Charitable Remainder Trusts – A Potential Solution To The SECURE Act

Posted on February 27, 2020 by James Lange in Forbes.com Articles.

Charitable Remainder Trusts – A Potential Solution To The SECURE Act

by James Lange, CPA/Attorney

Reprinted with permission of Forbes.com where Jim is a paid contributor.

Big Picture with Charitable Remainder Trusts

Before I get immersed in the details, the big picture that I’m presenting in this post is that there are many situations where your children would get more money and a steadier income if you named a charitable remainder trust as the beneficiary of your IRA than if you named your children directly. If you have a million dollars or more in your IRA, even if you aren’t very charitable, you should at least consider naming a charitable remainder trust as the beneficiary of your IRA.

What is a Charitable Remainder Trust?

First of all, when I say a charitable remainder trust, what am I talking about?

In this context, I am talking about naming a trust as the beneficiary of your IRA or retirement plan. Of course, if you are married, you would name your surviving spouse as the primary beneficiary. In this post, I will compare naming your children as the contingent beneficiary after your spouse (or your children if you don’t have a spouse you are providing for) to naming a charitable remainder trust.

To oversimplify, the trust would provide your beneficiary (let’s assume your child) with a distribution that has some, but not a complete correlation to the income of the trust, and then at the child’s death the amount remaining in the trust would go to the charity of your or even your child’s choice. Actuarially, the charitable remainder trust must be set up in a way that the charity receives 10% of the present value of the bequest at the date of death but that leaves 90% for your children. When you take into the enormous tax benefits of the charitable remainder trust and the draconian tax treatment of leaving your IRA to your children directly, your children often get more value, sometimes by hundreds of thousands of dollars, than if you just leave the IRA outright to them.

Below I present the very favorable math of the charitable trust for your family. Having charity in your heart is a major bonus. If you like the idea of maintaining a significant amount of money in the tax deferred environment and having your beneficiary get regular distributions for the rest of his or her life, especially if it results in more money for your children, then charitable remainder trusts should at least be considered.

The charitable remainder trust can to some extent be treated as a stretch IRA.

To get the best results, leaving your IRA to someone other than your spouse requires strategic planning. Let’s go back to exempt beneficiaries. In addition to your spouse, charities and charitable trusts are also exempt from the 10-year tax acceleration rule. To utilize this exemption to the 10-year tax acceleration rule, you could establish a Charitable Remainder Unitrust (CRUT), or Charitable Remainder Annuity Trust (CRAT) and name it as the beneficiary of your IRA (after naming your spouse as the primary beneficiary assuming you are married).

So, to be clear, this trust is a testamentary trust meaning that it isn’t funded before you and your spouse die. While you and/or your spouse is alive, there is no tax return, no money goes into it, and other than some paper sitting in a fireproof drawer, it doesn’t exist. It is totally revocable meaning you can change it as long as you and/or your spouse is alive. But, after you and your spouse die, if you name it as the beneficiary of your IRA or retirement plan, it becomes irrevocable and the trust comes to life.

Here’s how a CRUT (or a CRAT with minor differences) works at the basic level. When you die or when both you and your spouse are dead, what remains, or a portion of your IRA could be transferred to a CRUT and the IRA can then be liquidated without paying taxes.

The conventional approach would be to leave your IRA directly to your children and/or grandchildren and all of it will be taxed in 10 years. With a CRUT, your children won’t get a lump sum of money when you die, but they also will not face a big tax bill immediately after you die or as big of a tax bill even 10 years after you die. They would receive a regular “income” from the CRUT for the rest of their lives. The distribution would be treated as ordinary income until the amount of the initial IRA plus any interest and dividends earned in the CRUT has been paid to your child. After the ordinary income has been distributed, then capital gains would be distributed. Finally, when your children die, whatever is left in the CRUT goes to the charity of your or their choice.

Although you probably have some charity in your heart, you would most likely rather see your children get the bulk of your money rather than your favorite charity. Me too. The reason that this is an idea worth considering is that the money that goes into the CRUT in this case, your IRA isn’t subject to the new rules governing after-death IRA distributions.

A CRUT, since it is an exempt beneficiary, can mimic the benefits of the stretch IRA by paying out the IRA income over a period of more than ten years and providing your heirs with a steady income over their entire lifetimes. Distributions from a CRUT can be stretched and taxed over your child’s life (if you have no spouse) or after the deaths of you and your spouse. I like to look at everyone’s unique situation and I like to do the math.

Disadvantages of a CRUT

You need to have an attorney draft the CRUT.
You need to name a trustee.
You can expect to pay an additional $500 to $2,000 or sometimes more every year for the remainder of the beneficiary’s life, to maintain the trust from a legal and tax compliance standpoint. You not only need to file a special CRUT tax return, but you also must file a K-1 with the beneficiary which complicates his return. The additional complication and aggravation of drafting and more importantly maintaining the charitable trust for the life of your child or children should not be underestimated.
The trustee of the CRUT is required to report the income that the beneficiary receives to the IRS and must send to each beneficiary a form called a K-1 which complicates the beneficiary’s own tax return. If your beneficiary lives for 20 years, it’s not unrealistic to think that the fees required to maintain the trust could exceed $20,000 or even $40,000.
Ultimately you could be creating significant complications for less tax savings than you would have realized if you had just left the money to your child instead of the CRUT.
If you leave your IRA to a CRUT, it could potentially hurt your family. If the income beneficiary of the trust (most likely, your child) dies prematurely, the remaining balance will go to the named charity and not to your grandchild like it would if you just left the IRA to your child. So, there is a very real risk with a CRUT, and it would likely not be a good choice if your beneficiary has a reduced life expectancy. The answer to that objection is to buy a term life insurance policy on the income beneficiary with a trust for his or her child or children as the beneficiary of the policy.

Advantages of a CRUT

Including a CRUT as part of your estate plan may make an enormous difference for the long-term security of your child or children and it may be the best way to maximize the number of dollars your child receives. If you have charity in your heart as well as protecting your family, it may be a wonderful thing.

Let’s compare leaving your million-dollar IRA to a CRUT versus leaving it to your child. What is the best option for the $1 million dollars if she will have to pay income taxes on the entire million (plus growth) within 10 years of your death? Though I could do some post-mortem planning, it will be extremely difficult to protect that distribution from very high tax rates that are projected to get even higher in the future.

To oversimplify, the tax on the $1 million Inherited IRA could be $400,000 leaving your child with net proceeds after taxes of $600,000 plus appreciation.

