Debate on Tax OverhaulIs Under Way (Really)
But it’s no surprise if you missed the story buried in last week’s newspapers.

With little fanfare and even fewer expectations, at least in the short term, the Obama administration and Congress have opened a debate on a major overhaul of the U.S. tax code. Action will wait awhile -- probably until after the 2012 elections -- but the ground will be laid, or at least worked a bit, between now and then.
The goal is the ever elusive quest for a simpler tax system, and the catalyst is the report issued late last month by Obama’s economic recovery board, led by former Federal Reserve Chairman Paul Volcker. The task force had little room to maneuver, both in terms of its mandate and in terms of the requirement that it not go against Obama’s promise not to raise taxes on the middle class. Still, it managed to provide a wealth of proposals worthy of consideration.
Atop the list: Revamping family tax breaks. One option is to combine the personal exemption, standard deduction and the child credit into one credit. The earned income credit and the refundable extra child credit for low incomers would also be consolidated. The other choice would combine the earned income credit, the dependent exemption for kids and the child credit into a single credit. Because many of these tax breaks require complex calculations, Congress will likely opt for some form of simplification.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
And restructuring education tax incentives. There’s widespread agreement that the hodgepodge of the American opportunity credit, the lifetime learning credit and the tuition deduction is confusing. Melding them into one credit would help.
Defanging the alternative minimum tax, or possibly even repealing it. Lawmakers know the AMT is affecting far more taxpayers than it was intended to. Options include increasing exemptions and eliminating several tax preferences.
Easing the scope of the kiddie tax. Under current law, dependents with investment income over certain thresholds are taxed at their parents’ rates. The leading options are to raise the threshold so the tax affects fewer dependents and to use the rate schedule for trusts to figure tax on excess investment income.
Simplifying the huge menu of savings plans. Two of the board’s proposals have decent shots: Combining 401(k), 403(b) and 457 plans into one standard plan. And consolidating all health and education savings plans...flexible spending plans, health savings accounts, Archer MSAs, Coverdells, 529 plans...into a single plan.
Turning to business taxes: Reducing the maximum corporate tax rate. The board did not suggest a particular rate. But there is a consensus in Congress that the current 35% top rate makes it hard for U.S. companies to compete overseas.
Broadening the corporate tax base is the flip side of a rate cut. Tax reform won’t result in a net tax cut for business, so many deductions will be wiped out. Among the more plausible options offered by the board are eliminating the deduction for domestic production and limiting the deduction of interest on corporate debt.
Discussions on bigger-ticket items such as personal tax rates will come later. The board wasn’t asked to recommend major tax reform, such as the 1986 overhaul, which consolidated five tax rate brackets into two. That’s why the report is silent about revising the tax brackets. Remember, to sell tax reform to the public in 1986, Congress funded tax cuts for individuals with a $120-billion tax hike on business.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

-
Four Surprising Signs You’ll Never Retire (and How to Fix Them)
Gearing up to retire? If any of these four signs ring true, you may want to make some changes before you do.
-
Stocks Rise After Trump-Powell Fed Tour: Stock Market Today
Nvidia hit a new all-time high intraday, but another renowned semiconductor name and some less iconic stocks were bigger movers Friday.
-
Five Ways Trump’s 2025 Tax Bill Could Boost Your Tax Refund (or Shrink It)
Tax Refunds The tax code is changing again, and if you’re filing for 2025, Trump’s ‘big beautiful’ bill could mean a bigger refund next year, a smaller one, or something in between. Here are five ways the new law could impact your bottom line.
-
New SALT Deduction Could Put Thousands Back in California Homeowners’ Pockets
Tax Breaks The federal state and local sales tax (SALT) deduction cap is higher this year, and could translate into bigger savings for Golden State homeowners.
-
Money for Your Kids? Three Ways Trump's ‘Big Beautiful Bill’ Impacts Your Child's Finances
Tax Tips The Trump tax bill could help your child with future education and homebuying costs. Here’s how.
-
New Cap on Gambling Loss Deductions Begins Soon: What to Know Now
Tax Changes A gambling losses tax deduction cap in Trump’s “big beautiful bill” is causing an uproar. Here’s what you need to know.
-
Key 2025 Tax Changes for Parents in Trump's Megabill
Tax Changes Are you a parent? The so-called ‘One Big Beautiful Bill’ (OBBB) impacts several key tax incentives that can affect your family this year and beyond.
-
Elon Musk and Most Taxpayers Don't Like What's in Trump's 'Big Beautiful Bill'
Tax Policy President Trump is betting big on his newest tax cuts, signed into law on July 4. But not everyone is on board.
-
2025 SALT Cap Could Hurt Top 'Hidden Home Cost'
Tax Deductions The GOP tax bill could make hidden homeowner costs worse for you. Here’s how.
-
No Social Security Tax Changes in Trump’s 'Big Bill'? What Retirees Need to Know
Tax Policy Eliminating taxes on Social Security benefits is missing from President Trump’s tax overhaul. Here’s why and what an alternative offering could mean for retirement taxes.