The Congressional Budget Office says people who die and retirement savers could do a lot more to cut federal budget deficits.
The CBO is predicting that the U.S. federal government will pile up $22 trillion in deficits over the 10-year period from 2025 through 2034.
Changing the rules for valuing the assets left by people who die could increase federal tax revenue by $536 billion over that 10-year period, and reducing how much taxpayers can add to traditional IRAs and 401(k) plans could add $187 billion, CBO analysts estimate in a new guide to 76 deficit-fighting options.
The inherited asset proposal and the retirement plan contribution cap proposal could cut budget deficits by a total of $723 billion over 10 years.
CBO analysts estimated in 2017 that the two changes could increase federal tax revenue by $160 billion over 10 years. In 2020, the analysts estimated the changes could increase 10-year revenue by $209 billion.
The analysts also looked at proposals for general tax rule changes, such as imposing a surtax on high-income people, and other proposals affecting life, health and retirement provisions, such as a reduction in the income tax exclusion for employer-sponsored health benefits.
The analysts do not classify the options they reviewed as CBO proposals. They did not discuss how likely Congress would be to approve any of them.
What it means: Supporters of the current rules will have to work harder to defend the rules against members of Congress who are looking for ways to reduce the federal budget deficit, fund new programs or new tax breaks, or pay to protect existing programs and tax breaks.
For financial professionals, any tax changes that do take effect could lead to a rush to find new ways to help clients hold down their tax bills or provide cash that the clients could use to cope with bigger tax bills.
In the past, for example, many high-income taxpayers used permanent life insurance to handle the tax obligations related to inherited assets.
If the tax rules for IRAs and 401(k) accounts tighten and the tax rules for individual annuities stay the same, using annuities could become more attractive.
The backdrop: The CBO is an arm of Congress that helps lawmakers understand rules and programs that affect federal spending.
