Panel targets cherished tax breaks

LIMITS ON MORTGAGE AND HEALTH-INSURANCE DEDUCTIONS WOULD OFFSET OTHER REFORMS

Author: Mark Schwanhausser

Published: October 12, 2005

Zeroing in on ways to protect middle-class taxpayers from the alternative minimum tax, President Bush's tax advisory panel said Tuesday it might recommend whacking two of California's most cherished income-tax deductions: mortgage interest and health insurance.

``Choose your poison,'' said Claudia Hill, a Cupertino tax preparer who testified to the panel in March about the need to reform the AMT system.

Meeting in Washington on Tuesday, the blue-ribbon Advisory Panel on Tax Reform agreed that homeowners should be allowed to write off all their mortgage interest only on loans less than about $350,000 -- and maybe even lower -- far below the typical loan needed to buy a home in Silicon Valley. That's roughly one-third the current maximum of $1.1 million in mortgage and home-equity debt.

The panel also is leaning toward limiting the deduction employers can take for paying the premiums for their workers' health insurance. Currently, there is no limit to that deduction, and workers pay no income tax on that compensation.

The panel discussed capping tax breaks for health insurance to the roughly $11,000 benefit provided to members of Congress and federal workers, but reached no consensus. The panel also debated whether to allow employers to continue taking a write-off but force workers to pay tax on the employee benefit.

The irony is that such measures are intended to offset possible reductions in the alternative minimum tax, which is projected to raise $1.2 trillion in revenue from 2005 to 2015 if left as it is.

Created in 1969 as a tax on about 200 rich Americans who paid no income tax, the AMT is increasingly hitting middle-class Americans. It is especially common in Silicon Valley because it preys on taxpayers who pay high state and local taxes, high property taxes and cash in incentive stock options.

Left unchecked, the AMT is expected to hit 20 percent of Americans in 2006 and 30 percent in 2010, according to the Tax Policy Center. Because of the quirks in the tax rules, families earning $75,000 to $100,000 will be more likely to owe the AMT in 2010 than taxpayers with incomes of $1 million.

Appointed in January, the nine-member panel is scheduled to make its final recommendations to the Treasury Department by Nov. 1. President Bush plans to use the findings as a blueprint for overhauling the tax code next year.

One idea behind taking aim at two of America's biggest and most popular tax breaks is to make the income-tax system more fair to low- and middle-class Americans by reducing the write-offs that mostly benefit wealthier taxpayers. For example, wealthy workers benefit disproportionately when employers cover their health-insurance premiums and pay no tax. Likewise, most Americans take out much smaller mortgages than home buyers in Silicon Valley, where the median-priced single-family house sold for $714,000 in August.

``For us, a $312,000 mortgage may be standard, but in most parts of the country that's a very high mortgage,'' said Hill, who owns Tax Mam Tax Services Group, a tax-preparation firm.

Slashing the maximum mortgage that can be deducted also could have a compounded impact in California if state lawmakers moved to match federal changes in order to haul in more tax revenue, Hill said.