Last year in this space I asked the question: should the income earned on savings be exempt from income tax regardless of the purpose of the savings? Under the federal tax code, there are three common types of savings accounts in which the earnings are given at least some exemption from income tax: retirement accounts (IRAs), health savings accounts (HSAs), and education savings accounts (Coverdell ESAs and 529 plans). Each type of tax-advantaged savings vehicle has developed more or less separately with their own, sometimes very complex, rules.
Are there other things taxpayers should be saving for that merit a tax advantage? What about saving for a down payment on a first house, or long term care expenses for elderly family members?
And if Americans aren’t saving enough in general, as we are repeatedly told, then why shouldn’t there be savings vehicles in which the income earned on the savings is not taxed, regardless of the ultimate use of the savings?
When I asked those questions last year, I pointed out that I wasn’t talking about some new, outrageous idea, or something I thought up myself. Such savings vehicles already exist in Canada (called tax-free savings accounts, or TFSAs) and Britain (individual savings accounts or ISAs).
I’m not saying that I had anything to do with it, but after I wrote about the subject, Congressman Dave Brat of Virginia introduced federal legislation that would create universal savings accounts (USAs). The proposal isn’t perfect, because it’s only a limited version of my idea that savings accounts should be completely exempt from income tax. Contributions would be limited to $5,500 per year, and could be invested in bonds and equities, which would make USAs similar to Coverdell ESAs.
The proposed legislation would create another kind of limited tax-exempt savings vehicle, so it wouldn’t do anything for tax simplification. It would, however, encourage saving.
If tax-free savings accounts must be limited, couldn’t Congress at least standardize the rules for the different types of such accounts, instead of having separate, very complex, rules for each type? That would at least make the tax treatment of savings a little simpler, instead of making it even more complex by creating yet another type of account with its own rules.
Nahan B. Hannah is a Shareholder in the Tucson office, and practices in the areas of estate planning and administration, real estate, and commercial transactions. He is also a noted blogger, and you can find more of his articles on his private blog,
Contact Attorney Hannah: firstname.lastname@example.org or 520/ 322-5000
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