On the other hand, the CRUT pays no income taxes when you die. So, the income that your child will receive is based on $1 million, not $600,000. What I will show below is that your child may be able to get more money over their lifetime as the beneficiary of a CRUT than if she receives your $1 million IRA outright.

Let’s look at an example. Suppose Alice creates a CRUT that names Roberta as the income beneficiary, and her favorite charity (or charities) as the remainder beneficiary. She stipulates that $1 million of her IRA will be transferred to the trust at her death. Roberta won’t inherit the IRA directly, but she will receive a nice check from the CRUT on a regular basis for her entire life. The amount that she receives is calculated yearly according to a complex formula required by the IRS because there is a minimum amount that must eventually be turned over to the charity in order to get this favorable treatment.

So, which inheritance will benefit Roberta the most, the money outright subject to accelerated taxes or the income from the CRUT? The answer is it depends on what interest rates you assume but perhaps more importantly, and how long Roberta lives.

Given certain reasonable assumptions, Roberta would have $400,331 more money if her aunt left her IRA to a charitable trust compared to leaving it outright to Roberta.

Roberta only has to live past the age of 63 to receive more money from the CRUT as compared to inheriting the $1 million IRA stretched over ten years. (The breakeven point may change depending on your circumstances, what assumptions you use, the Section 7520 rate when the CRUT is created and how old your beneficiary is at your death.) The other advantage of the CRUT is that she will have all the protections of a trust including protection from creditors, protection from herself, and in some cases, financial protection from her husband should she divorce or the marriage survives and her husband has different ideas on how she should spend her money. In addition, the charity would get $1,221,929 after Roberta dies.

Key Ideas

In many situations it will make more sense to leave your IRA to a charitable trust than to leave it to your children directly. It is possible, even likely, your children will actually end up with more money than if you left the IRA to a charitable trust than if you left it to them outright
After the SECURE Act many IRA owners that never had a good reason to closely look at a charitable remainder trust as the beneficiary of their IRA should now consider one.

Why consider a charitable remainder trust as IRA beneficiary after the SECURE Act?

Will my kids actually get more money with a charitable remainder trust as IRA beneficiary?

What are the downsides of using a charitable remainder trust as IRA beneficiary?

There are real tradeoffs. You will pay an attorney to draft the CRUT, name a trustee, and budget $500 to $2,000 or more annually for tax filings and K-1 reporting for the life of the beneficiary. If the income beneficiary dies prematurely, the remaining balance goes to the named charity rather than to your grandchildren, which is a meaningful risk that can sometimes be hedged with term life insurance.

How much of the IRA goes to charity when using a charitable remainder trust as IRA beneficiary?

Who should consider a charitable remainder trust as IRA beneficiary?

This strategy is worth serious consideration for IRA owners with roughly $1 million or more in retirement accounts, especially those whose children would face high tax brackets under the 10-year rule. It also fits well for parents who want creditor protection, divorce protection, and a steady lifetime income stream for their child, even if charitable giving is not their primary motivation.

About Your Presenter: James Lange, CPA/Attorney

Jim is the author of 10 best-selling financial books and has been quoted 37 times in The Wall Street Journal. He has published 21 articles for Forbes.com.

The Defenses Against the SECURE Act

Posted on August 23, 2019 by James Lange in Beneficiary Designations, Educational Resources, IRAs, Retirement Plan Options, Roth IRA, Roth IRA Conversions, Stretch IRA and tagged Beneficiaries, James Lange, Retirement Planning, Roth IRA Conversion.

The Best Defenses Against the SECURE Act by James Lange

photocredit: Getty

This blog post has been reposted with permission from Forbes.com

I have posted several articles explaining the most important provisions of the SECURE Act and the devasting effect that its provisions will likely have on individuals who inherit IRAs or retirement plans. This article will address some of the proactive steps you can take now and after the SECURE Act or something similar becomes law.

Reduce Your Traditional IRA Balance With Roth IRA Conversions

If timed correctly, Roth IRA conversions can be an effective strategic planning tool for the right taxpayer. Often, a well-planned series of Roth IRA conversions will be a great thing for you and your spouse and will be one of the principle defenses from the devastation of the SECURE Act.

You and your heirs can benefit from the tax-free growth of the Roth IRA from the time you make the conversion up to ten years after you die. One of the advantages of making a series of conversions is that the amount you convert to a Roth IRA reduces the balance in your Traditional IRA, which will reduce the income taxes your heirs after to pay on the Inherited IRA within ten years of your death.

Inherited Roth IRAs are subject to the same ten-year distribution rule after death as Inherited Traditional IRAs under the SECURE Act. The important difference between the two accounts is that the distributions from Roth IRAs are generally not taxable. One good thing about Trump’s Tax Cuts and Jobs Act of 2017 is that it temporarily lowered income tax rates, so this year is probably a better than average year for many IRA and retirement plan owners to consider Roth IRA conversions as part of their long-term estate planning strategy. We did several posts on Roth IRA conversions earlier this year and concluded this was a great time to look at Roth conversions. Now, it is even more important.

In short, it may make more sense for you to pay income taxes on a series of Roth IRA conversions done over a period of years than it would for your heirs to pay income taxes on the accelerated distributions required under the SECURE Act. The strategy of doing a series of Roth IRA conversions over several years tends to work better because you can often do a series of conversions and stay in a lower tax bracket than if you did one big Roth conversion. Of course, there is no blanket recommendation that is appropriate for every IRA and retirement plan owner.

Spend More Money

Many of my clients and readers don’t spend as much money as they can afford. Maybe if they realized to what extent their IRAs and retirement plans will be taxed after they die, they would be more open to spending some of it while they are alive. Assuming you can afford it, why don’t you enjoy your money rather than allowing the government to take a healthy percentage of it? Considering taking your entire family on a vacation and pay for everything. My father in law takes the entire family on a four-day vacation in the Poconos every year. Yes, it costs him some money, but those family memories will be a much more valuable legacy than passing on a slightly bigger IRA – especially if your IRA is destined to get clobbered with taxes after you die.

A variation on the same idea is to step up your gifting plans – not only to charity but also to your family. Sometimes it makes sense to give a financial helping hand to family members who might need one sooner than later. Not only might you be able to ward off additional troubles for them, but it might help your own peace of mind if you don’t have to worry about them. What about that new grandbaby? Consider opening a college savings plan – it could open a whole new world of opportunity for him when he reaches college age.

