TAX CHANGES DON'T CHANGE A TAXING SITUATION
CODE EXPECTED TO BE JUST AS CONFUSING AND FRUSTRATING
AS EVER FOR US TAXPAYERS
By Dolores Kong
12/24/2000
The Boston Globe
As certain as death and taxes, tax wrangling will live
on in 2001. The new year will bring some federal and
state tax changes already approved. And it will give
President-elect George W. Bush the chance to navigate
the choppy waters of US tax policy.
Just as certain, the American taxpaying public will
continue to be frustrated, mystified, and even
outraged at the complexity and seeming unfairness of
the nation's tax code.
Campaign pronouncements aside, what's almost certainly
not going to happen under a Bush administration, tax
policy experts say, is a sweeping overhaul of the tax
system. They don't expect a major reform, such as that
of 1986, when President Ronald Reagan cut the top
marginal tax rate from 50 percent to 28 percent in an
effort to simplify taxpaying. Nor do they foresee a
replay of the headline- grabbing debate of the 1996
presidential campaign over a flat tax.
"Bush has not really sent signals that he's interested
in reform," although he wants to cut taxes by $1.5
trillion over 10 years, said Jon Bakija, assistant
professor of economics at Williams College, who
co-authored a book on tax policy. "His [Bush's] nature
is more incremental."
Bush's tax plan calls for an across-the-board cut in
income tax rates, replacing the current five-rate tax
structure that tops out at 39.6 percent with a
four-rate structure peaking at 33 percent. The plan
would also phase out the estate tax and reduce the
so-called marriage tax by reinstating a special
deduction for two wage-earner couples, among other
measures.
Even though anger at the income tax has been
bipartisan over the years - President Jimmy Carter
called it "a disgrace to the human race" in 1977 - any
changes to it will probably be incremental because of
the nature of political compromise, according to tax
specialists.
"My guess is the president-elect will probably have
some success in implementing some targeted tax
reductions," said James Alm, chairman of the economics
department at Georgia State University's Andrew Young
School of Policy Studies, who has authored studies on
the impact of taxes on married couples and single
people.
But as to the entire tax cut that Bush is seeking, "I
think that's going to be a tough sell, given a divided
Congress," Alm said. Bush's biggest chance of success,
according to Alm and other tax policy experts, is a
reduction in the marriage tax and the estate tax.
So that means the American taxpayer will most likely
continue to be befuddled and frustrated by one of the
most complicated tax codes around.
"I can't believe that people accept this situation. To
the average person, the tax form is a magic trick.
Abracadabra!" said Daniel Feenberg, research associate
with the National Bureau of Economic Research in
Cambridge. "It's just shocking."
Even before Bush takes office, some incremental tax
changes take effect Jan. 1 at the federal and state
levels.
Federal changes for the 2001 tax year:
- Treatment of long-term capital gains. Individuals in
the 15 percent tax bracket will immediately see their
capital gains rate cut from 10 percent to 8 percent on
profits from sale of investments held more than five
years. So, for example, if an investor bought stock in
1995 and sold it for a $5,000 profit in January, the
capital gains tax due for the 2001 tax year would be
$400 rather than $500.
But individuals in the 28 percent and higher marginal
tax brackets will qualify for a lower capital gains
rate - 18 percent vs. 20 percent - only on investments
they acquire on or after Jan. 1 and hold for more than
five years.
There is a special election that these higher income
taxpayers can take, however, to qualify assets
acquired before Jan. 1 for the 18 percent: Pretend to
sell the investment and immediately repurchase it at
the start of 2001, pay the old capital gains tax on
the make- believe transaction, and start the clock on
the five-year holding period.
"It's as if you sold it to the government and bought
it back," said Mark H. Misselbeck, a certified public
accountant and senior tax manager for Levine, Katz,
Nannis & Solomon P.C. in Needham.
Although this special election exists, Misselbeck and
fellow certified public accountant Eugene Tarsky say
it may not be worth the hassle to save 2 percent after
five years.
"Say I own an asset that cost me $100, and it's now
worth $105, but I expect in five years it might be
worth $200. I might be willing to elect the $5 gain in
2001, so I could then report five years from now the
$95 gain at the reduced rate," said Tarsky, who has
his own firm in Norwood and is on the public relations
committee of the Massachusetts Society of CPAs.
"But if I own an asset that cost me $100, and it's
worth $200 now, and I expect in five years it's going
to be worth about $600 or $700, I'm not so sure I want
to pay tax on the $100 gain now."
Agreed Mark Kaizerman, a certified financial planner
with his own firm in Natick: "Taxes are important, but
certainly holding on to an investment or putting off
an investment decision because of taxes is not the
thing to do."
- Student loan interest. The amount that can be
deducted will increase to $2,500, from $2,000, for
2000. But the deduction gets phased out based on
adjusted gross income.
- Use of car for business, job-related moves, and
medical transportation. The standard mileage allowance
for taxpayers who use their cars for these purposes
will rise to 34.5 cents per mile, from 32.5 cents in
2000.
- Retirement plan contribution limits. The limit for
so-called 457 plans goes from $8,000 to $8,500; for
SIMPLE plans, from $6,000 to $6,500; and, for Keogh
plans, from $30,000 to $35,000. The limits remain the
same for 401(k) and 403(b) plans, at $10,500; and for
SEP plans, at $25,500.
State changes for 2001 tax year:
- Charitable contributions. For the first time, as a
result of a change in state law and a ballot
referendum, charitable contributions will be
deductible on state income tax returns. But unlike the
charitable deduction allowed on the federal tax
return, taxpayers do not need to itemize deductions.
- Income tax reduction. Because of a ballot
referendum, the state personal income tax rate will
drop from the current 5.85 percent to 5.6 percent for
tax year 2001, to 5.3 percent for tax year 2002, and
to 5 percent for tax year 2003 and beyond.
- Student loan interest. The deduction will no longer
be limited to the amount of the federal student loan
deduction; it will equal the full amount of the
interest paid.
- Rent deduction. The deduction increases to 50
percent of rent paid, or $3,000, whichever is less,
from the 50 percent/$2,500 limit in 2000.
- Earned income credit. The Massachusetts credit for
low-income taxpayers who qualify climbs to 15 percent
of the federal credit allowed, up from 10 percent.