Some Unfair Taxes That Need to Change in Case of Tax Reform

June 25, 2011 by  Filed under: Taxes 

As the government deficit looms and even gets larger, there is growing pressure for the government and Congress to come up with a solution to meeting its financial needs. However, with the complex tax code and the politics around the whole issue, it is hard to raise more revenues. Many policy experts are suggesting that this is an ideal opportunity to initiate a long-awaited tax reform. As opposed to having a quick fix for the deficit, a comprehensive reform could solve government funding for a long time while simultaneously reviewing some of the tax codes that are unfair or unnecessary. Some of these taxes that have been suggested for changes towards tax reform are:

The Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) was introduced to ensure that the high income earners paid some level of federal tax, irrespective of the tax credits that they claimed. Without the AMT, some high earners would not have to pay any taxes after claiming various credits. However, in spite of the good intent of the AMT, this tax has been subject to abuse by the lawmakers over the past years. Congress keeps making various adjustments to the AMT almost every year to relieve more taxpayers from being hit by the tax in a bid to buy more votes. On the other hand, AMT is used to raise more revenues, especially from the middle class in times of government deficits. Therefore, as opposed to using the tax as a political tool, it may be a good option to simply do away with the AMT.

Employee Private Health Insurance

The current tax code seems to be unfair to employees who are not provided health insurance by their employers. For such employees, the cost of health premiums is not an allowable expense for deduction. This is unlike that of employees who get health insurance benefits from their employers. The employer is allowed to deduct the premium costs and therefore, no tax is paid for the health insurance. The self-employed counterparts also get a similar benefit. They are allowed to deduct their health insurance benefits from their taxable income and they are therefore, not taxed on the health plans. Therefore, this only leaves the employee who pays his or her own health insurance premiums to be the only party that is required to pay taxes on health insurance.

Taxes on Social Security

Another tax that has been suggested for removal by many tax experts is the tax on Social Security distributions. Depending on one’s amount of Social Security distributions, a senior citizen may get to pay tax on 50% or 85% of the money received. The unfair part of this taxation is that Social Security contributions are taxed and therefore, taxing distributions amounts to double taxation.

Tax on IRA or 401(k) Accounts

Even after taxing Social Security, Uncle Sam is not yet through with the senior citizen’s cash. Funds in IRA or 401(k) accounts is also subject to taxation. There is a tax levied on the Required Minimum Distributions (RMDs) from these retirement funds accounts. There are talks to have a higher cap on the distribution of RMDs not to be taxed. However, many tax experts feel that this is not enough. They believe that the government ought to be more sensitive to the money made available to senior citizens, as they require the funds for their health and well being. Therefore, tax reform could consider doing away with the tax on RMDs.

Homeowners versus Home Renters Tax Benefits

Another seemingly unfair tax code is the credits that are given to homeowners but are conspicuously absent for house renters. Homeowners are given tax relief on their mortgage interest payments and their property taxes. They also do not pay any taxes on capital gains up to a cap of $250,000.00 and for married couples that file jointly, up to a maximum of $500,000.00. Over and above this, the homeowners also get tax credits for various energy-saving home improvements. The house renters get no tax relief whatsoever. Granted, the tax code seeks to promote taxpayers to own their own homes. However, most taxpayers who rent houses do so not out of choice but because they cannot afford to purchase a house. Therefore, the tax benefit seems to favor the wealthier taxpayers who can afford to take out a mortgage. If tax reform were to happen and be more “fair” for renters, the homeowner tax benefits should either be removed or similar tax benefits should be made available to renters.

Rob L Daniel and partners of Limon Whitaker & Morgan, for years have helped businesses and individuals Nationwide, with their delinquent IRS & State tax problems. The firm is based in Los Angeles, California USA. / Tel:888.321.6188

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