If you donate to charity, make sure that you “gift smart”. The Tax Cuts and Jobs Act of 2017 made it more difficult for many Americans to itemize their charitable contributions. If you fall into this category, you need to know about a provision in the law that allows you to make charitable contributions directly from your IRA. Known as a Qualified Charitable Distribution (QCD), this strategy allows you to direct all or part of your Required Minimum Distribution (RMD) directly to charity. The amount of the QCD is not an itemized deduction on your tax return – but it’s even better. It is excluded from your taxable income completely! So, if you are required to take RMD’s from your retirement plans and intend to donate to charity anyway, a QCD may be a much more tax-efficient way to do it.

Update Your Estate Plan

Thoughtful estate planning can provide options for survivors that will allow them to make better decisions because they can do so with information that is current at the time you die. Even if you have wills, life insurance and trusts, the changes in the laws suggest you review and possibly update your entire estate plan. This includes your IRA beneficiary designations too, and that’s particularly true if you have created a trust that will be the beneficiary of your IRA or retirement plan. Assuming some form of the SECURE Act is passed into law, you would likely improve your family’s prospects by updating your estate plan.

Consider Expanding Your Estate Plan

The changes brought about by the SECURE Act could make life insurance even valuable to your estate plan than in the past. The idea is you would withdraw perhaps 1% or 2% of your IRA, pay taxes on it, and use the net proceeds to buy a life insurance policy. The math on this type of policy stays the same as in the past. The difference is in the past your heirs could stretch the IRA over their lives. This makes the life insurance option much more attractive because the alternative is worse. Charitable Trusts might also become a good option depending on the final form of the law.

One idea that we think can be a good strategy for some IRA owners under the SECURE Act are Sprinkle Trusts. If used in an optimal manner, they can provide families with the opportunity to spread the tax burden from inherited IRAs over multiple generations by including children, grandchildren, and great-grandchildren as beneficiaries. Sprinkle Trusts have been one of the many “tools” in the sophisticated estate planner’s repertoire for years but have become much more attractive recently because they can offer significant tax benefits to certain IRA owners. They can also have hidden downfalls, so consider talking with an attorney who has expertise in both taxes and estate planning to help map out a strategy that is appropriate for your situation.

Combine Different Strategies

Perhaps the best response to the SECURE Act involves a combination of strategies. For example, in some situations the most course of action might be revised estate plans, a series of Roth IRA conversions, a series of gifts, and the purchase of a life insurance policy.

Spousal IRAs

The SECURE Act will not apply directly to an IRA or retirement plan that you leave your spouse. After your spouse dies and leaves what is left to your children, then the SECURE Act does rear its ugly head.

The SECURE Act is a money grab – an action by Congress that betrays retired Americans. You will likely be able to at least partially defend your family against its worst provisions by taking action. This is not one of those posts where you think “great post, now back to watching television”. It is a post meant to create dread that the IRA you worked so hard to accumulate will get clobbered with taxes after you die unless you take action. The ideas discussed above are some of our favorite action points. This post should be the beginning, not the end of your research and action on this enormous problem.

For more information go to https://paytaxeslater.com/next-steps/ to take next steps to protect your financial legacy.

If you’ll be in the Pittsburgh area, go to https://paytaxeslater.com/workshops/ for updates on Jim’s FREE retirement workshops to learn even more about how to established retirement plans that will be beneficial to make the most out of what you’ve got for your family.

James Lange

The SECURE Act: Is It Good For You Or Bad For You?

Posted on August 19, 2019 by James Lange in Beneficiary Designations, Educational Resources, Estate Tax, Government Programs, Income Tax, Inherited IRAs, IRAs, Retirement Plan Options, Roth 401(k), Roth IRA, Roth IRA Conversions, Stretch IRA, Traditional IRA and tagged death of the stretch ira, James Lange, Retirement, Retirement Planning, Roth IRA Conversion.

Is The SECURE Act Good for You or Bad For You by CPA/Attorney James Lange on Forbes.com

Will you be able to retire safely under the SECURE Act?

This blog post is republished with permission from Forbes.com

My previous post introduced the potential consequences of the SECURE Act, which is being promoted as an “enhancement” for IRA and retirement plan owners. This is because it includes provisions allowing some workers to make higher contributions to their workplace retirement plans. I think it is a stinking pig with a pretty bow, so I wanted to give retirement plan owners the good and bad news about it.

I am a fan of Roth IRAs because they allow you to have far more control over your finances in retirement than you might have otherwise had. You are not required to take distributions from your Roth IRA, but the good news is that they’re not taxable if you do take them. These tax benefits can be a critical factor for seniors, especially if you are suddenly faced with costly medical or long term care bills. Saving money in a Roth account can offer financial flexibility to many older Americans – and one good thing about the SECURE Act is that it can help you achieve that flexibility. Here’s how.

The Good News About The SECURE Act

Under the current law, you are not allowed to contribute to a Traditional IRA after age 70½. (You can contribute to a Roth IRA at any age as long as you have taxable compensation, but only if your income is below a certain amount.) The age limitation for making contributions to Traditional IRAs is bad for older workers – and that’s an important point because the Bureau of Labor Statistics estimates that about 19 percent of individuals between the ages of 70 and 74 are still in the workforce. The SECURE Act eliminates that cutoff and allows workers of any age to continue making contributions to both Traditional and Roth IRAs.

That same provision of the SECURE Act offers a hidden bonus – it means that it will also be easier for older high-income Americans to do “back-door” Roth IRA conversions for a longer period of time. The back-door Roth IRA conversion, currently blessed by the Tax Cuts and Jobs Act, is a method of bypassing the income limitations for Roth IRA contributions. The current law prohibits contributions to a Roth IRA if your taxable income exceeds certain amounts. Those amounts vary depending on your filing status. But even if you are unable to take a tax deduction for your Traditional IRA contribution, you can still contribute to one because there are no income limitations. Why bother? Because, assuming you don’t have any other money in an IRA, you can immediately convert your Traditional IRA to a Roth IRA by doing a back-door conversion. That’s a good thing because the earnings on the money you contributed can then grow tax-free instead of tax-deferred.

Here’s more good news. The current law requires Traditional IRA owners to start withdrawing from their accounts by April 1^st of the year after they turn 70 ½. These Required Minimum Distributions (RMDs) can be bad for retirees because the distributions are taxable. The increase in your taxable income can cause up to 85 percent of your Social Security benefits to be taxed and can also move you into a higher tax bracket. And once you begin to take RMDs, you are no longer allowed to make additional contributions to your account, even if you are still working. The SECURE Act increases the RMD age to 72, a change which will allow Traditional IRA owners to save more for their retirements.

