Congress rushing to change tax code

Author: Mary Deibel

Published: October 7, 2004

Tax changes large and small are headed your way in the crush before Congress quits to campaign for re-election.

A bill expected to clear Congress is laden with corporate tax breaks but contains relief for individuals, too:

- Sales taxes could be written off again, reopening a tax break President Ronald Reagan and Congress killed in the 1986 tax reform.

The change lets all itemizers deduct state and local income taxes or state and local sales taxes, whichever is more, on their 2004 and 2005 federal tax returns. Only income taxes are deductible now.

In practice, people in the 38 states and District of Columbia that have both income and sales taxes likely pay more in income tax, so the sales-tax deduction won't help unless they buy cars, boats and other big-ticket items one year and tally their receipts.

Big beneficiaries are people in eight states that rely on sales taxes and have no general income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. Chief sponsor Rep. Kevin Brady, R-Texas, says Texas taxpayers alone will save $1 billion a year.

- Stock options awarded to employees as incentives wouldn't be subject to federal FICA payroll taxes to finance Social Security and Medicare or unemployment taxes.

- Car donations to charity would be tightened, starting Jan. 1, 2005.

No longer may taxpayers merely write off the Blue Book value or provide the Internal Revenue Service with an appraisal of vehicles valued at $5,000 or more. Instead, charities must provide taxpayers with written substantiation of the value of any vehicle worth more than $500. Also, the deduction amount cannot exceed the gross proceeds the charity receives from the car's sale.

Flagrant abuses prompted IRS Commissioner Mark Everson to place a recent call to National Public Radio's popular "Car Talk" show. "Play it straight, don't inflate" the car's value, Everson warned Click & Clack's listeners.

- The SUV loophole would be narrowed to a $25,000 deduction, effective on enactment. A tax break approved in 2003 let small business owners write off up to $100,000 of the purchase price of SUVs and trucks that weigh 6,000 pounds or more. That prompted legions of doctors, lawyers and the like to write off purchases of luxury SUVs, including Cadillac Escalades, Lincoln Navigators and Hummers bought for personal use.

Sen. Don Nickles, R-Okla., pushed the reduction after his car-dealer son convinced him it was "a rip-off." Keith Ashdown, head of Taxpayers for Common Sense, calls the change "a small pearl in this pile of pork."

- A tax-simplification study by a bipartisan commission was deep-sixed to give President Bush time to try to make good on his campaign promise to "reform and simplify" the tax code.

Despite Treasury Secretary John Snow's letter warning against the dozens of narrow special-interest tax breaks for everything from imported ceiling fans to fishing tackle boxes, the White House indicates President Bush will sign the legislation if it passes.

A second bill signed into law Monday by Bush and supported by Democratic challenger Sen. John Kerry will avert major tax increases for millions of taxpayers rather than let these tax breaks expire Dec. 31, 2004. That measure, known as the Working Families Tax Relief Act, extends:

- The $1,000 child tax credit for families with children under 17 through 2009.

- Marriage penalty relief through 2008, largely by increasing the standard deduction for couples who file jointly to twice the level allowed to single taxpayers.

- The 10 percent tax rate on the first $7,000 income, or $14,000 for couples filing jointly, through 2010. Otherwise, the 10 percent rate was scheduled to apply to the first $6,000 income.

It also provides tax relief in 2005 for taxpayers subject to the Alternative Minimum Tax, a parallel tax system that denies many better-off taxpayers such popular write-offs as state and local taxes.

The measure is billed as a middle-class tax cut, but more than half the total tax breaks go to people with incomes between $100,000 and $500,000, reports Len Burman, a former Treasury official who co-founded the Tax Policy Center, a non-partisan Washington think tank.

Taxpayers who do best are high-income married couples with children under 17, says attorney-accountant Mark Luscombe of tax publisher CCH. Its analysis shows a two-child family with $100,000 income will see a $3,420 tax savings next year compared with $925 for the same-size family making $50,000.

Taxpayers in the top 20 percent pay two thirds of all federal taxes.