The President’s Advisory Panel on Federal Tax Reform has come up with proposals that could do everything from creating new annuity purchasing vehicles to eliminating tax breaks that now promote the sale of universal life insurance, variable annuities and group disability insurance.[@@]
The panel held a hearing today in Washington and put hundreds of pages of poorly compressed, slow-to-load recommendations on its Web site.
The panel also has sent its report to the U.S. Treasury Department, which could use the recommendations in efforts to formulate policy.
Although the panel, led by Sen. Connie Mack, a former Republican senator from Florida, came up with 2 distinct sets of proposals, one of which would shift the country to an entirely new, “consumption-based” tax system, both proposals would replace individual retirement accounts and a long list of other retirement, education and health savings vehicles with Save at Work plans for work-based retirement savings, Save for Retirement Accounts for personal retirement savings, and Save for Family Accounts for medical and education expenses.
The panel wants to eliminate the much-hated alternative minimum tax. One major panel proposal for replacing the lost AMT revenue would put sharp limits on use of the home mortgage interest deduction. Many of the media questions at today’s hearing focused on questions about the deductibility of mortgage interest.
The proposals also could have a huge effect on the life insurance, annuity, health insurance and employee benefits industries.
The Save for Retirement Account would “replace existing IRAs, Roth IRAs, Nondeductible IRAs, deferred executive compensation plans, and tax-free ‘inside buildup’ of the cash value of life insurance and annuities,” the panel writes on page 119 of its report.
Today, the panel notes on page 123 of its report, “some life insurance policies and annuities allow for nearly unlimited tax-free savings. Currently, there is no taxable income until the policy is cashed in, even though the policyholder is receiving the benefit of increases or ‘inside buildup’ in the value of the policy or annuity. In addition, withdrawals from policies are tax-favored.”
If the “Simplified Income Tax Plan,” a proposal that would create a streamlined version of the current tax system, were adopted, “the increase in the value of those policies would be treated as current income, and therefore would be subject to tax on an annual basis, just like a savings account,” the panel writes.
But the panel says consumers could use cash in tax-deferred Save for Retirement Accounts and Save for Family Accounts to buy products such as whole-life insurance policies and deferred annuities.
“Products that cannot be cashed out and annuities that provide regular, periodic payouts of substantially equal amounts until the death of the holder (known as lifetime annuities) would not be taxed on an inside build-up, the same treatment as under current law,” the panel writes.
The panel goes on to observe that the Simplified Income Tax Plan would eliminate executives’ ability to save through executive deferred compensation plans.
The proposal would grandfather in existing life insurance policies, annuities and deferred compensation plans.
The Save for Retirement Accounts would be available for all taxpayers and have an annual contribution limit of $10,000.
Like the proposed “SRAs,” the proposed SFAs would have an annual contribution limit of $10,000.
All taxpayers would be able to use pre-tax dollars to purchase health insurance coverage, but with a limit of the amount of the average premium, which the panel estimated at $5,000 for individuals and $11,500 for families.