First, the standard deduction (i.e. no itemizing) is used by 70% of taxpayers. So, limiting itemized deductions would only affect 30% of taxpayers, many of which would earn higher income. Second, many itemized deductions, except for medical and casualty, tend to be taken by higher income tax payers. Examples include state/local income tax or sales tax, property tax, and mortgage interest deductions. Third, capping or eliminating itemized deductions would be steps towards reform in the tax code.
Here are some specific itemize tax deductions changes I think are worth considering:
- Other tax deductions. Limit deductions for state/local tax, sales tax, property tax, and personal property tax, which are currently unlimited except for AMT. Start at $25,000 and reduce cap down to $15,000 over the next five years. For example, someone earning $250,000 in New York pay around $15,000 of state/local taxes.
- Mortgage deduction. Limit the mortgage interest deduction to $30,000, which would allow taxpayers with up to $500,000 mortgages to deduct interest. Deductible interest is currently limited to mortgages less than $1,000,000
- Charitable contributions. Limit charitable deductions to 50% of income or $125,000, which ever is less. Currently, charitable contributions are limited to 50% of income.
Of course, I believe there should be an equivalent amount of spending cuts instead of the increase tax revenue being wasted on additional government spending.
For more on New Beginnings, check back every Sunday for a new segment.
This is not financial or tax advice. Please consult a professional advisor.
Copyright © 2012 Achievement Catalyst, LLC
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