There’s a hidden bonus in this change as well. Increasing the RMD age to 72 will allow retirees more time to make tax-effective Roth IRA conversions. What does that mean? Once you are required to take distributions from your Traditional IRA and your taxable income increases, you may find yourself in such a high tax bracket that it may not be favorable to make Roth IRA conversions at all.

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The Hidden Money Grab In The SECURE Act

Posted on July 9, 2019 by James Lange in Educational Resources, Inherited IRAs, IRAs, Roth 401(k), Roth IRA, Roth IRA Conversions, Stretch IRA, Traditional IRA and tagged Beneficiaries, death of the stretch ira, James Lange, Roth IRA Contributions, Roth IRA Conversion.

Capitol Building Washington DC used in Pay Taxes Later Blog Photo Courtesy of Delgado Photos

*Please note this blog post is a repost with permission from Forbes.com

On May 23, 2019, the House of Representatives overwhelmingly passed the SECURE Act (Setting Every Community Up for Retirement Enhancement). A more appropriate name for the bill would be the Extreme Death-Tax for IRA and Retirement Plan Owners Act because it gives the IRS carte blanche to confiscate up to one-third of your IRA and retirement plans. In other words, it’s a money grab.

The SECURE Act is wrapped with all kinds of goodies that are unfortunately of limited benefit to most established IRA and retirement plan owners. But if you have an IRA or a retirement plan that you were hoping you could leave to your children in a tax-efficient manner after you are gone, you need to be concerned about one provision in the fine print that could cost them dearly. Non-spouse beneficiaries of IRAs and retirement plans are required to eventually withdraw the money from its tax-sheltered status, but the current law allows them to minimize the amount of their Required Minimum Distributions by “stretching” them over their own lifetimes. This is called a “Stretch IRA”. Distributions from a Traditional Inherited IRA are taxable, so the longer your beneficiaries can postpone or defer them (and hence the tax), the better off they will be. The bad news is that the government wants their tax money, and they want it sooner than later. The ticking time bomb buried in the SECURE Act is a small provision that changes the rules that currently allow your beneficiaries to take distributions from Traditional IRAs that they have inherited and pay the tax over their lifetimes, virtually cementing “the death of the Stretch IRA.” (The provisions of the SECURE Act also apply to Inherited Roth IRAs, but the distributions from a Roth IRA are not taxable.)

If there is any good news about the SECURE Act, it’s that it does not require your beneficiary to liquidate and pay tax on your entire Traditional IRA immediately after your death. For many people, that would be a costly nightmare because they would likely be bumped into a much higher tax bracket. Under the provisions of the SECURE Act, if you leave a Traditional IRA or retirement plan to a beneficiary other than your spouse, they can defer withdrawals (and taxes) for up to 10 years. (There are some exceptions for minors and children with disabilities etc.) If you leave a Roth IRA to your child, they will still have to withdraw the entire account within 10 years of your death, but again, those distributions will not be taxable. But any way you look at it, the provisions of the SECURE Act are a huge change from the old rules that allow a non-spouse heir to “stretch” the Required Minimum Distributions from a Traditional Inherited IRA over their lifetime and defer the income tax due.

That’s not the end of the bad news. Once your beneficiary withdraws all the money from your retirement account, it will no longer have the tax protection that it currently enjoys. In other words, even if your children inherited a Roth IRA from you and the distributions themselves weren’t taxable, the earnings on the money that they were required to withdraw are another story. Even if they wisely reinvest all the money they withdrew from their Inherited Traditional or Roth IRA into a brokerage account, they’re still going to have to start paying income taxes on the dividends, interest and realized capital gains that the money earns.

I know there are readers out there who are thinking “it can’t be all that bad”. Yes, it is that bad. Here is a graph that demonstrates the difference between you leaving a $1 million IRA to your child under the existing law, and under the SECURE Act:

Child Inherits Stretched IRA Under Existing Law versus Child Inherits 10 Year IRA Under SECURE Act Reprinted with Permission from Forbes.com for Pay Taxes Later website

Child Inherits Stretched IRA Under Existing Law versus Child Inherits 10 Year IRA Under SECURE Act – James Lange

This graph shows the outcome if a $1 million Traditional IRA is inherited by a 45-year old child, and the Minimum Distributions that he is required to take are invested in a brokerage account that pays a 7 percent rate of return. Other assumptions are listed below*. The only difference between these two scenarios is when your child pays taxes! The solid line represents a child who can defer (or “stretch”) the taxes over his lifetime under the existing rules. At roughly age 86, that beneficiary who was subject to the existing law in place still has $2,000,000+. The dashed line represents the same child if he is required to take withdrawals under the provisions of the SECURE Act. At age 86, that same beneficiary has $0. Nothing. Nada. The SECURE Act can mean the difference between your child being financially secure versus being broke, yet Congress is trying to gloss over this provision buried in the fine print. I don’t think so!

The House of Representatives passed the SECURE Act by an overwhelming majority, so the probability that the Senate will pass a version of this legislation is quite good. In 2017, the Senate Finance Committee recommended the Death of the Stretch IRA by proposing the Retirement Enhancement and Savings Act (RESA). In true government fashion, RESA was unbelievably complicated. It allowed your non-spouse beneficiaries to exclude $450,000 of your IRA and stretch that portion over their lifetime – but anything over that amount had to be withdrawn within five years and the taxes paid. And if you had more than one non-spouse beneficiary, the amount that they’d be able to exclude from the accelerated tax would have depended on what percentage of your Traditional IRA they inherited. Imagine trying to plan your estate distribution around those rules!

The Senate is now floating an updated RESA 2019 that seems to say that it will change the original exclusion amount to $400,000. It will be a good change if it is passed. That is because instead of each IRA owner getting a $400,000 exclusion, the new version includes language to allow a $400,000 exclusion per beneficiary. When I first read that provision I thought I had either read it wrong or that it was a typo. That little detail would be extremely valuable (and make estate planning for IRAs and retirement plans far more favorable), especially for families with more than one child. But even in the Senate version, anything over and above that exclusion amount will have to be distributed (and the taxes paid) within five years of your death (instead of ten years like the House version).

Unfortunately, our “peeps” think the House version of the bill (which has a 10-year deferral period, but no exclusion) will be what eventually becomes law. This is particularly troubling because the Senate version would allow room for far more creative planning opportunities (and tax savings, because of the $400,000 per beneficiary exclusion). As of the time of this post, Senator Cruz is attempting to hold up the bill, but his reasons have nothing to do with the fine print that affects Inherited IRAs. The original version of the Act contained provisions about college tuition (Section 529) plans, but those provisions were stripped in the version the House voted on and Senator Cruz wants them restored. Unfortunately, no one is arguing about the biggest issue with the SECURE Act, which is the massive acceleration of distributions and taxes on your IRA after your death. And unless someone in Congress objects to the provision in the SECURE Act about Inherited IRAs, your non-spouse beneficiaries will find out the hard way that their elected officials have quietly arranged to pick your pockets upon your death.

