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Tax Overhaul Legislation

September 22, 1986

The Levin article is long overdue. At last, here is someone who calls it like it is, after the deluge of myths and misinformation that we have been fed. Obviously, this is a very complex matter and in this brief article, Levin could only touch on the unfairness and the myths of this tax bill and how it will affect the average American.

Unfortunately, one of the most unfair, if not cruel, aspects of this improperly named "tax reform bill" has not been mentioned by Levin. This is the reported elimination of the present law on lump sum distributions of profit-sharing or savings plan funds. This is the so-called "Special Ten-Year Averaging Method for Total Distribution from Qualified Retirement Plan--Form 4972."

Ever since 1967, some corporations, in lieu of raises or cash bonuses, have established such funds where they contributed for their employees, and kept them in trust. These funds were to be taxed in 10, 20 or more years upon retirement or termination, and the law allows these earnings to be taxed as if earned over a 10-year period. Since in most cases, earnings were accumulated over longer than 10 years, this was not a true concession by the Internal Revenue Service.

Complete details as to how this "Ten-Year Rule" will be eliminated have not been widely published. The inevitable implication is that these lump sum distributions of earnings going back 20 years or so, will be taxed just like other income earned in the year distributed, and added to other income on Form 140. In such an event, the effect on low- and middle-income workers will be devastating.

The tax increase on the distributions will be from 100% to 300% or more, depending upon other income. The greatest percent increases will be on the lowest earners. There is only one word to describe such a situation: confiscation of one's life savings.

Most of these individuals would have been far better off, being paid these sums each year and paying their tax when filing their returns.

The sad part is that the great majority of people in this situation do not know what will hit them next year if the bill passes and this 10-year provision is eliminated.



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