Finance moves transportation bill–revenue sources at issue

by Linda Beale

Finance moves transportation bill–revenue sources at issue

Senate Finance committee approved on a 17-6 vote the transportation financing proposal (13 Dems and 5 GOP voting yes; the GOP were Snowe, Crapo, Roberts and Thune).
The GOP –Jon Kyl a favorite spokesperson–claimed that the Committee’s rush had “lost the opportunity to have a truly bipartisan deal.” See BNA Daily Tax RealTime 020712. What that means is that the GOP doesn’t like the revenue provisions in the bill (surprise). In particular, they don’t like the “black liquor” provisions (see my earlier post about that) and the pension provision.

What’s the pension provision? It is expected to raise about $4.648 billion over ten years. It provides that inherited IRAs and 401(k)s must pay out (and therefore be taxed) over a 5 year period instead of over the expected life of the beneficiary, unless the beneficiary is the account holder’s age, a child with special needs, or past 70 years old.

Those Congressmen interested in protecting fat cat privileges can be expected to boo-hoo over the poor beneficiary who inherits a windfall of cash and, gee, has to pay tax as it gets paid to him over 5 years instead of getting to defer most of it by taking it into acccount over his lifetime. But taxing that to the beneficiary up front is clearly the right answer. The beneficiary did nothing to earn it. It is funds that have been accumulating over time in the IRa without tax. If beneficiaries are allowed to keep it in the IRA and continue the tax-free growth over most of their productive lives as well, they really receive a windfall–millions of tax free accumulation. See Richard Rubin, Senate Baucus Eyes Inherited IRAs for $4.6 Billion, Bloomberg.com (Feb. 7, 2012).

As the Bloomberg story notes, the intended purpose of IRAs is as a retirement planning tool, not a way for wealthy estate holders to pass even more of the estate to beneficiaries essentially tax free. Ending that tax bonus makes sense. Not unexpectedly, estate planners don’t like the idea: one estate planner objected that this deal would be a “non-starter” because “there’s too much invested in the whole stretch IRA concept.” In other words, wealthy people like their perks, so the Congress won’t have the guts to eliminate a provision that made no sense as a policy provision from the outset!

originally published at ataxingmatter

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