Ways and Means Chairman Camp releases long-awaited comprehensive tax reform plan
Ways and Means Chairman Camp releases long-awaited comprehensive tax reform plan
February 27, 2014
As promised, House Ways and Means Committee Chairman Dave Camp (R-MI) has released his proposed tax plan, “The Tax Reform Act of 2014.” Calling the existing regime as “our broken tax code,” and referring often to the accomplishments of the ’86 Tax Reform Act, the plan aims to both simplify the Code and strengthen the economy.
This article examines the individual tax provisions in Rep. Camp’s plan. For the business provisions, see ¶ 20.
Reduce rates and collapse tax brackets. The Tax Reform Act of 2014 would collapse the existing seven tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) into three brackets of 10%, 25%, and 35%.
The 10% rate would apply to single filers with taxable income below $37,400 and joint filers with taxable income below $74,800 (i.e., taxpayers in the existing 10% and 15% brackets). The 25% rate would apply to taxable income above these amounts. The 35% rate would begin at the same income levels as the current 39.6% bracket (i.e., above $400,000 for single filers and $450,000 for joint filers). However, the 35% would not apply to “qualified domestic manufacturing income” (QDMI; see below), which would be subject to a maximum statutory rate of 25%.
QDMI generally would be net income attributable to domestic manufacturing gross receipts, which would include gross receipts derived from (1) any lease, rental, license, sale, exchange, or other disposition of tangible personal property that is manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part within the U.S., or (2) construction of real property in the U.S. as part of the active conduct of a construction trade or business. Income that either is net earnings from self-employment or results from an adjustment under Code Sec. 481 (for changes in accounting methods) would not qualify as QDMI. Puerto Rico would be considered “domestic” for these purposes, and other rules similar to those under current-law Code Sec. 199 would apply.
The exemption of QDMI from the 35% bracket would be phased in over three years, with only one-third of QDMI being excluded from the top bracket in tax year 2015, and two-thirds being excluded in 2016.
Capital gains and dividends. The Tax Reform Act of 2014 would tax long-term capital gains and qualified dividends at the same rate as applies to ordinary income, but with 40% of gains and dividends excluded.
Increased standard deduction. The Tax Reform Act of 2014 would provide an increased standard deduction of $11,000 for individuals and $22,000 for married couples (both indexed for inflation). The additional standard deduction for the elderly and the blind would be eliminated. The Joint Committee on Taxation estimated that the increased amounts would result in nearly 95% of taxpayers not having to itemize.
Single filers with at least one qualifying child could claim an additional deduction of $5,500, regardless of whether or not they itemize deductions.
The standard deduction (or, for itemizers, an equivalent amount of itemized deductions) would phase out by $20 for every $100 by which modified adjusted gross income (MAGI) exceeds $517,500 for joint filers and $358,750 for single filers. The additional deduction for single filers with a qualifying child would phase out by one dollar for every dollar by which AGI exceeds $30,000.
Charitable deductions. The proposed increased standard deduction amounts are projected to decrease the number of taxpayers who itemize their deductions. For those who continue to itemize, the charitable deduction would be available under the Tax Reform Act of 2014 to the extent that contributions exceed 2% of income. It would also extend the deadline for making tax deductible donations for a given year to April 15th of the following year.
The special, temporary rules for conservation easements, including the rules for farmers and ranchers, would also be made permanent. The general rule would provide that deductions for conservation easements would be limited to 40% of AGI (up to 100% for farmers and ranchers for property used in agricultural or livestock production).
Repeal of the AMT. The Tax Reform Act of 2014 would abolish the alternative minimum tax.
Repeal of the personal exemption. According to the section-by-section summary, the personal exemption for the taxpayer and taxpayer’s spouse would be repealed and consolidated into the larger standard deduction. The personal exemption for children and dependents would be consolidated into an expanded child and dependent tax credit (see below).
Increase and expansion of child tax credit. The child credit would be increased to $1,500 and would be allowed for qualifying children under the age of 18, and a reduced credit of $500 would be allowed for non-child dependents (both indexed for inflation). The credit would be refundable to the extent of 25% of the taxpayer’s earned income (earned income in excess of $3,000 before 2018). The credit would not begin to phase out until MAGI exceeds $413,750 for single filers and $627,500 for joint filers.
