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Recent proposals by Chairman Camp have sparked a real discussion regarding tax r

ID: 2410552 • Letter: R

Question

Recent proposals by Chairman Camp have sparked a real discussion regarding tax reform a. One of his major proposals is to limit the amount that a person in the highest marginal tax bracket can deduct, such that the taxpayer in the 35% bracket can deduct only as much as the person in the 25% tax bracket. There are three individual income marginal tax brackets, 10%, 25% and 35%. Cliff is firmly in the 25% bracket and Linda is firmly in the 35% tax bracket. i. If we were under current deduction rules (before the limit in deductions proposed by Camp) and both taxpayers can deduct $1000. How much does each taxpayer save on their tax bill? (4 points) ii. If we were instead under Chairman Camp's new proposed rules and each taxpayer deducts $1000. How much does each taxpayer save on their tax bill? (4 points) b. If a taxpayer, John, has $1000 in long term capital gains income, explain how Camp proposes that we tax this income? (4 points)

Explanation / Answer

Answer:

a (i) under current deduction rule both Linda and Cliff are allowed to have $1,000 deduction from their taxable income

as Linda falls under 35% tax Bracket the total amount of savings will be $1000*35% = $350

and Cliff falls under tax bracket of 25% , so the total amount of savings from his tax bill will be $1000*25% = $250.

a (ii) As Per chairman camp new proposal rule maximum ( Highest) deduction will be allowed to person falls under tax bracket 35%, will be the deduction which will be allowed to person falls under tax bracket under 25%

that simply means total savings from tax bill which will be allowed to CLIFF, the same amount will be allowed as deduction from tax bill to LINDA also.

Calculation of deduction:

Total deduction allowed $1000

CLIFF falls under Tax Bracket of 25%

Savings from Tax Bill $1000*25% = $250

that means maximum deduction from tax bill will be $250 to CLIFF and LINDA also

as the new proposal Limit the deduction which will be allowed to person under 25% Tax Bracket.