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Tax Planning

Get Ready for the Mother of All Tax Bills in 2009 ...

Major tax changes are on the horizon for 2009. Not all of them will thrill you.

Charles Rangel, chairman of the House's tax-writing Ways and Means Committee, extols his plan as the "mother of all tax bills." Critics denounce it as the "mother of all tax hikes."

Gentlemen, gentlemen! Can we agree on at least one thing? The real mother here is necessity, which, as Plato explained nearly 2,500 years ago, is the mother of invention. Congress has to invent a new tax code ... and soon. Time is running out for coming to grips with two major issues.

First is the ever-growing threat of the alternative minimum tax (AMT) -- the special tax aimed at 155 taxpayers in 1969 that now threatens tens of millions of us. Congress and the president managed to pass a $50-billion Band-Aid to prevent an additional 20 million taxpayers from falling over the AMT precipice when they file tax returns this spring. (The patch needs to be renewed for 2008.)

The second issue that Congress can't ignore much longer: the scheduled expiration of the Bush tax cuts.

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The growing menace of the AMT and the threat of returning to 20th-century rules for income, capital-gains, dividend and estate taxes mean Congress has to get its act together.

But probably not in 2008. The likelihood of bitter partisan politics leading up to November's election makes it unlikely that lawmakers will tackle anything as thorny as tax reform. But count on action in 2009.

Assuming the Democrats retain control of Congress, Rangel's proposal will be the starting point. So you need to know what the New York Democrat has in mind.

What Rangel would do

Slay the AMT. First and foremost, Rangel wants to kill the AMT outright, at a cost of nearly $800 billion over the next ten years. (In other words, that's how much the AMT would collect over the next decade if it were neither patched nor revoked.)

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Impose a surtax on high-income earners. Rangel would pay for the change by replacing the AMT with a surtax on the very wealthiest taxpayers. A 4% surtax would apply to single taxpayers with adjusted gross income (AGI) between $150,000 and $250,000; a 4.6% surtax would apply to AGI over $250,000.

For married couples, the 4% surtax would apply to AGI between $200,000 and $500,000, with the 4.6% surtax applying to additional income. Some people paying the surtax would pay less tax overall because of the elimination of the AMT.

Boost standard deductions. The AMT rarely hits taxpayers who claim the standard deduction, so killing it wouldn't help the nearly two-thirds of Americans who don't itemize. For them, Rangel would boost the standard deduction, by $425 for singles and $850 for couples. He'd also make modifications to the earned-income-tax and child credits to help lower-income taxpayers.

Squeeze exemptions and deductions for high earners. Current law is gradually eliminating a reduction in the value of personal and dependent exemptions and itemized deductions for high-income taxpayers. Rangel would restore the full-powered squeeze.

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His proposal has a lot of other moving parts -- including a cut in the top corporate rate. He also wants to hike the tax on hedge-fund managers' income, which is now treated as capital gains. You can be certain that tax rates, capital-gains treatment and the estate tax will all be on the table come 2009.

According to an analysis prepared for the Tax Policy Center, a respected think tank, the top 1% of earners would bear the brunt of Rangel's plan. Pretty much everyone else would enjoy a tax cut or see little or no difference in their federal income-tax bill.