Sweeping Changes to Tax Laws to Benefit Middle Class and Business Introduced in House

Members of the Republican Study Committee (“RSC”) have announced the introduction in the Lower House of “The Economic Recovery and Middle-Class Relief Act of 2009,” an economic stimulus package.

The new proposed legislation is based on three main themes: 1) Support Families through Tax Relief; 2) Provide Economic Relief for American Businesses and Entrepreneurs; and 3) Save Future Generations from a Crushing Debt Burden.

Specifically, the bill has the following features:

Support Families through Tax Relief

1. Five Percent Across the Board Income Tax Cut. This provision would reduce the six federal income tax rates by 5% beginning with 2008, and make the new rates permanent. Under current law, by contrast, income tax rates will increase in 2011.

2. Increase the Child Tax Credit from $1,000 to $5,000. Under current law, families are eligible for a $1,000 tax credit for each child under the age of 17. This provision would increase, and make permanent, an increase in the child tax credit to $5,000 beginning in 2008. This will provide a substantial, immediate tax cut for middle-class families. The increased credit would not be refundable.

3. Make the Lower 15% Rate on Capital Gains and Dividends Permanent. The Jobs and Growth Tax Relief Reconciliation Act of 2003 lowered the top tax rates on capital gains and dividends to 15%. Under current law the lower rates currently in effect expire at the end of 2010, which means that the top capital gains rate will go back to 20% and the top tax rate for dividends will be 39.6%. This provision makes the 15% rate permanent.

4. Repeal the Alternative Minimum Tax on Individuals. The AMT was created in 1969 to prevent 155 wealthy taxpayers from using loopholes in the tax code to avoid paying taxes altogether. Under current law, the tax will hit more than 30 million people in 2009. The legislation would permanently repeal the AMT.

5. Permanently Repeal Required Distributions on Retirement Accounts. Under current law, senior citizens, beginning at the age of 70-and-a-half, are required to make mandatory withdrawals from their IRAs and 401(k)s. Though temporarily suspended for 2009, this provision in the tax code is scheduled to go back into effect in 2010 and for every year thereafter. The bill permanently repeals this provision.

6.  Make All Withdrawals from IRAs Tax- and Penalty-Free During 2009. As a general matter, the purpose of 401(k)s and IRAs is to incentivize retirement savings. The bill would, for 2009, make all withdrawals from IRAs penalty- and tax-free.

7. Increase by 50% the Tax Deduction on Student Loans and the Tax Deduction on Qualified Higher Education Expenses. Under current law, the tax code provides a tax deduction of $2,500 for interest on student loans and a tax deduction of $4,000 for higher education expenses. This provision would increase the value of both by 50% or to $3,750 and $6,000 respectively, and apply both provisions to a larger number of middle-class families by allowing any individual earning up to $75,000, or any family earning up to $150,000, to claim the full deduction.

Provide Economic Relief for American Businesses and Entrepreneurs

1. Full, Immediate Expensing. The bill would allow all businesses to immediately expense—or fully deduct on their tax returns—the costs of assets (including buildings) they purchase for their business in the year that they buy such assets (“Section 179” expensing). Under current law, businesses can only take limited deductions in pieces, over several years.

2. Significant Reduction in the Top Corporate Income Tax Rate. The bill would immediately cut the top corporate income tax rate from 35% to 25%, aligning it with the average rate in the European Union.

3. End the Capital Gains Tax on Inflation. The bill would index for inflation the cost basis used when calculating the capital gains tax on assets acquired before the end of 2009. Under current law, the capital gains tax is based on the difference in the original purchase price of the asset and the sale price of the asset.

4. Simplify the Capital Gains Rate Structure. The bill would allow corporations to benefit from the 15% capital gains rate. Under current law, individuals pay a top capital gains rate of 15%, but corporations are subject to a 35% top rate.

5. Make the R and D Tax Credit Permanent. The Research and Development tax credit is currently due to expire at the end of 2009. Originally enacted as party of President Reagan’s Economic Recovery Tax Act of 1981, it has since been extended on 13 separate occasions without being made permanent. The purpose of this tax provision is to spur research and development in the private sector.

6. Extend the Carryback Period for Net Operating Losses to Seven Years. A business incurs a net operating loss when its tax liability is negative in a given year. Under current law, there is a two-year carryback period for businesses to receive refunds on previously paid taxes. In other words, a business may receive a refund equal to their negative tax liability up to the amount of taxes paid over the previous two years. This legislation would extend this period from two years to seven years.

Save Future Generations from a Crushing Debt Burden

1. No Trillion Dollar Spending Spree. This legislation does not contain one penny of new spending, and rejects the idea that massive new government spending will lead to an economic recovery. Borrowing from one part of the economy and redistributing it to others will not grow the economy.

2. A Down-Payment on Spending Restraint. The bill includes a one-percent reduction to FY 2009 discretionary spending, excepting the Defense and Military Construction-Veterans appropriations bills.

Also See:

IRS Reminds Tax Preparers Need to File Due Diligence Checklist with All Earned Income Tax Credit Claims

IRS Provides Penalty Relief to Farmers Affected by MF Global Bankruptcy

IRS Issues Guidelines to Parents and Students on College Tax Benefits

Treasury, IRS Issue Proposed Regulations for FATCA Implementation

IRS Issues Guidance to Encourage Small Employers to Check Out Small Business Health Care Tax Credit