It's a bad time to be a sacred cow. With Congress and the White House looking for ways to at least appear to be addressing the nation's deficit, favorable tax treatment of retirement savings and investment income is likely to be at risk.
Last year's deal between President Obama and Congress extended favorable treatment of capital gains and dividends, but only through the end of 2012 – after the fall election that will decide the make-up of the White House and Congress, it just so happens.
What that means is that the real battle won't be fought until 2013, when Democrats are expected to continue their tax-the-rich campaign while Republicans argue that higher-income Americans carry a disproportionate share of the tax burden.
“[T]he real action is likely to come in 2013, and you'll see a macro effort to deal with the reform of the tax code,” said James Delaplane, a partner at Davis and Harman LLP, speaking at the Investment News Retirement Income Summit. “At some point, action is going to be forced onto the policy makers. I think it's just a matter of time before the grand deficit reduction legislation happens.”
“Presuming the economy is more solid and the deficit pressures are starker, then that's a recipe for tax cuts not being extended,” he added.
And what about retirement savings? With all the talk of Social Security and Medicare being on the ropes, you'd think the tax code would be modified to encourage Americans to save more for retirement.
Don't bet on it.
Delaplane noted that the Bowles-Simpson deficit reduction commission proposed capping tax-deferred savings in defined-contribution plans to the lesser of $20,000 or 20% of income in an attempt to shore up the nation's budget. The commission didn't specifically comment on the treatment of tax-free inside build-up for life insurance and annuities, but it may be limited in some way, he warned.
Delaplane advised his audience of personal financial advisors to put clients on notice that tough times may lie ahead, especially as the nation keeps bumping up against the federal debt ceiling. Each time Congress is called on to raise the ceiling, it increases pressure to cut spending on raise taxes.
“It's going to get down to the last minute, and it won't be what the Treasury will prefer or what the markets want,” he said. “Put on your seatbelts.”