Is permanent the new temporary with the Taxpayer Relief Act?

By Kevin Startt

Startt Planning!


They say that Congress has its own dating service just like eHarmony, except that no one in either party wants to pay. That certainly was validated when the recent fiscal cliff deal kicked the can down the road to Fiscal Cliff II, otherwise known as the debt ceiling.

We are all much better versed on this one, though, since we have had more practice. In the spirit of New Year cheer and good tidings, however, there were some big victories for annuity savers and investors, despite the continued spending like a drunken sailor. In fact, "fiscal cliff" was one of the most terms hated in 2012, so a debt ceiling deuce of the fiscal cliff with the American Taxpayer Relief Act of 2012 is timely and rolling at us like a train. By the time the end of February rolls around, the debt ceiling deal will be just like the terrific book on anti-gravity and Congress will not be able to put it down. It will be like an old sick dying dog that the owner can’t decide what to do with.

1. First, Congress finally agreed to index the alternative minimum tax (AMT) to inflation, sparing 30 million Americans, including this writer, the joy of another round of double taxation. I believe the AMT is another example of giving Congress the power of the purse string. When it comes to the phrase "temporary tax," run and seek cover. It does not happen. That will impact the annuity industry slightly and help the municipal bond industry, where private purpose bond income is taxed. Prior to the deal, 35 percent of affluent investors with $100,000-plus in investable assets purchased annuities, and the number is growing, according to Cogent Research. With a doubling down of the debt deal, the Age of Safety continues to include more well-heeled investors. Most of the $450,000 annual income taxpayers, or 2 percent, do not own annuities, although the number is growing as savers and investors seek safe retirement income avenues and buy income riders. Most income recipients will continue to receive income at the same or lower rates they did in 2012.

2. A permanent estate tax exemption and capital gains rates. Again, the word "permanent." They say that someone in Washington who is honest, caring and well-read is a tourist. The Credit Shelter Trust drawers will be disappointed, as Washington continued to allow portability of a remaining spouse’s marital deduction at death of the other spouse. The tax will continue to be indexed for inflation, so the individual exemption for 2013 will be $5.2 million. The rate remains the same, unless you are at the $410 million level, where your rate will bump up from 35 percent to 45 percent.
3. Washington needs the revenue now, so an in-plan Roth conversion change enables Congress to capture more of your hard-earned dollars with the perception that Roth income will never be taxed. Ask Tax guru Ed Slot what his firm’s number one question is. The answer: What happens if Congress taxes my Roth? Permanent once again defies the law of certainty of life, death and taxes. In addition, Congress will allow you to deduct again up to $100,000 of your IRA if donated to charity, which allows for a charitable deduction and not having to include this amount in required minimum distributions. This is a qualified charitable deduction (QCD).

There is plenty of good news for annuity savers and investors who, with the exception of a decrease in their paychecks this month due to the expiration of the payroll tax (increase from 4.2 percent to 6.25 percent), or an increase in their Social Security check due to inflation, are seeing income taxes at the same rate. That means with market uncertainty and volatility, a continued flight to safety as investors trade in the roller coaster for the serenity and peace of a carousel where they can pick the color and type of pony, get some preservation of principal when the markets rise) but know that they will not see their pony goes down when the market does.

All in all, we have rung in the New Year with cheer, a deferred crisis and a big stock market rally. It still feels like last year’s Halloween party, though, when there was a big tub of water and we bobbed for I.O.U.s.