NAIFA Blog

Reports from the New Jersey agents about Hurricane Sandy re-raise the question a lot of people asked in Sandy’s aftermath: Is this the new normal? Similarly, as media outlets and the internet count down to the fiscal cliff and the (perceived) inability of Congress and the White House to avert economic disaster, people ask: Is THIS the new normal?

More specifically, since most of the political rhetoric is about taxes, is this the new Tax normal? If so, it’s fair to ask what it means for families and businesses using permanent life insurance and annuities to undergird basic financial security. That’s because the new normal seems to be that tax revenue is going to go up, some-how, some-way.  Unknown is the mechanisms Congress will choose to generate the revenue increases.

President Obama is strongly making the case that high income earners should be subject to higher tax rates, however you define “high earner.” GOP congressional tax leaders are suggesting a tax reform way, a way that focuses on limiting deductions, eliminating exemptions or reducing exclusions.

Agents know that families are encouraged to purchase life insurance and annuities to some degree because of the current tax treatment afforded their purchase. How Congress chooses to raise revenue in the tax reform option could have long term implications for the basic financial security of American families.

At the moment, it is not clear which way the fiscal cliff issue is going to go although a lot of insiders think a deal will be done before too long. If Congress and the White House do reach a deal this year it is quite likely much of the details will have to be worked out in the New Year—likely under the banner of “tax reform.”

Under almost any deal scenario, the new normal means that NAIFA members will have to continue to make the case that the tax treatment of permanent life insurance and annuities promotes a critical benefit to society--and should be continued. It will not be easy. But, what is crystal clear is that NAIFA members will be equal to the task.

It’s harder to say by how much. The answer to that depends on what Congress does in the next couple of weeks.

Let’s say Congress fails to enact a fiscal cliff bill by year-end. In that case, virtually every American’s tax bill will go up—experts say for the middle class, the average tax hike will be $2,200. The new tax bite gets bigger as your income goes up. Current law provides:

• The current 2-point cut in an employee’s share of Social Security taxes expires.
• Tax rates revert to 2001 levels—that means the lowest tax bracket goes from this year’s 10 percent to 15 percent. The highest tax rate goes from 35 percent this year to 39.6 percent.
• Capital gains rates go to 20 percent, from 15 percent.
• Dividends will be taxed as ordinary (wage) income—i.e., up to 39.6 percent.

Marriage penalty relief disappears, child tax credits shrink, estate tax rules go back to 2001 levels ($1 million exemption, 55 percent top rate).

What if Congress does enact an agreement to avert the fiscal cliff? Will your clients' taxes and your taxes go up then?

Quite likely.

If your adjusted gross income (AGI) is $250,000/married or $200,000/individual, you will pay an additional 3.8 percent on investment income, and an additional 0.9 percent in Medicare taxes with or without an agreement. And, an agreement is likely to include new taxes on “the rich”—that could be AGI of $200,000/$250,000, or it could be higher—maybe $500,000 or even $1 million. Those new taxes could include higher rates, and/or limits on at least some tax expenditures.

In 2013, Congress will tackle tax reform—maybe only for business (corporate and pass-through) income, or maybe for individuals as well. Once again the tax rules that apply to life insurance, annuities, pensions, retirement savings, and employer-provided health insurance and other benefits will be at risk.

You can help prevent some (or all) of these adverse consequences. Plan to join your colleagues at NAIFA’s Congressional Conference in Washington, DC April 8-9 to tell your Representative and Senators how important these rules are to the security of 75 million American families. You can make a difference. Please register to participate today.

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