What the Proposed Tax Reform Plan Will Mean for You

Source: Flickr/TaxCredits.net.

For the past few years, Rep. Dave Camp (R-Mich.) has been working on a vast overhaul of the U.S. tax system to make it less complicated and better for economic growth. This week, the House Ways and Means Committee unveiled the efforts of his work in what's being called the Camp Plan. Read on for more on the Camp Plan's proposals and what it would mean for you.

Simpler tax system
The current U.S. tax code runs a mind-boggling 70,000 pages long. The Camp Plan simplifies and repeals more than 220 sections of the code, cutting the whole thing by 25%. The biggest proposed cuts to the tax code include:

  • The repeal of the Alternative Minimum Tax, or AMT.
  • The repeal of the deduction for state and local tax payments.
  • Simpler tax rates for capital gains and dividends.
  • The repeal of deductions for personal exemptions.
  • A simpler Earned Income Tax Credit.
  • The combination of education tax credits from four programs to one.
  • The end of the traditional IRA and the move to a Roth IRA accessible to everyone.
  • A cap on mortgage interest deductions on mortgage indebtedness above $500,000.

For these cuts in the tax code, the plan proposes a few big changes for individuals.

Larger standard deduction and child tax credit
Under current tax law, taxpayers get a standard deduction of $6,100 for individuals, $8,950 for heads of households, and $12,200 for married individuals filing a joint return. The Camp Plan would increase the standard deduction to $11,000 for individuals and $22,000 for joint filers, though it should be noted that the deduction would phase out for earnings above $358,750 and $517,500, respectively. The child tax credit would be increased 50% from $1,000 per child to $1,500 per child and would be indexed to inflation.

New lower rates
In addition to the increase in the standard deduction, the Camp Plan proposes new lower tax rates for many individuals.

2015 Estimated Income Brackets for Single Filers

2015 Estimated Income Brackets for Joint Filers

Current Tax Rate

Camp Plan Tax Rate

<$9,200

<$18,400

10%

10%

$9,200-$37,400

$18,401-$74,800

15%

10%

$37,401-$90,600

$74,801-$151,100

25%

25%

$90,601-$189,000

$151,101-$230,100

28%

25%

$189,001-$410,950

$230,101-$410,950

33%

25%

$410,951-$412,650

$410,951-464,200

35%

25%

>$412,650

>$464,200

39.6%

35%

Source: Joint Committee on Taxation.  

The Camp Plan simplifies the tax system from the current seven brackets and the AMT, to just three brackets of 10%, 25%, and 35%.

Investment income
Under the Camp Plan, short-term capital gains would still be taxed as ordinary income. Long-term capital gains and dividends would be taxed at 60% of the taxpayer's marginal income rate. So if you were in the 35% bracket, your long-term capital gains rate would be 21%, not including the additional 3.8% Net Investment Income Tax on incomes above $200,000. So in all, your rate would be 24.8%.

New corporate tax rates
The U.S. currently has the highest corporate tax rate in the industrialized world. The Camp Plan proposes to significantly change that with a new proposed corporate tax rate of 25% and a modernized foreign profits taxation system. You can read a synopsis of the proposed corporate tax system here.

Faster economic growth
Overall, the Joint Committee on Taxation expects that the Camp Plan would be a net positive to the economy, with the simplified and lower tax rates yielding 1.5% more GDP growth annually and an additional $700 billion in tax revenue over the next decade. Even better, for a variety of reasons, Camp thinks these numbers are low and will be revised upward upon further review, meaning more growth for the economy.

Foolish bottom line
These changes to the corporate tax system would be a net positive if adopted, but they shouldn't change your investing strategy. When it comes to your investments, you should continue to educate yourself, find great companies, and invest for the long term, no matter what happens in Washington D.C.

Of course, it's anybody's guess at this point whether the bill will pass and, if it does, what will change. But one thing is certain: In both the public and private sectors, governance functions best when stakeholders educate themselves, take an active interest in what's going on, and hold their representatives accountable. So take a moment to let your representative know what you think of the Camp Plan or write directly to the House Ways and Means Committee at TaxReform.gov.

Stocks for the long haul
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 


Read/Post Comments (3) | Recommend This Article (5)

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 March 03, 2014, at 2:52 PM, XXF wrote:

    This proposal doesn't change several of the idiotic things wrong with our current tax system. For instance why do we insist on taxing people into poverty (and taxing the already impoverished into worse poverty)? Rather than taking the poor's money and then doling it back out after all sorts of levels of lobbyists and bureaucrats take a piece why not just reduce the tax rate to zero on the poor and instantly raise their incomes by 10%? If there are still people in need of public assistance after that we can look into how generous we should be in supporting them as a country, but the idea that we tax people into poorness and then argue about how generous we should be in support of the people we made poor has got to be one of the stupidest things we do as country.

    I am, however, a huge fan of any proposal that begins to phase out the mortgage interest deduction (lower the cap to $500,000 and don't index it to inflation is a good start). Why anyone ever thought that we should write part of the tax code in such a way that encourages people to carry huge debts is absolutely beyond me. If we wanted to encourage home ownership (which may lead to positive externalities, which is how the discussion should be framed) we could EASILY have done so with a home ownership tax credit, but instead we try to encourage it by enticing people to take out huge, expensive, tax subsidized, mortgages.

  • Report this Comment On March 03, 2014, at 11:56 PM, AlexWilsonsBlog wrote:

    Why can't we just adopt a flat tax system or better yet, a national VAT tax with limited exceptions. Tax those that spend, not those that save. Plus the amount of money you would make on the underground economy... it would eliminate "under the table" dealings because the money would be taxed at spending, not earning.

    You will now get taxes from:

    - tip earners that don't claim them

    - illegals getting benefits from the system but not paying taxes

    - all the cash earners at craft shows, handymen, yard workers, etc.

    - illegal activities such as prostitution and drugs... they have to buy supplies for their trade

    Most states already have a system in place to collect the tax. It would not be difficult to pull it off. Would consumer prices go up? Absolutely, but then again, so would your income. Keep the exceptions to a minimum.

  • Report this Comment On March 08, 2014, at 10:05 PM, leradron wrote:

    Alex, your comment would get a lot more traction if all the examples you gave weren't people at the lower end of the economic spectrum. What can be gained by taxing the spending of those folks is extremely immaterial relative to the spending of higher earners.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2860818, ~/Articles/ArticleHandler.aspx, 8/22/2014 4:24:59 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement