A New Tax Reform Plan on the Horizon

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Experts believe if the new tax reform plan is done "right," then it should level the playing field, simplify tax code, and apply taxes at decreased rates on a broad base of activities. One major goal of the reform plan is to decrease tax avoidance while increasing economic competitiveness.

The Act, known as the Bipartisan Tax Fairness and Simplification Act of 2010, was the work of Dem. Senator Ron Wyden of Oregon, and Rep. Senator Judd Gregg of New Hampshire. If worked out properly, taxpayers will see the federal tax burden lowered. The Act requires that the Alternative Minimum Tax would be eliminated, and would reduce the income tax rates from six to three. It will double the standard deduction for single filers bringing it to $15,000, while joint filers would see it rise to $30,000.

The new reform plan will also change how dividends and capital gains are taxed by the government. There would be capital gains exclusion, which is that the first 35% of quality dividends and long-term gains would be tax free, the rest would be taxed as ordinary income. Today long-term capital gains are at a rate of 15%, with the reforms in place the rate would increase to 22.75%.

The new proposal would also expand tax-free savings. It would consolidate all IRAs into one Retirement Savings Account and create a Lifetime Savings Account. Combine the two accounts, and Americans can save as much as $7,000 a year free of taxes, in addition to their 401k savings.

Two popular tax breaks have been preserved in order to keep the reforms politically viable. The health care tax exclusion and mortgage interest deduction will both remain in place. The new plan would also extend the earned income tax credit permanently, as well as the dependent care credit and child tax credit.

In order to make the US more competitive internationally, and attract investors from abroad, the plan proposes that the corporate income tax be set to a flat rate of 24%, replacing the 35% top rate. The proposal will also repeal corporate tax credits, deductions and exclusions in exchange for the decreased rate.