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President Obama, Congress, Fix the Tax Code Now

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For months, elected government officials have held the American public hostage with their seeming inability to address critical issues. With the election over and done with, it's finally time for government leaders to act like leaders and start working on building some long-awaited certainty on our hodgepodge of tax laws currently on the books.

What's already gone
Already, a number of tax laws that were in effect for last year's tax returns have expired. It's not too late to bring them back retroactively, but any delay in doing so could force the IRS to hold off on coming up with complying tax forms. That in turn could force early filers to wait before they can file and receive much-anticipated refund checks.

Arguably the most substantial already-expired provision is the annual patch to the Alternative Minimum Tax. Current law allows an exemption from the AMT, but the amount isn't indexed for inflation. As a result, Congress has to pass a law every year that temporarily increases the exemption, but it has never been able to muster enough support to put a more permanent fix into place. The fallout from a potential failure to pass an AMT patch is huge, with millions of taxpayers possibly paying as much as $8,000 more in income taxes.

But several other provisions have already officially gotten chopped and need government action to bring them back. Among them are deductions for college tuition and other higher education, the choice to use state sales taxes as an itemized deduction, favorable treatment for charitable donations from IRAs, and deductions for teachers' school expenses.

What's going
Meanwhile, plenty of other provisions are set to change at the beginning of 2013, making up what's been well publicized as the fiscal cliff. The biggest changes are the increases of tax rates from their current bracket structure ranging from 10% to 35% to higher rates stretching from 15% to 39.6%. Special rates on dividends and capital gains are also set to expire.

But a host of other provisions are set to see big changes:

  • Favorable provisions for the Earned Income Tax Credit expire, reducing the maximum credit amount for taxpayers.
  • The temporary payroll tax holiday that reduced the amount of tax withheld from paychecks for Social Security by 2 percentage points is set to expire, pushing Social Security withholding back up to 6.2%.
  • The child tax credit is slated to drop from $1,000 to $500.
  • The contribution limits for Coverdell Education Savings Accounts will drop from $2,000 to $500, making them even less useful for college savings.
  • Credits for college education and child care expenses will get reduced.

More tax reform needed
Yet beyond the immediate needs to address urgent issues are far-reaching reform ideas that the government needs to address. The link between lobbying and corporate tax benefits, for instance, disturbs many taxpayers' sense of fairness, with General Electric (NYSE: GE  ) , Boeing (NYSE: BA  ) , and Verizon (NYSE: VZ  ) among those spending big money to earn valuable tax subsidies. GE and Boeing also made a list of companies with very low effective corporate tax rates, even as GE, Oracle (Nasdaq: ORCL  ) , and Cisco Systems (Nasdaq: CSCO  ) seek a repatriation tax holiday to bring overseas cash back into the country.

To their credit, both candidates saw the need during their campaigns for extensive tax reform proposals. Although political expediency kept details to a minimum, major changes are likely to happen in the coming months and years. Despite fears of gridlock due to a divided Congress, pressing matters like the ballooning national debt and the future of the ailing Social Security system demand a faster pace of action.

Watch and act
As the end of the year approaches, it'll be crunch time for lawmakers to move on tax provisions, especially ones that they'll need to enact retroactively. If your elected representatives, whether new or incumbent, are slow to act, take a minute and give them a push by getting in contact with them. The financial health of the nation is at stake.

The prospect of repatriation taxes certainly isn't the only thing affecting Cisco Systems right now. Once a high-flying tech darling, Cisco is now on the radar of value-oriented dividend lovers. Find out whether Cisco Systems is a buy in our latest premium report. Our top analysts share their thoughts now and also have you covered with a full year of free updates to keep you informed as its story changes, so click here now to read more.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.


Read/Post Comments (15) | Recommend This Article (26)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 07, 2012, at 9:34 AM, remahtim wrote:

    Why would you think anyone is interested in fixing the tax code? We just voted for bigger government and more taxes. I say let the tax cuts expire - that is the will of the people. We have spoken.

    Higher taxes on everyone, but me!

  • Report this Comment On November 07, 2012, at 9:49 AM, aquapong52 wrote:

    Dream on.

  • Report this Comment On November 07, 2012, at 10:57 AM, Mathman6577 wrote:

    As long as Obama leads and stops doing the blame game we could have fiscal and tax reform. And it's not going to happen if he expects the GOP in the House to kowtow to his agenda. Compromise starts w/ the leader -- not the followers !!!!!

  • Report this Comment On November 07, 2012, at 11:51 AM, mdk0611 wrote:

    Another major change looming for 2013:

    Estate tax exemption drops from $5 million to $1 million and the top estate tax rate increases to 55%.

    Think successful small business owners are looking at that?

  • Report this Comment On November 07, 2012, at 3:01 PM, rtichy wrote:

    @mdk0611-

    No, I don't think they are looking at that. Very few Americans show much capacity to plan real far ahead, even businessmen. AND nobody likes to plan for their death, or even to admit its going to happen.

