Election Day is almost here and the tax code is in flux, with the
presidential candidates presenting starkly different plans for
income-tax rates, capital-gains taxes, estate taxes and other key
provisions for 2013 and beyond.
But one idea is gaining support from both political parties: cutting
individual income-tax breaks. Republican presidential candidate Mitt
Romney has advocated putting an overall limit on deductions such as the
ones for home-mortgage interest and state and local taxes, while
President Barack Obama wants to cut the value of those and others, but
only for top-bracket taxpayers. It is too soon to predict exactly what will happen to which benefits, or when. ...
Overhauling the tax code could produce a simpler and more efficient
system, say economists in both political parties. The individual income
tax brings in more revenue than any other federal levy—about 47% of the
total—yet it forgoes almost as much to scores of exceptions for mortgage
interest, employee health insurance, capital gains, charitable
donations and many more. (Please see the table [right].)
In fiscal 2011, for example, the individual income tax raised $1.1
trillion, but "lost" $953 billion to such breaks, according to estimates
by Congress's Joint Committee on Taxation. The Simpson-Bowles deficit-cutting
commission and Mr. Romney both have suggested cutting tax rates even as
deductions are pared back. Recently 80 CEOs of major companies joined
them, calling on Congress to enact "comprehensive and pro-growth tax
reform, which [cuts tax breaks], lowers rates, raises revenues and
reduces the deficit."
Such an overhaul could make any remaining tax breaks less valuable.
In the current system, a taxpayer in the 35% bracket saves 35 cents per
dollar of deductions. "If rates are reduced, the value of deductions and
exemptions will fall proportionately," says Roberton Williams, a tax
expert at the Tax Policy Center in Washington.
In general, experts say, the biggest tax breaks are likely to be the
ones that will attract the most scrutiny, so knowing what might be in
play is the first step in changing your strategy. Here is a roundup of
some of the most widely used tax benefits and who uses them, plus tips
for maximizing them where possible.