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Not Too Taxing

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Whoever wins, look for an estate-tax cut, an end to the marriage penalty and, pray, no silly AMT

Well, we were sorta kinda pretty sure we had a winner for a while. Now it's less clear. That's O.K. We can still get on with our lives. Here's a look at four taxing matters likely to come under the microscope for either Bush or Gore. Forget the big stuff. After such a bitterly contested election and with an evenly split Senate and a narrow G.O.P. majority in the House, neither candidate will get anything close to what he wants. Heck, he won't be able to pick out a pair of pants without a fight.

On a grand scale, that's not so bad. A do-nothing Congress won't blow the budget surplus, leaving it for debt repayment, which would put downward pressure on interest rates and provide a backdoor tax cut. That's the gridlock benefit you hear so much about from Wall Street. But it's a mistake to think nothing will happen, especially if Bush prevails. He ran on the promise of a broad tax cut. "He has to deliver something," says political analyst Andy Laperriere at ISI Group.

Doing so may not be as tough as some expect. The economy is slowing, so a new Congress will be more inclined to provide some kind of stimulus. And the projected 10-year surplus of $4.6 trillion, including Social Security funds, could jump $1 trillion (new estimates are due next month). That would leave more room for tax cuts.

No matter who wins, the focus will be on measures that have enjoyed bipartisan support. The main ones: reducing the estate tax, eliminating the marriage penalty, expanding IRA and 401(k)-plan savings. Further down the list is fixing the horribly crafted alternative minimum tax, or AMT.

If I had my way, the AMT would be first up. Enacted in 1986 to make sure the rich don't dodge taxes by taking big deductions for such things as investment expenses and second mortgages, this tax now soaks even the middle class. Next year 1% of all tax filers will pay it--double the percentage of a few years ago. Many AMT victims earn well under $100,000 a year. By 2010, 10% of filers will pay the AMT, a complicated tax that effectively takes back deductions for Everyman expenses like state property and income levies and medical care as well as personal exemptions for children. The central issue is that the trigger point for the AMT doesn't rise with the cost of living. Look for that trigger to be indexed to inflation. Full repeal probably isn't in the cards.

That's true of the estate tax as well. A bill to kill it got as far as the President's desk this summer. But the measure has come under increasing fire as a break for the very rich. Relief may come in doubling the lifetime exclusion to $2 million by 2006, with additional exemptions for farmers and small-business owners. The top "death-tax" rate of 55% may also be cut, possibly to under 40%. This would be a fun battle to watch. Those who favor repeal don't want to merely chip away at the tax because as fewer people pay it, support for repeal erodes.

The limit for annual contributions to a Roth or traditional IRA could be raised from $2,000 to $5,000 and for 401(k) plans from $10,500 to $15,000. There's a decent chance that the income ceiling to be eligible for a Roth ($160,000 per household, $110,000 for singles) would be indexed to inflation.

Eliminating the marriage penalty may gain the quickest momentum. Some married couples are paying more tax than they would if they stayed single but lived together. Look for the spouse deduction to double, ending that inequity for most. Of course, at the rate this election is going, some couples will have divorced before a winner is declared.


Cover Date: December 18, 2000



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