Lawmakers from both parties and in both chambers are telling constituents and Washington representatives that they agree that it would be bad tax policy to tax permanent life insurance and annuities. But even if this initial reaction holds during the heat of a hard-fought tax reform debate, there may be tax changes that could indirectly but just as adversely impact permanent life insurance and annuities.
For example, if Congress imposes a dollar amount cap on tax deductions, exclusions, deferrals and credits, the cap could set off a “competition” for spending on life insurance, mortgage amounts, charitable contributions, etc. Where a taxpayer’s prior spending choices leave him or her well below a cap amount, this would not be a problem. But it is likely many taxpayers will find themselves at or above a cap once they own a house, pay their state income taxes, make a charitable contribution, or receive tax-free employer-provided benefits. This is especially true in high-cost states (for example, state income tax and the cost of a house, and its resulting mortgage, are much higher in a state like New York than in a state like Wyoming).
Or, Congress could decide to “trim” tax rules on an issue-by-issue basis. How would the exclusion for life insurance and annuity cash values be trimmed? Would a reduction in the tax rule be pegged to income? To the size of the policy? By particular use (e.g,. company-owned life insurance, or COLI)?
It is good to continue to make sure as many lawmakers as possible agree that it would be bad for America, for the middle class, and for the economy to tax permanent life insurance. But we must also be continuously aware and guard against the possibility that proposals to cap, trim, or limit favorable tax rules could also adversely impact permanent life insurance and annuities.NAIFA’s professional lobbyists are on the Hill daily, and NAIFA members meet frequently with Members of Congress in their districts. The April 8-9, 2013 Congressional Conference will bring members together in DC for a day and a half event that will allow members to tell our story to our elected officials in a meaningful and impactful way. Learn more at www.naifa.org/advocacy/caphill.