4 Ways Congress Could Make Filing Your Taxes Way Easier
Income taxes in the United States have become incredibly complex. That's why tax advisors like myself spend our days guiding people through the murky waters of their own tax returns. But while everybody agrees that the tax code could use some simplifying, few agree on just how it should be done. Here are some proposals that lawmakers have developed over the last few years to declutter our tax code.
Eliminate itemized deductions
One of the biggest decisions that taxpayers make each year is whether to take the standard deduction or to try itemizing. Itemized deductions are the ones that you can't take if you also take the standard deduction, and they include such common deductions as medical expenses, mortgage interest, and state and local taxes. The GOP has suggested getting rid of itemizing in its recent tax reform proposals, although these plans leave in certain itemized deductions, namely, the charitable contributions deduction and the mortgage interest deduction.
Eliminate the alternative minimum tax (AMT)
In 1969, Congress discovered that loopholes in the federal tax code allowed many high-income taxpayers to dramatically reduce their income taxes. Indeed, some taxpayers with incomes over $200,000 per year were paying no federal income taxes at all. In response, legislators created the alternative minimum tax to close off those loopholes. In brief, the AMT is an alternate way of calculating your income taxes. First you figure out your tax return using the regular approach, and then you do it all over again using the AMT approach (which eliminates certain tax breaks commonly used by high-income taxpayers). The approach resulting in the higher tax bill is the one that you have to use for the year. Both the House Republican plan of last year and President Trump's tax reform summary from April do away with the AMT entirely.
Consolidate dependent-related tax breaks
Households with children under 18 can claim a plethora of tax breaks, including the child's personal exemption, the child tax credit, the child and dependent care credit, and others. Some of these breaks, such as the child tax credit, are available to any household with dependents under a certain age; others, such as the earned income credit, are partially based on income or other factors as well. Numerous eligibility rules apply to the more complicated dependent-related tax breaks, making them challenging for most households to calculate and claim. Consolidating these tax breaks, or removing some and expanding others, would greatly simplify many parents' tax returns.
Consolidate capital-gains taxes
Capital gains taxes come in three varieties: short-term capital gains taxes (for investments held 365 days or less), long-term capital gains taxes (for investments held more than one year), and collectibles taxes (a flat rate of 28%). President Trump's April tax reform overview proposed eliminating the collectibles tax rate, using only the short-term and long-term rates for all types of assets. In this approach, gain on assets would be taxed based only on how long you owned an asset, not on what type of asset it was.
The future of tax reform
President Trump says that decluttering the tax code is one of the main goals of his tax reform plan. His administration is still hoping to pass tax reform in 2017, although, given the many delays that have slowed its introduction to Congress, it's unlikely that any tax reform bill will pass this year. Nevertheless, the GOP is not going to give up on tax reform, so you may well see some of these tax code simplifiers go into effect in the near future.
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