This week’s biggest story is continuing gridlock on tax legislation, derailing the extenders law and threatening to block others.
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Featured articles
Three items this week:
- Social Security Retirement Benefit Confusion explains why many people have the mistaken impression that their Social Security retirement benefits will be reduced if they start to take benefits before age 70.
- Not Just a Math Trick shows how the rule of 72 can be used to illuminate some key principles of investing.
- Roth Conversions and the Medicare Tax discusses how this new tax might affect your thinking about doing a Roth conversion in 2010, even though the tax doesn’t take effect until 2013.
@ Congress
The big winner this week was gridlock, killing one tax bill and threatening to drag down others.
Extenders. After repeated failed attempts to obtain 60 votes, the Senate leadership has set the extenders bill aside and turned to other matters. This bill would have revived a number of popular tax breaks that have expired, including the deduction for state and local sales taxes, the additional standard deduction for real property taxes, and the above-the-line deduction for qualified tuition and related expenses. It also would have extended unemployment benefits, so the failure of Congress to pass this law will terminate benefits for many Americans who are out of work.
It’s likely that Congress will return to the extenders later in the year, perhaps even in a lame duck session after the election. The delay causes problems for taxpayers who can’t plan on these tax breaks and also for the IRS as they must prepare income tax forms based on existing law, which doesn’t include these expired provisions.
Small business. Having given up for now on extenders, Senate leaders will try to muster votes for a more modest tax bill providing tax breaks for small business. Republicans generally favor these tax breaks but object to other provisions, so its fate remains uncertain.
Estate tax. While Senators Jon Kyl, R-Ariz., and Blanche Lincoln, D-Ark., continue to seek support for a bipartisan compromise on estate tax legislation, three others (two Democrats and an independent) introduced an alternative that includes a smaller exemption amount and higher rates, up to 55% on amounts above $50 million and a 10% surtax on amounts above $500 million. It’s unlikely this version will become law, but the initiative signals a view among some Democrats that may make it difficult to attract the needed votes for the more generous compromise legislation.
Last year, a stalemate on estate tax permitted the tax to go out of existence for one year. This year, the shoe is on the other foot: failure of Congress to act will revive the tax at levels that were in effect before the Bush tax cuts took effect.
Pension funding. One law escaped all this gridlock. Congress had to act this month to prevent a drastic reduction in Medicare payments to doctors, disrupting services to Medicare recipients. Congress pulled this provision out of the failed extenders bill and passed it separately, covering the cost with a provision that eases funding requirements for certain sponsors of defined benefit pension plans.
This relief provision raises tax revenue because some employers will be putting less money into the plans and therefore claiming smaller deductions.
Homebuyer credit. A report indicating substantial amounts of fraud in claiming the homebuyer credit bodes ill for any hopes the credit might be revived.
@IRS
The Treasury together with other agencies issued regulations dealing with key provisions of the Patient Protection and Affordable Care Act regarding preexisting condition exclusions, lifetime and annual dollar limits on benefits, rescissions, and patient protections.
@Fairmark
The 2010 edition of Consider Your Options has been submitted for publication but as of this writing is not yet available on Amazon.com. With any luck it will appear within a week or so.
An archive of the radio interview in which Kaye Thomas discussed his new book That Thing Rich People Do Saturday on Stu Taylor’s Equity Strategies show is available as a podcast.
Elsewhere
The Tax Report in Saturday’s Wall Street Journal offered a well-balanced discussion of the question whether we should shy away from Roth conversions out of concern that Congress may one day decide to tax Roth accounts, concluding that conversions can provide real benefits while a cutback in the tax benefits may not come for years, or ever. Interesting tidbit: people using the conversion strategy include tax policy expert (and former Treasury official) Michael Graetz, as well as Charlie Munger, Warren Buffett’s less public but equally astute partner.
