GOP Control of Congress Could Extend Tax Breaks for HNWI’s IRAs

Debate in Congress leaves high net-worth individuals (HNWIs) uncertain about their tax breaks.

  • Since recession, philanthropy has increased to all-time highs - expected to rise.
  • GOP's control of Congress may give new life to "tax extenders" bill.
  • Senator Harry Reid uncertain of whether tax breaks will remain expired for HNWIs.

Mid-Term elections shifted partisan influence in Congress from blue to red for the foreseeable future. But with the EXPIRE Act actually expired (January 2014), HNWIs are left wondering if their IRA distributions to charities will stay free of income tax, or will adjustments to the "tax extenders" change how these distributions are taxed.

In April of 2014, the Senate Finance Committee (SFC) passed the EXPIRE Act (Expiring Provisions Improvement Reform And Efficiency Act) with one of its 50 tax provisions extending the tax-free distributions from individual retirement plans for charitable purposes. The provision reads:

The bill extends for two years the provision that permits an Individual Retirement Arrangement ("IRA") owner who is age 70-1/2 or older generally to exclude from gross income up to $100,000 per year in distributions made directly from the IRA to certain public charities. A two-year extension of this provision is estimated to cost $1.8 billion over 10 years.

This provision is only becoming more important as philanthropy among HNWIs is on the rise and expected to continue this increase for decades.

Philanthropy Back in Vogue

In the wake of the economic crisis that began in 2008, HNWIs cut their charitable distributions considerably. (Clearly all budgets got tighter.) However, according to Wealth-X, charitable contributions are on the upswing since 2009, and one class of HNWIs (Ultra-HNWIs) are expected to increase their charitable giving to $86 billion in 10 years, increasing the significance of this law for HNWIs as well as charities.

So, Why is the Law Hitting Obstacles?

Congress is debating with itself on a couple key issues:

  1. What provisions should remain in effect for HNWIs?
  2. For how long will the provisions be in effect?

No one in Congress is settled yet on the best way to approach these questions. For example, the incoming chairman for the Senate Finance Republicans, Senator Orrin Hatch, has been said to support an indefinite extension to some of the extenders, reports The Hill. But he is a lone voice, as other members of Congress are calling for just another 2-year extension; while still others want the extensions to be up for vote again after 2014.

Regardless, HNWIs want to see the tax breaks renewed by the end of 2014 (they don't want to see another tax year without the breaks), which is a likely possibility.

Jim Lyons, Tax Counsel for the SFC, suggests that what Republicans really want to do is empty their legislative cue before 2014 so they can start fresh after the lame-duck session—when they gain full control of Congress in 2015.

What do the Democrats Say?

Well, not much, yet.

Harry Reid told reporters that he "guessed" Congress was deadlocked on the bill until after the mid-terms (Majority Leader seeming a little under-zealous).

What is for sure is that Democrats do not want to commit $85.3 billion (up $17.9 billion from the current law that expired in 2014) for the long-term.

Depending on what Republicans barter, Democrats are amenable to the tax extenders, but there will no doubt be substantial quid pro quo as Congress moves into the lame duck session. And leaving these extensions in effect indefinitely is does not interest Democrats in the least.

For now, Republican law makers are set on continuing tax breaks for charitable deductions from IRAs for HNWIs; but challenges remain as they navigate the Democrats who are still smarting from the loss of control in Congress. Republicans had better start inventorying their concessions soon.

The IRA provision is expected to cost $1.8 Billion —by no means the most expensive provision in the law. But with charitable donations on the rise, some improvements to economic figures and the government backing off from QE; incentivizing philanthropy might just be the compromise Congressional Democrats are looking for despite the cost.

HNWIs will be watching Congress closely as they decide on whether or not these tax extenders will pass, and how long they will last. With mid-terms behind us, both Congress and HNWIs will be watching their dollars very closely. The irony will be if Democrats put the "kibosh" on rising philanthropy amongst HNWIs as they argue tax breaks should not continue to be passed onto HNWIs.

What is good for the goose might stop being good for the gander.

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