Subject: Suggestions for changing the income tax law Comment: As a retired IRS agent, I know first-hand the uselessness of complexity in the Internal Revenue Code (IRC). The simplification of the tax law requires political courage, but nothing will be done unless you have the courage and conviction to change. Then afterward, make no changes in the IRC for five years until we all adjust for the changes made. Here are but a few suggestions: 1. Tax all income the same - wages, interest, dividends and capital gains. All income should be taxed at the same graduated rates. This would end the distinction between capital gains and ordinary income and make unnecessary Subchapter P and other recapture sections not in Subchapter P designed to prevent recharacterization of income as capital gain (for instance, section 751 re: partnerships). Numerous other sections would need to be changed allowing a "sale or exchange" requirement (for example, sections 165(g) and 166(d)). This proposal would also include taxing income (currently excluded) from state and municipal debt obligations. To eliminate large "spikes" in income, every individual taxpayer should be allowed to use income averaging whereby the taxpayers income for the present year and the last four years would be "averaged" and taxed at the "average" existing tax rates (see repealed sections 1301-1305). 2. Repeal all credits, except pre-payment, withholding and foreign tax credits. This would mean NO earned income credits or child credits. To compensate, make the personal exemption and dependent exemptions large enough to make unnecessary filing an income tax return for people below the "poverty line." 3. Make 100% of all medical expenses deductible (no % floor tied to AGI). Consistent with that change, eliminate the now 100% deductible health savings accounts and flexible spending accounts. 4. To simplify business structures, repeal Subchapter S entirely and repeal partnership sections 734(b),743(b), 754 and 755 re: step-up and step-downs in "inside" partnership basis. Tax all corporations a flat tax for all corporate income using the highest rate for an individual to prevent use of corporations to divide income into lower brackets. Furthermore, allow all corporations a 100% deduction for dividends paid. This would discourage tax shelters since tax avoidance could be accomplished simply by paying a dividend. 5. Repeal the alternative minimum tax. 6. Repeal the phase outs and floor for miscellaneous itemized deductions, itemized deductions and exemptions. 7. Make all post high-school education tax deductible "above the line" provided the taxpayer could demonstrate an approximate or direct connection between the educational expense and his or her present job or planned future career. 8. Repeal the individual filing distinctions for "head of household" and "surviving spouse." 9. Simplify the requirements for tax-deductible deferred compensation plans, perhaps following the previous suggested proposals of the Bush Administration. The Administration proposal would create three new retirement savings accounts: (1) Retirement Savings Accounts (RSAs); (2) Lifetime Savings Accounts (LSAs); and (3) Employer Retirement Savings Accounts (ERSAs). RSAs and LSAs would allow individuals to invest up to $ 5,000 in 2005 (adjusted annually) and permit account gains to grow tax-free. Withdrawals from LSAs could be made tax free, at any time and for any purpose. RSA withdrawals would only be tax-free if the holder was at least age 58. ERSAs are modeled after 401(k) plans, and would replace all employer plans, including 401(k)s, Simplified Employee Pensions (SEPs), and SIMPLE IRAs. Michael A. Talbert, C.P.A. M.S. Taxation; M.S. Accounting 11516 Kings Coach Road Grand Blanc, MI 48439 810-695-9916 mtalbertgolf@sbcglobal.net |