    The estate tax exemption is real far down the list of things to address... after all, any successful businessman who hasn't already given his business to his kids and negotiated a substantial perpetual salary, hasn't been paying attention yet, so why expect him/her to pay attention as the favorable situation sunsets?

    Think George Steinbrenner planned his death so that his sons could get the Yankees tax free? I doubt it.

    Big, broad-based problems/situations need to be addressed first, IMO.

  • Report this Comment On November 07, 2012, at 6:01 PM, JadedFoolalex wrote:

    Good luck all you American Fools...I hope you guys avoid the Fiscal Cliff!

  • Report this Comment On November 07, 2012, at 8:04 PM, stevook21 wrote:

    We weren't fool enough to elect Romney!

  • Report this Comment On November 09, 2012, at 6:54 PM, donbcms wrote:

    With 41 Senators & 236 Congressmen all "Norquist Pledged" not to raise taxes on the RICH?? "AX THE TAX CODE"; with its $1.1Trillion in "breaks"; Plus 45% paying NOTHING?? THERE, is your "DEFICIT"??

  • Report this Comment On November 09, 2012, at 7:14 PM, famiglia112 wrote:

    Any discussion on tax reform obligates me to direct you to www.fairtax.org

  • Report this Comment On November 10, 2012, at 8:49 AM, Darwood11 wrote:

    Has anyone here ever taken the time to read the 1983 tax code? I did.

    The problem with tax reform is all of the favored treatments. Some individuals are named in that code. However, just about everyone gets some kind of break or favored treatment of some sort. For example, we all know about the home mortgage interest deduction, etc.

    So if we're going to implement real reform, the line of tax breaks and people asking for them to be excluded from any reforms will be very, very long. For example, does anyone really think the NAR and the builders will allow a tax code which reduces home mortgage deductions?

    Fair tax is like equality. It a word that's thrown around. There isn't any, and it isn't about the rich. That is really some politician's sound bit. For example, there are a lot of people in this country with their hands outstretched expecting an Earned Income Credit and related tax credits each year.

    The list is endless. So good luck!

  • Report this Comment On November 10, 2012, at 9:33 AM, Chris1016 wrote:

    I have some issues with this article. First, the fact that the AMT is not indexed to inflation is meaningless since the official CPI is only 2% and the AMT effects so few taxpayers.

    Why would we want to extend the 2% reduction in SS taxes? That reduction directly increases the deficit and unless you're a socialist it's the "fairest" tax of all. Everyone pays the same percentage and the $110k income cap is balanced by a cap on benefits that is heavily skewed towards low income brackets.

    I've never understood why I should subsidize the irresponsible growth of someone elses family. If you can't afford the children, don't have them. Same with the deduction for tuition.

    At the same time so called "corporate subsidies" are attacked when in reality most of the "subsidies" are deductions for legitimate business expenses and overseas endeavors. Why should a corporation pay taxes on income that wasn't generated in the US? And besides, the consumer pays all corporate taxes anyway. If Wal-Mart didn't have to pay taxes, it would cost me less at checkout.

    I say all this with 3 children, 1 in college; employed by a large corporation; 3rd quintile for household income.

  • Report this Comment On November 10, 2012, at 2:50 PM, skypilot2005 wrote:

    Dan wrote:

    "If your elected representatives, whether new or incumbent, are slow to act, take a minute and give them a push by getting in contact with them."

    What is the President's position?

    What are the details of his proposed budget?

    He is the leader of the Democratic Party and the country.

    Sky

  • Report this Comment On November 10, 2012, at 3:13 PM, StoneyTerp12 wrote:

    The AMT affects a lot of people (4 million last year) and will affect a tremendous amount of people without the "patch". I was at a tax conference yesterday where the CBO estimated 40 million people would be paying AMT without this year's patch. The problem is the exemption hasn't been changed since 1986, and even minor inflation over 25 years can cause lots of problems without inflation indexing.

  • Report this Comment On November 14, 2012, at 4:51 AM, lyka12 wrote:

    Thanks for this site..it really helped me a lot and will let me learn a lot

  • Report this Comment On November 17, 2012, at 1:45 PM, bhessel wrote:

    famiglia112,

    I had the same reaction. As for how to “sell” the Fair Tax, my suggestion is to focus on the corporatism that is embedded in the current income tax system, and demonstrate how basing government revenue on taxing income creates an irresistible honey pot to The Powers That Be, who are driven to capture control in order to utilize government power to get the rules to favor their own narrow interests.

    The Fair Tax eliminates this honey pot…well, actually, Mr. Caplinger’s piece inspired me to write a whole article on this subject:

    http://www.fool.com/investing/general/2012/11/16/tax-policy-...

    Brad Hessel

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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