I have been a popular guest on financial talk radio lately. Many of the hosts want to blame one political party or the other. I blame all of Congress. This is one of the few truly bipartisan bills that has potential devasting consequences, at least for my clients and readers, and it is highly likely to pass both sides of Congress. I wonder how many of our legislators in the House actually read this bill or understood what is was they voted for. Did they realize they are effectively—by accelerating income-tax collection on inherited IRAs and other retirement plans—imposing massive taxes on the families of IRA and retirement plans owners – even those with far less than a million dollars? Or perhaps they did understand it and hoped that the American public wouldn’t.

If you can’t tell by my tone, I am upset. I am also motivated to examine every strategy that we can use to legally avoid, or at least mitigate, the looming hammer of taxation on your Traditional IRAs and retirement plans. I’m going to address these strategies in a series of posts, so please read them to see how this proposal could affect someone in your specific situation. Even though the Senate version has a five-year tax acceleration instead of a ten-year, the Senate version could be better for most readers because of the value of the exclusion – especially if you have multiple beneficiaries.

Please check for follow-up posts on this subject. I will show you some strategies to protect your family from the Death of the Stretch IRA and keep more of your hard-earned money in your hands.

James Lange

Assumptions used for Graph

$1 Million Traditional IRA inherited by 45-Year Old Married Beneficiary
7% rate of return on all assets
Beneficiary’s salary $100,000
Beneficiary’s annual expenses $90,000
Beneficiary’s Social Security Income at age 67 $40,000

The SECURE Act: Is It Good For You Or Bad For You?

Posted on June 13, 2019 by James Lange in Forbes.com Articles.

The SECURE Act: Is It Good For You Or Bad For You?

by James Lange, CPA/Attorney

Reprinted with permission of Forbes.com where Jim is a paid contributor.

The Good News About The SECURE Act

The Bad News About The SECURE Act

Now let’s get down to the stinking pig.

The SECURE Act contains provisions about workplace retirement plans that I’m not convinced will be all that good for employees. Those provisions pale in comparison, though, when compared to the worst part of the SECURE Act – and believe me, it’s bad. That provision requires Traditional and Roth IRAs that are inherited by a non-spouse beneficiary to be distributed within 10 years. (There are some exceptions for minors and children with disabilities, and IRAs that you leave to your spouse are not subject to the rule at all.) Withdrawals from Inherited Roth IRAs are not taxable to your beneficiary, so the cost of the SECURE Act to them will be limited in the sense that they will eventually lose the tax-free earnings on their inheritance. Roth IRAs, however, haven’t been around that long. They weren’t established until 1997 (as part of the Taxpayer Relief Act), and the amount that you can contribute to them is limited. Even if you were smart enough to jump on the Roth bandwagon twenty years ago, the big problem that everyone seems to be overlooking is that most of America’s retirement money still lies in taxable Traditional accounts.

The existing law allows owners of Inherited IRAs to “stretch” their RMDs over their lifetimes. The SECURE Act requires that Inherited Traditional IRAs be distributed within 10 years of the original owner’s death. The SECURE Act essentially means the Death of the Stretch IRA. Since your heirs will no longer be able to “stretch” the distributions from your IRA over their lifetimes, there will be a massive income tax acceleration for them. And the younger your heirs are, the worse that acceleration will be.

I talked about the consequences of that tax acceleration in my earlier post. This provision in the SECURE Act betrays those conscientious savers who socked money away for years under the assumption that they would be able to pass it on to their children in a tax-efficient manner after their deaths. To me, the SECURE Act is particularly egregious because this change comes very late in the game for many IRA and retirement plan owners. It will be devastating to people who have worked hard their entire lives, played by the rules, and accumulated significant amounts of money in their IRAs and retirement plans. It will be even more devastating for retirees whose IRA and/or retirement plan constitutes the biggest asset in their estate because it potentially means a difference of millions of dollars for their children and grandchildren.

There are some things that you can do to help mitigate the consequences of this bill, and I will cover those in a later post. Thank you for reading.

What are the main SECURE Act pros and cons for IRA owners?

The biggest SECURE Act pros are the elimination of the age 70½ contribution cap on Traditional IRAs and the increase in the Required Minimum Distribution age to 72, which gives savers more time to grow their accounts. The biggest con is the elimination of the lifetime stretch for most non-spouse beneficiaries, who must now drain inherited IRAs within 10 years and pay the resulting income taxes.

Do the SECURE Act pros and cons affect Roth IRAs differently than Traditional IRAs?

Yes. The SECURE Act pros and cons hit Traditional IRAs harder because distributions are fully taxable. Inherited Roth IRAs must also be emptied within 10 years, but those distributions remain tax-free. The lingering downside for Roth heirs is losing the long-term tax shelter, since reinvested money in a regular brokerage account starts generating taxable dividends, interest, and capital gains.

How do the SECURE Act pros and cons impact older workers still earning income?

Why is the death of the stretch IRA the most discussed item in SECURE Act pros and cons?

Because it can mean the difference of hundreds of thousands or even millions of dollars for your heirs. The 10-year withdrawal window forces beneficiaries into compressed taxation, often pushing them into higher brackets during their peak earning years. For families whose IRA is the largest asset in the estate, this single provision overshadows nearly all the positive changes in the law.

Are there strategies to capture the SECURE Act pros while limiting the cons?

Yes. Common approaches include lifetime Roth conversions to shift money into the tax-free environment before death, using the higher RMD age to do those conversions at lower brackets, naming a charitable remainder trust as IRA beneficiary to mimic a stretch, coordinating which heirs receive which assets based on tax bracket, and using life insurance or 529 plans to transfer wealth more efficiently around the 10-year rule.

About Your Presenter: James Lange, CPA/Attorney

Jim is the author of 10 best-selling financial books and has been quoted 37 times in The Wall Street Journal. He has published 21 articles for Forbes.com.

The Hidden Money Grab In The SECURE Act

Posted on June 11, 2019 by James Lange in Forbes.com Articles.

The Hidden Money Grab In The SECURE Act

by James Lange, CPA/Attorney

Reprinted with permission of Forbes.com where Jim is a paid contributor.

