It is unlikely that we will see any major tax reforms coming from Congress in the near future, given the current state of political gridlock and dysfunction. However, there are a few individual tax measures that could be voted on before yearend and a recent tax change made by the Treasury regarding corporate inversions that we are watching with interest.

1. QUALIFIED CHARITABLE DISTRIBUTIONS FROM AN IRA

This was a temporary tax provision created by the Pension Protection Act of 2006 that allows required minimum distributions (RMD’s) to be taken tax-free as long as the money is paid directly to a qualified charity. If you are giving money to a charity anyway and are over the income limit for itemizing charitable deductions, this is a good way to do it. The provision applies to IRA owners or beneficiaries who are age 70 ½ or older at the time of the distribution and is capped at $100,000 per person per year. This provision expired after December 31, 2013, but is in line to be renewed. Earlier this year, the Senate failed to vote on a package of expired tax provisions that included this extension. In prior years, Congress has waited until December to reinstate this rule, also making it retroactive to the beginning of the year.

2. ROTH IRA

Two proposals in President Obama’s 2015 budget, if approved, would change the rules for how Roth IRA distributions can be taken. Currently, the owner of a Roth IRA is NOT required to take distributions at age 70 ½ (unlike a traditional IRA), so the money can sit untouched and grow tax-free throughout the owner’s lifetime. Roth IRA’s can be passed to beneficiaries who are then required to take tax-free distributions. Those distributions can be stretched over the beneficiary’s lifetime, making a Roth IRA a powerful estate planning savings tool. If passed, President Obama’s proposal would require owners of Roth IRA’s to take distributions at 70 ½ and non-spousal beneficiaries would be required to distribute the entire amount within five years of the owner’s death. These changes could reduce the estate planning benefits of converting traditional IRA’s to Roth IRA’s.

3. TAX INVERSIONS

The Treasury Department recently tightened tax rules to discourage US companies from moving their headquarters to other countries in order to lower their tax payments. A typical inversion deal involves a US company buying a smaller international company, then moving its headquarters to the country with a lower tax rate but keeping its offices and operations in the US. The new law should slow the number of inversion deals, but companies will most likely find ways to get around the rules in the future. Congress tried to slow inversions in 2004 by passing a law prohibiting companies from moving their headquarters to the Caribbean islands, but said moves to other countries were legal. Companies may challenge the Treasury’s new rules based on this old tax law. We think the new rules will slow mergers and acquisitions in the short-term and reverse the inflow of cash into sectors like healthcare, which have seen a spike in recent deals. The increase in inversion deals highlights the issue with US corporate tax rates, which are too high and have too many loopholes. In order to truly correct the problem and keep US corporations competitive, comprehensive corporate tax reform is needed.

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