Tax Breaks & Retirement Planning: Know This Before 2016
As the deadline to approve certain tax breaks looms closer, those in retirement mode need to make some choices. Learn how your choices may be impacted.
It’s December, and in Washington, that can mean only one thing: Congresspeople are engaged in their annual year-end bickering over extending temporary tax breaks. Several popular deductions—including mortgage interest, tuition and state sales taxes—expired at the end of 2014 and have yet to be renewed for this year or beyond. As we type, there are rumblings about a bipartisan effort to extend and make some of them permanent, which would no doubt make retirement planning a bit easier for many people. However, we wouldn’t hold our breath.
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Temporary Credits & Deductions of the Past
Over the years, America’s tax code has accumulated dozens of targeted, temporary credits and deductions, mostly aimed at currying favor with various segments of voters. One example is the ability to make tax-free charitable contributions of up to $100,000 in stock from an IRA. This is popular with many retirement investors, who use charitable donations to satisfy their required minimum distribution.
Yet despite the popularity, Congress has been hesitant to make any of these tax breaks permanent. Most acknowledge the added certainty would benefit households and businesses, but tax breaks are too useful as bargaining chips in wider debates, like the current wrangling over next year’s budget. The annual “will-they-or-won’t-they” over extensions gives politicians leverage over each other, which they use to win concessions on other pet issues. Make the tax breaks permanent, and they lose negotiating tools.
Can We Count on Extensions for Retirement Planning?
Never say never, but these political considerations make it unlikely Congress makes the whole gamut permanent. For today’s retirement investors, a better question is whether Congress will at least temporarily extend the expired breaks.
Historically, they have near-always done so, often at the 11th hour or just after. It isn’t unusual for them to dither beyond the deadline and then pass a patch retroactively. But that tendency presents a pickle, particularly for retirement investors deciding whether to make charitable contributions from their IRA. To be eligible for 2015 tax returns, the transfer would have to occur this calendar year, which is rapidly coming to a close. The longer Congress waits, the more uncertainty there is.
If you’re potentially impacted by this or any of the other in-limbo tax breaks, keep an eye on Washington D.C., and talk to your tax advisor. No one can predict what politicians will do, but your tax professional can at least help you navigate this minefield and keep you informed as you begin your early retirement planning.