Federal IRA and Ohio Business Deduction Proposals
May 9, 2019
When tax law changes are being discussed, we typically take the approach of waiting to see what’s in the final law before wasting too much time evaluating what is being discussed. This is because there can and likely will be major changes between when politicians first begin discussing something and the time of the final vote to implement changes. That said, we think several potential changes being discussed have a high likelihood of becoming law, aren’t receiving a lot of attention, and are worth considering:
IRA Distributions After Death – Under current law, spousal beneficiaries can rollover the IRA of their deceased spouse and treat it as their own (or receive it as an inherited IRA). There is no proposed change to this situation. What is likely to change is for non-spouse beneficiaries like children. Under current law, a beneficiary can generally transfer their share of an IRA to an inherited IRA and take required minimum distributions over their life. This can obviously be a long period of time for younger beneficiaries – for example, a 45 year old can use a 38.8 year life expectancy when taking required distributions. This is good for beneficiaries who don’t need to money and want to minimize taxes. This is bad for Uncle Sam’s coffers. The latest proposals are: 1) House bill will mandate that IRA’s be paid out over a maximum of 10 years and 2) Senate bill is a little more complicated and would result in IRA’s whose aggregate value exceeds $450,000 being required to be distributed over a maximum of 5 years. For individuals with (or beneficiaries expecting to inherit) large IRA balances, these changes are potentially significant. Other proposed changes are increasing the age at which required minimum distributions must begin from 70 ½ to 72 and allowing IRA contributions past age 70 ½. There is bipartisan support for the changes (a rarity in Washington these days) so it is likely some compromise of the House and Senate proposals will become law.
Ohio Business Deduction – This change involves only a small number of taxpayers but will be very significant if passed. Under current law, the first $250,000 of qualifying income earned via a “pass-through” entity is not taxed and income above $250,000 gets a 40% tax reduction. A proposal from the Ohio House will reduce the break to the first $100,000 of income and eliminate the additional tax break above that level. The Ohio Senate has not put forth a proposal on the matter. Given criticism in the media of this tax break and the fact that the House bill was bipartisan, I believe it likely that something like the House proposal will become law.
The above are high level summaries of the changes and leave out a lot of details and considerations.