Congress and the Treasury Department.
The result has been legislative proposals aimed at abusive
activities and regulatory rules that both require increased disclosure
of potential tax-avoidance activities and impose penalties on
taxpayers (including individuals) for substantial understatements of
tax. To avoid running
afoul of these new rules, as part of your year-end planning, ask your
tax advisor to review any transactions that could potentially be
deemed as lacking economic substance or as strictly tax-motivated.
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Tax Guide
