Thursday, July 18, 2013

Tax Break for Homemakers Saving for Retirement

On July 12, 2013, the United States Senate discovered that it had passed all legislation needed by the American people and it had some free time.  Accordingly, the Senate decided to pass the Kay Bailey Hutchison Spousal IRA Act unanimously.

The Kay Bailey Hutchison Spousal IRA Act says, in its entirety:
The heading of subsection (c) of section 219 of the Internal Revenue Code of 1986 is
amended by striking "Special Rules for Certain Married Individuals'' and inserting "Kay Bailey Hutchison Spousal IRA''.


In other words, the Act changed a heading of a tax code provision to honor former Senator Kay Bailey Hutchison, Republican Senator from Texas from 1993 to 2003, who is very much alive. 

The Joint Committee on Taxation conducted its research and dutifully concluded [PDF] that the "estimated revenue effect" of the legislation is zero. 

Internal Revenue Code section 219(c) is an interesting provision that was originally enacted in 1976, and substantially revised in 1996 due to the efforts of Ms. Hutchinson, governing contributions to Individual Retirement Accounts (IRA).  Normally, a taxpayer's IRA contribution is limited to his or her earned income for that year from wages and self-employment.  Congress believed "that this was unfair to a spouse who receives no compensation but performs valuable household work," so section 219(c) was amended to allow individuals to contribute to an IRA even if they do not have sufficient earned income, as long as their spouses have sufficient earned income.  

Such an IRA is called a "spousal IRA," though there is no difference between those IRAs and other IRAs. 

For example, assume the compensation incomes of H and W for a year are $700 and $50,000, H and W are married filing jointly, and the IRA contribution limit is $6,000 per person per year.  Section 219(c) allows H to contribute $6,000 to his spousal IRA, even though an unmarried H would be able to contribute only $700, up to his earned income.

The only other tax account named after a person is the Roth IRA, named after William Roth, the Senator from Delaware (1971 to 2001) who sponsored its legislation.

It is unclear whether future legislation will name the alimony tax provision (Internal Revenue Code section 71) after Newt Gingrich.

 Section 219 Retirement Savings
(c) Special rules for certain married individuals.
(1)  In general. In the case of an individual to whom this paragraph applies for the taxable year, the limitation of paragraph (1) of subsection (b) shall be equal to the lesser of— (A) the dollar amount in effect under subsection (b)(1)(A) for the taxable year, or (B) the sum of (i) the compensation includible in such individual's gross income for the taxable year, plus (ii) the compensation includible in the gross income of such individual's spouse for the taxable year reduced by— (I) the amount allowed as a deduction under subsection (a) to such spouse for such taxable year, (II) the amount of any designated nondeductible contribution (as defined in section 408(o) ) on behalf of such spouse for such taxable year, and (III) the amount of any contribution on behalf of such spouse to a Roth IRA under section 408A for such taxable year.
(2) Individuals to whom paragraph (1) applies. Paragraph (1) shall apply to any individual if—(A) such individual files a joint return for the taxable year, and (B) the amount of compensation (if any) includible in such individual's gross income for the taxable year is less than the compensation includible in the gross income of such individual's spouse for the taxable year.

No comments:

Post a Comment