Obama Budget Would Eliminate IRA Benefits for Upper Middle Class

It is not just the rich who might find themselves subject to substantially higher taxes in 2013—several initiatives in President Obama’s 2013 budget proposal would eliminate many important tax benefits of retirement savings plans for upper middle class taxpayers. If passed, the value of itemized deductions and tax preferences may be reduced substantially, so your clients could find that their contributions are essentially taxed twice. This budget proposal is one to pay attention to—if it is passed, many of your clients’ retirement strategies will need to be re-evaluated.

A Changing Retirement Tax Landscape

Importantly, the deductions allowed to reduce tax liability would be capped at 28% for “high income” taxpayers. The definition of “high income” taxpayers includes families (and small businesses) who earn more than $250,000 each year and single taxpayers earning over $200,000 annually—capturing much of the upper middle class. 

Limiting the reduction in tax liability for high income taxpayers to 28% means that many contributed funds will be taxed when contributed to the account and upon withdrawal. The 28% cap would apply to all itemized deductions, foreign excluded income, tax-exempt interest, employer-sponsored health insurance, and retirement contributions.

The proposal includes several other initiatives, including a measure that would require employers who do not offer retirement savings plans to enroll their employees in automatic IRAs funded by direct deposits from employee paychecks. Employers of fewer than ten employees would be exempt, and employees would be allowed to opt out.

How Will This Affect My Clients?