Fight Goes On Over Extending Dividend Tax Cuts To Annuities
Life insurers are facing a fluid situation at press time in the effort to include annuities in legislation that reduces the taxation of dividends.
The Senate Finance Committee recently approved legislation that would reduce the taxation of dividends. At press time, the legislation, S. 1054, was pending on the floor of the Senate.
While the Senate Finance Committees reduction is much smaller than the one approved recently by the House of Representatives, the bills have one thing in common: Neither extends the reduction to variable annuities.
Sen. Rick Santorum, R-Pa., has been working to amend the Senate bill to cover annuities, but the Finance Committee did not adopt his amendment.
The effort now is to have the language adopted on the floor of the Senate as part of a broader amendment that will be offered during the debate by Sen. Don Nickles, R-Okla.
Diane Sullivan, assistant vice president for taxes with the American Council of Life Insurers, Washington, says ACLI remains hopeful that any reduction of dividend taxes will ultimately be extended to annuities.
She particularly praised Santorum for his strong efforts on behalf of annuities.
If the Senate does not accept the annuities language, the industry will still have an opportunity to get the language included in a final consensus bill that will be worked out by a House-Senate conference committee.
Sullivan says members of Congress in both the House and the Senate have expressed sympathy for the life insurance industrys position.
Under the dividend language in S. 1054, the first $500 in dividends from stocks or mutual funds would be tax-free. In addition, 10% of dividends above $500 would be tax-free, with the percentage moving to 20% in 2008.
In other tax news, the IRS has proposed a regulation on the valuation of economic benefits under certain equity split-dollar life insurance arrangements that is causing some concern in the industry but is not expected to have a major impact on the market.
The new proposal represents an extension of the proposal issued on July 9, 2002, establishing new rules on the taxation of split dollar.
The 2002 proposal calls for two mutually exclusive regimes, a loan regime and an economic benefit regime.
The loan regime generally covers the taxation of collateral assignment arrangements while the economic benefit regime largely covers endorsement arrangements.
The new proposal applies only to the economic benefit regime, in which the owner of the life insurance contract is treated as providing economic benefits to the non-owner.