On May 23, 2019 the House of Representatives overwhelmingly passed the SECURE Act (Setting Every Community Up for Retirement Enhancement). A more appropriate name for the bill would be the Extreme Death-Tax for IRA and Retirement Plan Owners Act, because it gives the IRS carte blanche to confiscate up to one third of your IRA and retirement plans. In other words, it’s a money grab.

The SECURE Act is wrapped with all kinds of goodies that are unfortunately of limited benefit to most established IRA and retirement plan owners. But if you have an IRA or a retirement plan that you were hoping you could leave to your children in a tax efficient manner after you are gone, you need to be concerned about one provision in the fine print that could cost them dearly. Non-spouse beneficiaries of IRAs and retirement plans are required to eventually withdraw the money from its tax-sheltered status, but the current law allows them to minimize the amount of their Required Minimum Distributions by “stretching” them over their own lifetimes. This is called a “Stretch IRA”. Distributions from a Traditional Inherited IRA are taxable, so the longer your beneficiaries can postpone or defer them (and hence the tax), the better off they will be. The bad news is that the government wants their tax money, and they want it sooner than later. The ticking time bomb buried in the SECURE Act is a small provision that changes the rules that currently allow your beneficiaries to take distributions from Traditional IRAs that they have inherited and pay the tax over their lifetimes, virtually cementing “the death of the Stretch IRA.” (The provisions of the SECURE Act also apply to Inherited Roth IRAs, but the distributions from a Roth IRA are not taxable.)

The House of Representatives passed the SECURE Act by an overwhelming majority, so the probability that the Senate will pass a version of this legislation is quite good. In 2017, the Senate Finance Committee recommended the Death of the Stretch IRA by proposing the Retirement Enhancement and Savings Act (RESA). In true government fashion, RESA was unbelievably complicated. It allowed your non-spouse beneficiaries to exclude $450,000 of your IRA and stretch that portion over their lifetime – but anything over that amount had to be withdrawn within five years and the taxes paid. And if you had more than one non-spouse beneficiary, the amount that they’d be able to exclude from accelerated tax would have depended on what percentage of your Traditional IRA they inherited. Imagine trying to plan your estate distribution around those rules!

The Senate is now floating an updated RESA 2019 that seems to say that it will change the original exclusion amount to $400,000. It will be a good change if it is passed. That is because instead of each IRA owner getting a $400,000 exclusion, the new version includes language to allow a $400,000 exclusion per beneficiary. When I first read that provision I thought I had either read it wrong, or that it was a typo. That little detail would be extremely valuable (and make estate planning for IRAs and retirement plans far more favorable), especially for families with more than one child. But even in the Senate version, anything over and above that exclusion amount will have to be distributed (and the taxes paid) within five years of your death (instead of ten years like the House version).

I have been a popular guest on financial talk radio lately. Many of the hosts want to blame one political party or the other. I blame all of Congress. This is one of the few truly bipartisan bills that has potential devasting consequences, at least for my clients and readers, and it is highly likely to pass both sides of Congress. I wonder how many of our legislators in the House actually read this bill or understood what is was they voted for. Did they realize they are effectively—by accelerating income-tax collection on inherited IRAs and other retirement plans—imposing massive taxes on the families of IRA and retirement plans owners - even those with far less than a million dollars? Or perhaps they did understand it and hoped that the American public wouldn’t.

Please check for follow-up posts on this subject. I will show you some strategies to protect your family from the Death of the Stretch IRA and keep more of your hard-earned money in your hands.

Assumptions used for Graph

$1 Million Traditional IRA inherited by 45-Year Old Married Beneficiary
7% rate of return on all assets
Beneficiary’s salary $100,000
Beneficiary’s annual expenses $90,000
Beneficiary’s Social Security Income at age 67 $40,000

What changed under the SECURE Act inherited IRA rules?

How much can the SECURE Act inherited IRA rules cost my family?

Do the SECURE Act inherited IRA rules apply to Roth IRAs too?

Yes, but the impact is softer. Inherited Roth IRAs must also be fully withdrawn within 10 years, but those distributions remain tax-free. The hidden cost is that once the money leaves the Roth, future earnings on dividends, interest, and capital gains in a regular brokerage account become taxable, eroding the long-term tax shelter your beneficiary would have enjoyed under the old rules.

Are there any exceptions to the SECURE Act inherited IRA rules?

Yes. Surviving spouses can still treat an inherited IRA as their own and use lifetime distributions. Minor children, beneficiaries with disabilities or chronic illness, and beneficiaries less than 10 years younger than the IRA owner are also generally exempt from the 10-year rule. Charities and certain charitable trusts are exempt as well, which is why some families now consider naming a charitable remainder trust as beneficiary.

What can I do to protect my heirs from the SECURE Act inherited IRA rules?

Several strategies are worth evaluating: Roth conversions during your lifetime to shift money into the tax-free environment, naming a charitable remainder trust as IRA beneficiary to mimic a stretch, coordinating which assets go to which heirs based on tax bracket, and using life insurance or 529 plans to transfer wealth more tax-efficiently. The right mix depends on the size of your IRA, your heirs' tax situations, and your charitable intent.

About Your Presenter: James Lange, CPA/Attorney

Jim is the author of 10 best-selling financial books and has been quoted 37 times in The Wall Street Journal. He has published 21 articles for Forbes.com.

The Potentially Dire Consequences to Your Legacy with the “Death of the Stretch” IRA

Posted on May 22, 2019 by James Lange in Beneficiary Designations, Educational Resources, Estate Tax, Financial Scandals, Government Programs, Inherited IRAs, Roth IRA, Stretch IRA and tagged Beneficiaries, inherited ira, James Lange, PA, Pittsburgh.

The Death of the Stretch IRA is rearing its ugly head again.

Death of the Stretch Inherited IRAs by James Lange CPA/Attorney in Pittsburgh, PA As I have written about, this is personal to me. I was hoping that distributions from my Roth IRA and IRA would be “stretched” over the life of my daughter and maybe grandchildren. It could make a difference of well over a million dollars to my family.

If you have a million dollar or more IRA or retirement plan, this threatened (but as yet not totally defined) legislation could be just as devastating to you and your family. Once the two houses reconcile their differences (see the above post for the details of the different proposals), established estate plans will likely need to be reevaluated. This threat increases the merits of Lange’s Cascading Beneficiary Plan or a similar flexible estate plan. It also creates an even greater incentive for IRA owners considering significant Roth IRA conversions.