Elimination of deduction for state and local tax payments. The Tax Reform Act of 2014 would repeal the deduction for state and local income, property and sales taxes. This change would help to offset the repeal of the AMT.
Changes to mortgage interest deduction. The Tax Reform Act of 2014 would gradually reduce the current $1 million cap on the amount of mortgage interest that can be deducted beginning with new mortgages taken out in 2015 such that the limit for mortgages taken out in 2018 or later would be $500,000. Homeowners would still be able to deduct interest on the first $500,000 of mortgage debt on a pro rata basis (i.e., a taxpayer with a $1 million mortgage could deduct half of his mortgage interest).
Consolidation of education-related credits. The Tax Reform Act of 2014 would reduce the existing 15 tax breaks for higher education into five: the American Opportunity Tax Credit (which would be modified, see below, and made permanent), the deduction for work-related education expenses, the exclusion of scholarships and grants, gift tax exclusion for tuition payments, and tax-free 529 savings plans.
The new AOTC would provide a 100% tax credit for the first $2,000 of certain higher education expenses and a 25% tax credit for the next $2,000 of such expenses. It would be available for up to four years of higher education, and eligible expenses would include tuition, fees and course materials. The first $1,500 of the credit would be refundable, and it would generally phase out for MAGI between $86,000 and $126,000 for joint filers and $43,000 and $63,000 for other filers.
Reformed EITC. The Tax Reform Act of 2014 would reform the Earned Income Tax Credit (EITC) by making it a credit against actual employment (i.e., payroll and self-employment) taxes paid by or with respect to a taxpayer.
The employee’s share of payroll taxes would be offset by a credit against such taxes, while the employer’s share would be rebated through a refundable income tax credit. Only taxpayers with at least one qualifying child could qualify for the credit against the employer’s share of payroll taxes. For taxpayers without a qualifying child, the maximum credit amount would be $200 for joint filers ($100 for other filers). For taxpayers with one qualifying child, the maximum credit would be $2,400. For taxpayers with more than one qualifying child, the maximum credit would be $4,000 in the case of a joint return and $3,000 in other cases (all credit amounts indexed for inflation).
A special transition rule would apply to tax years 2015, 2016, and 2017 that would make the credit equal to 200% of the taxpayer’s payroll taxes (both employee and employer shares). In addition, taxpayers with one qualifying child could claim a maximum credit of $3,000 (rather than $2,400), and taxpayers with two or more qualifying children could claim a maximum credit of $4,000, regardless of filing status.
The credit would phase out as AGI exceeds certain levels. For taxpayers with qualifying children, the credit would begin phasing out at $20,000 for single filers and $27,000 for joint filers. For taxpayers without qualifying children, the credit would begin phasing out at $8,000 for single filers and $13,000 for joint filers (phaseout levels indexed for inflation).
Retirement savings. For future contributions, the Tax Reform Act of 2014 would allow up to $8,750 (half of the contribution limit) to be contributed either to a traditional or Roth account. Any contributions in excess of $8,750 would be dedicated to a Roth-style account, making these savings tax-free during retirement. The income eligibility limits for contributing to Roth IRAs would also be eliminated.
Repealed provisions. The Tax Reform Act of 2014 would also repeal a host of existing provisions, including the following:
- …itemized deductions for expenses attributable to the trade or business of performing services as an employee;
- …deduction for personal casualty losses;
- …deduction for tax preparation expenses;
- …itemized deduction for medical expenses;
- …deduction for alimony payments (and corresponding inclusion in gross income by payee);
- …deduction for moving expenses;
- …deduction and exclusions for contributions to medical savings accounts;
- …2% floor on miscellaneous itemized deductions;
- …overall limitation on itemized deductions (“Pease” limitation);
- …exclusion for employee achievement awards;
- …the special rule permitting recharacterization of Roth IRA contributions as traditional IRA contributions; and
- …the exception to the 10% penalty (on early distributions from retirement plans and IRAs) for up to $10,000 to pay for first-time homebuyer expenses.