New Senate Proposal Could End the “Parent Tax”

September 24, 2013 — 1 Comment

With many tax reform proposals floating around Congress, Senator Mike Lee (R- UT) outlined his newest plan in a speech titled “Tax Reform, the Family, and the Pursuit of Happiness.” Senator Lee characterized his ideas as “more pro-growth, pro-opportunity, and pro-family” than our current system.

His bill, The Family Fairness and Opportunity Tax Reform Act, would create a more simple system in which there are only two individual tax income rates: a 15% tax rate on all income up to $87,850 for single taxpayers ($175,700 for married taxpayers) and a 35% tax rate on income above those thresholds.

Next, Sen. Lee noted that the biggest problem in our current tax system is the problem called the “Parent Tax Penalty.”

“Under the current system, parents receive no additional benefits for having contributed or sacrificed hundreds of thousands of additional dollars raising their kids. This is the inequity my bill is designed to highlight and address.”

He plans to fix this by eliminating most deductions and credits not related to children. He would replace these with a $2000 personal exemption and standard deduction; a new charitable deduction; and a new mortgage interest deduction.

New $2000 Credit

To simplify the Tax Code, the tax credit replacing the personal exemption and standard deduction does make sense. However in theory, this new credit would disadvantage seniors and the blind since they qualify for an additional standard deduction under the current system, but the bill would eliminate this additional deduction.

New Charitable Deduction

Sen. Lee proposes that all charitable deductions be available to taxpayers without itemizing. “Similar ideas have been favored by many taxpayers since, more taxpayers at the bottom donate a larger percentage of their income (as opposed to total dollars) than those in the upper brackets but those taxpayers have not been able to take advantage of the deduction since they don’t itemize.”

 New Mortgage Interest Deduction

Presently, you can deduct interest on home acquisition debt of up to $1 million, including primary and second homes. There has been a tax revenue loss attributed to the current mortgage interest deduction.

“The loss of tax revenue attributable to the deduction was approximately $72.1 billion in 2006; $89 billion in 2008 and is expected to be $93 billion this year.”

Sen. Lee’s proposal would remove the need to itemize in order to claim the deduction; it would keep the cap low at $300,000.

According to Forbes Tax column contributor Kelly Erb, “since statistically, taxpayers in the higher tax brackets take the most advantage of this deduction, lowering the cap would not only reduce the tax benefit available to those at the top but, the real estate industry would argue, diminish the incentive to borrow more money to buy houses (we’re supposed to think that’s a bad thing).”

The proposal also looks to cut the Alternative Minimum Tax, the 3.8% Medicare surtax on investment income, and the 0.9% surtax on wages for high-income taxpayers.

As seen in the aforementioned additions and eliminations, he looks to “level the playing field to treat all taxpayers more equally” and to “restore opportunities to working parents and their children to pursue happiness that right now federal policy unfairly denies them.”

Congress, Senator Mike Lee (R- UT) outlined his newest plan in a speech titled “Tax Reform, the Family, and the Pursuit of Happiness.”

With all the eliminations, there are additions to the Tax Code; these additions deal with Sen. Lee’s focus on children.  There is currently a $1,000 child tax credit in place, and he looks to add another $2,500 per child tax credit for “all parents of younger children.”

He noted that this credit would apply to income and payroll taxes on both the employer and employee side.

Erb further states that she “can’t think of any other tax preference item of that size (outside of the itemized deduction) available to an average taxpayer family in the current Tax Code.”

To understand the gravity of this proposed tax preference, Erb provides an example:

Remember that credits are a dollar for dollar reduction in your tax bill so, for example if you had three children and were in a 15% bracket, the additional credit would be the equivalent of a $50,000 deduction ($50,000 x 15% = $7,500). That’s huge.

Furthermore, Sen. Lee wants to prove that he stepping away from Conservative party lines to show his seriousness on this proposed legislation. Unlike usual Republican cuts to certain existing child tax provisions, he wants to keep these forms of taxpayer welfare intact.

In particular, he wants to keep intact the Earned Income Tax Credit and the Child & Dependent Care Credit.

The Earned Income Tax Credit is a refundable tax credit dependent on the number of children you have. When the credit exceeds the amount of taxes owed, it results in a tax refund to those who claim the credit.

Similarly, the Dependent Care Credit is a nonrefundable tax credit available for those taxpayers who take care of qualifying individuals.

IRS Section 21 defines a qualifying individual as:

  1. Dependents under age 13 for whom a dependency exemption may be claimed,
  2. Dependents of any age who share the same principal place of abode as the taxpayer and are physically or mentally incapable of taking care for themselves,
  3. Spouses of any age who share the same principal place of abode as the taxpayer and are physically or mentally incapable of taking care for themselves, or
  4. Certain dependent children of divorced parents.

Sounds all dandy? There may be a few problems…

In 2008, the stimulus package sent out rebates to families, and the rebate increased with each additional qualifying child.

“The numbers of folks who suddenly remembered they had children appeared to skyrocket; ‘taxpayers’ were coming out of the woodwork to file returns simply to get additional money. That’s not the way our system is supposed to work,” notes Erb.

It is laudable that Sen. Lee has removed himself from party lines in presenting this proposal. However, it is highly unlikely that this bill will make it through Congress. It disfavors seniors, childless taxpayers, high-income taxpayers, and large mortgage holders. These proposals keep replacing one set of tax preferences for another set, but that does not necessarily mean it is a simplification of the Tax Code.

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  1. Which State Taxes the Poor the Most? « The Joy of Tax Law - September 26, 2013

    […] can benefit poor families. It notes that states can enact the Earned Income Tax Credit (EITC).  The Earned Income Tax Credit is a refundable tax credit dependent on the number of children you have. When the credit exceeds […]

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