I wrote two books on this topic based on the proposal that advanced through the Senate Finance Committee beginning in 2016. While the changes to IRA and retirement plan distribution rules weren’t included in the last set of tax changes (much to our surprise), clearly the idea still has a huge bipartisan appeal.

The action points in both books was to reconsider and revisit the idea of converting more of your IRAs to Roth IRAs. This is consistent with my most recent recommendations encouraging higher conversions because of the low income-tax rates we are currently enjoying. The threat of losing the ability to stretch distributions from IRAs and retirement plans for generations only makes looking into Roth IRA conversions more compelling. If you have an IRA and/or other retirement plan and were hoping to leave it to your heirs with a favorable tax treatment and want to be kept up to date with this information, please call our offices at 412-521-2732.

The Death of the Stretch is Back On Congress’ Agenda

Posted on May 21, 2019 by James Lange in Educational Resources, Estate Tax, Government Programs, Inherited IRAs, Market News, Stretch IRA and tagged death of the stretch ira, end of stretch ira, James Lange, Pittsburgh PA, Save Our Stretch IRA, stretch roth ira.

The Death of the Stretch is Back On Congress’ Agenda

This just in.

Stretch IRA James Lange Pittsburgh Pennsylvania The House is scheduled to vote on Thursday, May 23, 2019, on the SECURE ACT. Then, it will be in the Senate’s court to vote on RESA. Then the House and Senate will need to reconcile the differences between the bills. Experts, including us, think a compromise will be found and that the “stretch IRA” as we know it, will be gone, dealing a severe blow to IRA and retirement plan owners who were hoping their heirs would be able to continue deferring the distributions on their inherited IRAs and retirement plans for decades.

Here is the story so far.

In mid-April, Senate Finance Committee Chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., reintroduced their Retirement Enhancement and Savings Act (RESA).

Under this bill, which we’ve been talking about since 2016, the account balance in a defined contribution plan or IRA must be distributed and included in income by the beneficiary five years after the employee’s or IRA owner’s death. Surviving spouses, beneficiaries who are disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or the child of the employee (or IRA owner) who has not reached the age of maturity are excluded from this rule. Plus, an exception to the five-year distribution deadline is provided for each beneficiary to the extent that the balance of the account they receive from the deceased employee or IRA owner does not exceed $400,000.

Also in April, the House Ways and Means Committee passed a bill known as the Secure Act (Setting Every Community Up for Retirement Enhancement Act of 2019). What was remarkable about the Secure Act is that it was fast-tracked and approved with lightning speed, with the intention “To amend the Internal Revenue Code of 1986 to encourage retirement saving, and for other purposes.” And while it does include some incentives for people to participate in retirement plans, it also proposes the “death of the stretch IRA.” The House version of the bill differs from RESA in that it proposes a 10-year time limit on holding an inherited IRA or inherited Roth IRA or other defined contribution plan before all of the funds in the account must be distributed. According to the summary provided by the House Committee on Ways and Means:

Section 401. Modifications to Required Minimum Distribution Rules: The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner. Under the legislation, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death.

We have been anticipating the death of the stretch IRA for years and wrote two books about its consequences. We were pretty convinced it was going to be eliminated in the last round of tax law changes, and frankly, we were surprised when the limit on non-spouse heirs stretching distributions from inherited IRAs over their lifetimes was not included. But, it’s back, and once again the devil is in the details which will have to be hashed out between the two houses. In the next post, I will offer some insight into the consequences and preliminary recommendations.

If you have an IRA and/or other retirement plan and were hoping to leave it to your heirs with a favorable tax treatment and want to be kept up to date with this information, please contact our offices at 412-521-2732.

Protect Your Social Security from Cyber Criminals

Posted on March 29, 2018 by James Lange in Data Breach, Identity Theft, Social Security and tagged Fraud, Social Security Fraud.

As many of you know, I am a strong proponent of waiting until age 70 to apply for Social Security, because I want both you and your surviving spouse to receive the highest benefit possible during your lifetimes. And one of the technical points about Social Security that I’ve never covered in detail in my books – because it’s only been in rare cases that I have recommended that my clients do it – involves applying for benefits retroactively. But in order to make you understand how your future Social Security benefits could be at risk from cyber criminals, I find myself in the strange position of having to give you a quick lesson on how retroactive benefits work.

Suppose that you could have applied for Social Security at your Full Retirement Age (FRA) of 66, but you took my advice and waited so that you can receive the highest benefit possible at age 70. When you turn 67, you go to your doctor for your annual physical. There, the doctor gives you some terrible news – you have six months to live! Now you’re cursing at me because you missed out on all of this Social Security money that you could have collected since you were 66 – or did you? Not necessarily. In certain instances, Social Security will allow you to apply for retirement benefits retroactively. If you qualify, Social Security will send you up to six months of retroactive benefits, paid as a lump sum.

A True Horror Story of a Social Security Fraud Victim

I won’t waste time telling you how you can qualify for retroactive benefits because it’s a complicated topic, and I will not recommend you do it because it will result in lower monthly benefits for the rest of your life. I am going to tell you something very important that you need to understand about retroactive benefits: if you are at least Full Retirement Age but are waiting until age 70 to file for Social Security so that you can earn Delayed Retirement Credits, your account may be compromised by cyber criminals who are trying to get their hands on any lump sum retroactive benefits to which you might be entitled, but have no intention of ever claiming. Here’s a real-life example of what I’m talking about:

I have a client who received an unexpected letter from the Social Security Administration. She and her husband had intended to hold off applying for benefits so that they could earn Delayed Retirement Credits. The letter they received, however, stated that Social Security had approved their request for a lump-sum retroactive benefit payment, which amounted to almost $12,000. Immediately my client and her husband went to their local Social Security office, and in the several hours spent there, discovered that the criminal(s) had called the office and pretended to be her husband. During the conversation, which was on a recorded line, the criminal simply said that he had changed his mind and wanted to apply for benefits retroactively! And the Social Security office complied with his request!

It Seems to Have Become Easier for Criminals

I found this situation to be so unbelievable that I called the Social Security office myself and asked how it could happen. What I learned might shock you. In order to access my client’s Social Security account, the criminals had to provide them with only the husband’s full name, date and place of birth, mother’s maiden name, and his current address and phone number. Personal information like this is widely available online through sites such as Facebook and Ancestry.com, not to mention what is available on the dark web thanks to the infamous Equifax hack in 2017.

