Investment advisers are once again wondering what will happen with tax policy when Congress returns to work next month after its summer recess.
The fall is likely to be festive, with lawmakers and the White House wrangling over the federal budget and the debt ceiling in a tussle that might not be resolved until December. Along the way, a government shutdown and financial-market turmoil are risks.
Even though many tax rates were settled in January's fiscal cliff bill, negotiations may put some taxes in play.
“Revenue is going to be needed from a lot of different sources,” said Stanley Smiley, senior vice president of the advance planning group at Cetera Financial Group. “Nothing seems to be permanent [with Congress].”
Dusty Wallace, director of
financial planning at Lee Financial Corp., said many of her clients have seen tax increases as high as $10,000 this year. But she's not confident that's the end of the story.
“Anything that happens will change the playing field for the wealthy,” Ms. Wallace said. “The uncertainty is still there to some extent.”
Mr. Smiley is concerned that an idea floated in
President Barack Obama's budget earlier this year could become a bargaining chip this fall — a proposal for non-spouse beneficiaries of IRAs to take distributions over five years or fewer.
“That would totally upset the basic foundation of
estate planning for every wage-earning and net worth category,” Mr. Smiley said.
But partisan gridlock lessens the chance for an agreement that would change rules surrounding so-called stretch IRAs.
“It's one of a number of issues that could be on the table,” said Mel Schwarz, a partner in the Washington National Tax Office of Grant Thornton. “But I wouldn't put it at 50-50 to be enacted.”
In fact, Mr. Schwarz doesn't foresee any major part of the fiscal-cliff agreement being reopened. Instead, the key development to watch is whether there is any momentum for broad tax reform.
The first signal will come from the House Ways and Means Committee, where Chairman Dave Camp, R-Mich., is determined to produce a measure. If he gains the backing of some moderate Democrats, he may be able to move a bill by early October, Mr. Schwarz said.
Where it goes from there will dictated by politics.
“It depends on how well received the bill is by the business community and others,” said Jon Traub, managing principal of the tax policy group at Deloitte Tax LLP. “The best chance on tax reform getting enacted is if Congress is able to attach reform to a debt-limit increase.”
What form that would take – specific tax-law changes or just instructions to do a comprehensive overhaul — is another matter.
“I don't think there's a clear consensus on one approach over another,” said Mr. Traub, a former staff director for Mr. Camp.
Successful tax reform would require a rarity in Washington — cooperation.
Despite the efforts of Mr. Camp and Senate Finance Committee Chairman Max Baucus, D-Mont., to start a conversation about the issue over the last few weeks with events around the country, tax reform has been low-profile during the August recess.
“I just don't see the politics of it coming together,” said Chris Hesse, a tax partner at Clifton Larson Allen LLP. “No foundation has been laid for the concepts of wide-ranging tax reform.”
Various tax extenders that were renewed for 2013 in the fiscal-cliff bill — such as one that allows direct charitable contributions from IRAs — are also in limbo. They're set to expire at the end of the year.
“Your [tax] planning has to be done in a way that is very flexible,” Mr. Smiley said. “An adviser has to stay informed and do a great job communicating with clients.”
