Advisors need to keep an eye on potential tax loophole closures as the year goes forward, particularly as the government faces funding needs around homeland security and highway legislation.
Ahead of the State of the Union address, President Barack Obama laid out a tax plan that would raise $320 billion by increasing capital gains and dividend tax rates to 28 percent, among other reforms.
The plan also calls for eliminating the so-called trust fund loophole — where inheritors’ assets are “stepped up” to current market value at the time of death, rather than their original worth, which could incur capital gains taxes—taxing all withdrawals from 529 plans, imposing a 7 basis-point fee on the liabilities of U.S. financial firms with assets over $500 billion and prohibiting contributions to qualified retirement plans if total balances exceed $3.4 million.
“Is this going to go anywhere? No, not in a Republican Congress,” says Andy Friedman, principal of The Washington Update, so the split government gridlock will continue.
The only time the public is going to see legislation get passed by Congress is when absolutely necessary, Friedman says. He outlined seven “must-do” legislation items on the agenda for 2015, starting with the renewal of Homeland Security funding needed at the end of February. Additionally, Friedman also cited other “forcing events” such as the debt ceiling, highway funding, the export-import bank, government funding and tax extenders in December.
“You have to be aware of tax loopholes that may be closed to raise money to pay for things like highway funding,” Friedman says. An example of one of these loopholes? Stretch IRAs, he says. “Many people in both parties in Washington believe it’s inappropriate for somebody who inherits an IRA or a 401(k) to take payments out over their lifetime, that they should be required to take all payments within 5 years of the death. That [loophole closure] raises a fair amount of revenue for the government. ”
“I’m not saying it’s going to pass this year, but that’s an example of the loophole closers that will come up as Congress tries to find highway funding, raise the debt ceiling and fund the DHS,” Friedman says.
But in terms of individual tax reform, Friedman says tax simplification is complicated stuff. “My guess is individual tax reform that affects our clients is too heavy a lift for Congress,” Friedman says.