My client spent hours at the Social Security office trying to put a hold on the “lump sum withdrawal,” and were assured that everything had been resolved. We thought that the criminals had been thwarted and everything was fine, but yesterday they received a 1099 from the Social Security Administration saying that they had received $12,000 in benefits that they needed to report on their tax return! So now we’re back to square one, and are still trying to get this mess sorted out. It’s bad enough that the IRS has been notified that they need to pay tax on money they never received, but now I’m wondering whether my client is still earning Delayed Retirement Credits after these criminals filed for benefits under his name!

How Can You Protect Yourself?

The bottom line is that you need to treat your Social Security account like a bank or investment account. Even though you might not think of it as being an asset, it is – because if a criminal manages to take control of it, the consequences could be costly and far-reaching. One way to protect yourself is to open an account with Social Security online, at this website: https://www.ssa.gov/myaccount/. Even if you do not plan to file for benefits in the near future, this action can prevent someone else from opening an account in your name without your knowledge. For your security you will be required to create a user name and password, and they’ll send a one-time security code to your email or phone.

Once you’ve established your account, you should check it periodically to make sure that information such as your name, address and phone number is correct. They also have a feature called “Block Electronic Access,” which prevents anyone (including you) from changing your personal information online or over the telephone. If you block access to your account and then change your mind, you have to ask Social Security to unblock it for you.
Years ago, the fear of Social Security theft was largely confined to the possibility of armed thugs waiting outside the bank for retirees who had just cashed their monthly checks. Unfortunately, criminals are constantly looking for ways to liberate you from your money, and their creativity can be surprising. Remember, protect yourself and your spouse by making sure that your benefits are safe – even if you don’t plan to apply in the near future!

Are you interested in learning more about Social Security maximization strategies? Visit our Social Security section of our website here for more information.

How Does the Tax Reform Affect Retirees?

Posted on December 28, 2017 by James Lange in Government Programs, Income Tax and tagged Charitable Contributions, Medical Expenses, Miscellaneous Deductions, Mortgage Interest, Property Taxes, Retirees, tax reform.

How does the Tax Reform Affect Retirees? Read More on https://paytaxeslater.com/how-does-the-tax-reform-affect-retirees/

How does the Tax Reform affect Retirees?

I was able to spend some time reading over the holiday, and of course much of my efforts were devoted to finding out how people were reacting to the new tax reform bill. In quick succession, I came across three articles published by three different media outlets. The first said that the tax reform would hurt poor people; the second insisted that the tax reform would hurt the middle class, and the third swore that the tax reform would hurt the rich. Many of our clients are retired, and they are asking “how will the tax reform affect me?” So I thought I would give you some ideas about how the tax reform might affect retirees.

One concern for retirees involves the changes made to the rules affecting Schedule A, Itemized Deductions. Will the tax reform affect you if you are retired, and you have been able to itemize? The short answer is that, depending on what and how much you deduct, the tax reform may affect you because some of the itemized deductions were reduced or even eliminated. Let’s look at specifics.

Tax Reform and Medical Expenses

Many retirees have high medical costs – and the good news is that medical expenses will still be deductible in 2017 assuming that they exceed a certain threshold. What makes this statement less than straightforward, though, is that there were two different thresholds when you did your taxes last year. Prior to the tax reform, individuals who were younger than age 65 had to have medical expenses that exceeded 10% of their adjusted gross income in order to be able to use the deduction.

If you or your spouse were 65 or older, though, the threshold was lower – only 7.5%. And whatever your age, you could only deduct the medical expenses that were in excess of your threshold. The bottom line for retirees? If you itemize, tax reform shouldn’t affect your medical deductions unless both you and your spouse are younger than 65 years old. The tax reform may actually benefit younger individuals who have high medical costs because, starting in 2017, everyone regardless of their age will have to meet a threshold of only 7.5% before they can deduct any medical expenses.

Tax Reform and Property Taxes

Many retirees could be affected by the changes in state and local tax (or, SALT) itemized deductions. Through 2017, you can deduct all of your state, local, real estate, sales and personal property taxes on Schedule A if you itemize. In 2018, those deductions will be capped at $10,000. How does this affect retirees? It depends. If you didn’t deduct these expenses because you used the standard deduction last year, this provision in the tax reform won’t affect you at all.

But if your income is high enough that it is subject to state and local tax, or if you own a home on which you pay high property taxes, any deduction that you might be able to take after the tax reform could be reduced. If this sounds like you, you will need to check the Schedule A on your prior year return to see exactly how much of the taxes you paid were deductible in the past. The tax reform could affect you negatively if you’ve been able to deduct more than $10,000 because, starting in 2018, your deduction will be limited to that amount.

Tax Reform and Mortgage Interest

Many retirees prefer to have the mortgages on their homes paid off before they leave the work force. If that’s you, the changes to the mortgage interest deduction rules, by themselves, shouldn’t affect you. Prior to the tax reform, married couples could deduct the interest they paid on mortgages that were less than $1,000,000. Under the tax reform, that mortgage limit is lowered to $750,000 – which means that individuals who have large mortgages may not be able to deduct as much of the interest as in the past. If you are retired, this change should not affect you unless you are planning to buy a new home in 2018 or later. If you do buy a new home and finance more than $750,000 (and you itemize) you will not be able to deduct as much as you would have prior to the tax reform.

Tax Reform and Miscellaneous Deductions

How about miscellaneous itemized deductions? The big ones for my clients are their investment account fees and, in some cases, employee business expenses, but includes smaller deductions such as tax preparation fees and safety deposit box fees. The new law temporarily repeals all of those, so if you itemize and have taken advantage of them in the past, the tax reform may hurt you in this area of your return.

Tax Reform and Charitable Contributions

What about charitable contributions? The tax reform will not affect charitable contributions at all. If you don’t itemize, your charitable contributions weren’t deductible in prior years and so nothing has changed for you. If you do qualify to itemize, contributions that you make to legitimate charities will still be deductible in 2018.

This leads me to my big finale! My theme throughout this post has been, “assuming that you qualify to itemize”. Even if you were able to itemize in the past, you may not need to itemize after the tax reform because the standard deduction (or, the amount that the government gives to everybody with no strings attached) has almost doubled. In 2017, the standard deduction for married couples filing jointly is $12,700 but in 2018 it will be $24,000. So even if you fall into one of the categories where you believe the tax reform might initially hurt you – for example, if you have a significant amount of investment account fees that are no longer deductible – it might be a moot point if the government is going to just give you more than what you would have gotten by itemizing anyway.

Confusing? You bet! So please bear with us during tax season as we try to sort this out!

Stop back soon!

-Jim

Learn how Jim Nabors saved $4.8 Million by marrying his husband.