Congress is on the verge of giving financial advisers something for which they've been longing: certainty in the tax code.
Late Tuesday night, the House and Senate tax-writing committees released a package of tax breaks for individuals and businesses that both chambers are likely to approve by the end of the week. The measure would secure in the tax code many so-called extenders that have had to be renewed each year, often after expiring.
Among the 22 extenders that will become enshrined is one that allows tax-free distributions from individual retirement accounts to charitable organizations. Another individual tax that will be extended indefinitely allows for the deduction of state and local sales taxes.
“These permanent provisions allow taxpayers to make informed decisions about their income, giving and tax planning generally,” said Suzanne Shier, chief wealth planner and tax strategist at
Northern Trust Co. “It allows the planner to provide options to clients with a greater degree of certainty and lead time, and that provides the client greater flexibility in actually implementing the recommendations.”
Small business tax deductions that would become permanent include a research and development tax credit and another for capital investments.
Another 34 tax extenders were extended through 2016 or 2019. In addition,
the legislation makes changes to tax policy related to 529 college savings plans, real estate investment trusts and other areas.
Advisers were pleasantly surprised by the tax package, which would cost $622 billion over 10 years, according to the congressional Joint Committee on Taxation.
“Most of the [extenders] we were looking for permanency on we now have,” said Tim Steffen, director of
financial planning at Robert W.
Baird & Co.
If the legislation is approved, financial planners will actually be able to do tax planning ahead of time regarding issues usually dependent on the extensions, rather than
waiting until the end of the year — or sometimes into the following year — to see whether they would be renewed.
“You couldn't do anything for 50 weeks,” said Michael Kitces, director of financial planning at Pinnacle Advisory Group and author of the
Nerd's Eye View blog. “We've had that problem for almost every year for a decade. We'll never have that problem again.”
The IRA charitable contribution tax break is a popular one among advisory clients. It allows individuals to make distributions of up to $100,000 annually from these accounts that they can exclude from their gross income.
Since that provision was enacted in 2006, it has expired five times and been extended four times, according to Ms. Shier.
The IRA charitable contribution and state and local tax extenders generally have been favorites of Democrats and Republicans alike.
“The history of bipartisan support made them natural candidates for permanent extension,” said Marc Gerson, a partner at Miller & Chevalier and a former Republican tax counsel on the House Ways and Means Committee.
Congressional Democrats and the Obama administration had resisted making tax extenders permanent. But in the final package, Democrats were able to secure from Republicans permanent extensions of some of their most coveted tax breaks, including the child tax credit and the earned income tax credit.
“At the end, you have a bill that [contains] the priorities of both parties and is a compromise in many ways,” Mr. Gerson said.
