Tax Reform’s Phase 2 Should Make Middle Class Tax Cuts Permanent
Ryan Ellis, Forbes Contributor
Permanently “repealing” the AMT (est. score $300 billion). The tax law all but eliminates the alternative minimum tax (AMT) in tax years through 2025, a relief to the 5 million families that have been paying it and the millions more who had to calculate it. The AMT “standard deduction” is now so high that almost no one will pay the AMT anymore. Keeping the all-but-repealed AMT as deadwood on a permanent basis will do a lot of good in suburban districts for those running on tax relief. It also removes a source of complexity in the tax code which has been a hindrance to tax reform.
So that’s the tax relief. How to pay for it? Two tax reforms were put in place as part of the tax law, but they are also scheduled to expire. They should be made permanent.
Repealing the personal and dependent exemptions (est score $550 billion). The old exemptions for tax filers and dependents are no longer needed. The personal exemption taken by tax filers and their spouses is rolled into the doubled standard deduction. The dependent exemption is more than made up for with the doubled child tax credit. This also eliminates the need for a personal exemption phaseout (“PEP”).
Keeping the itemized deduction limits in place permanently (est. score $340 billion). There were two major limitations put in place for those relatively few families that still choose to itemize their deductions instead of take the standard deduction. First, the overall deduction for state and local taxes (SALT) is limited to $10,000. Second, the overall indebtedness limit on new mortgages is capped at $750,000 (and home equity loan interest unrelated to acquisition indebtedness isn’t deductible at all). There’s also an increase in the amount that can be deducted as charitable contributions in any given year. Most other itemized deductions are eliminated. The high income phaseout of itemized deductions (“Pease”) is also eliminated.
Put these five policies together, and you have a very close to revenue neutral package. This mixture of middle class items not only should be popular politically, but it also cements in place a tax code in which relatively few families are attached to big ticket tax write-offs for mortgage interest, state taxes, and charitable gifts. That alone should be worth the price of admission for serious tax reformers.