The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Minnesota is representative of a common question involving President Obama’s 2014 budget proposal and the proposed 28% itemized deductions. The advisor asked:
“I’ve heard that Capitol Hill may be capping deductions for taxpayers. Is this true, and can you provide more details on the cap?”
Highlights of Discussion
• It is true that the 2014 budget proposal contains a provision that, if enacted into law, would limit the tax value of specified deductions or exclusions from adjusted gross income (AGI) and all itemized deductions for taxpayers in the 33%, 35% and 39.6% tax brackets. The cap would reduce the value of the deduction to 28%. A similar limitation also would apply under the alternative minimum tax.
EXAMPLE: Trina is in the 39.6% tax bracket. She has a deduction worth $100. Under present law, the deduction would save her $39.60 in taxes. Under this proposed cap, the value of her tax savings would be reduced to $28.
• The income exclusions and deductions that could be limited by this provision would include the following:
— Employee contributions to defined contribution retirement plans and individual retirement arrangements
— Any tax-exempt state and local bond interest
— Employer-sponsored health insurance paid for by employers or with pretax employee dollars
— Health insurance costs of self-employed individuals
— The deduction for income attributable to domestic production activities
— Certain trade or business deductions of employees
— Moving expenses
— Contributions to health savings accounts and Archer Medical Savings Accounts
— Interest on education loans
— Certain higher education expenses
• If a deduction or exclusion for contributions to retirement plans or individual retirement arrangements is limited by this proposed cap, then the taxpayer’s basis will be adjusted to reflect the additional tax imposed.
• As proposed, the 28% cap on deductions would take effect Jan. 1, 2014.
Conclusion
It is important to keep in mind that the 2014 budget proposal merely starts the formal budget negotiation process with the House and Senate. The 28% cap on deductions is only a proposal at this point. Financial advisors who understand the importance of any potential changes to contribution and accrual limits and/or deductions set themselves apart from the average advisor and are better positioned to support their clients.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.
