Don’t Let Congress Catch You Sleeping!
Our office is pretty busy right now because of the approaching income tax extension deadline of October 15th. I was talking to some clients who had come in to pick up their return, and who had received an email from me last week about stopping the Sneaky Tax. I guess it was just bad timing since their federal tax return was on their mind, but they thought that the term “Sneaky Tax” was somehow related to the tax code simplification that President Trump had promised in his campaign. And since they both work in the medical field and are in the highest income tax bracket anyway, they assumed that their personal tax situation couldn’t get any worse and didn’t bother to read my email! For this particular couple, it could have been a very costly mistake.
Who Will Pay The Sneaky Tax?
Most of the information I have written about the Death of the Stretch IRA has been for the benefit of parents who will be leaving their IRAs and retirement plans to their children. These clients had no children, so they didn’t need to worry about how much their own beneficiaries would pay in taxes after their deaths, right? Wrong! These clients were the children – meaning that both had elderly parents who owned IRAs and retirement plans that they would eventually inherit. So think about this situation for a minute. This couple is not planning to retire for at least ten years, and the statistical odds are that their parents will pass away before then. If that happens, the proposed legislation that I call the Death of the Stretch IRA will make them pay tax on their inherited IRAs within five years of their parent’s deaths. They’re already in the highest tax bracket, so they stand to lose a whopping 39.6% of their inheritance because of the Sneaky Tax! That’s almost as high as the maximum federal estate tax rate – which most people aren’t subject to anyway because each individual can exclude $5.49 million in assets before it applies. That’s why I call it the Sneaky Tax – people (erroneously) think they don’t have to worry about it because they don’t have more than $5.49 million. The Sneaky Tax is not the same as the estate tax – they’re as different as federal income tax and the sales tax you pay when you buy a new car! And if you don’t watch out, this tax could very well sneak up on you and cost you a lot of money.
Baby Boomers and the Sneaky Tax
If you have elderly parents and are the beneficiary of their IRAs and retirement plans, then the Sneaky Tax will affect you – even if you have no children of your own. The Death of the Stretch IRA legislation would force you to distribute and pay tax on any IRAs that you inherit (subject to exceptions), within five years of the owner’s death. If you are required to take distributions from your inherited IRAs and retirement plans at the same time you are receiving income from working, it is quite possible that you’ll be bumped into a higher tax bracket – maybe even the highest possible bracket. The excessively high tax consequence could affect your standard of living during retirement, or even your ability to retire at all.
Stopping the Sneaky Tax
Unfortunately, if this legislation passes and you subsequently inherit an IRA from someone other than your spouse, there will be little you can do to minimize the astounding consequences of the Sneaky Tax – and I say astounding because it is estimated that this tax will cost IRA beneficiaries trillions of dollars. If the original owner (presumably your parent) is still alive, he or she might benefit from reading some of the preceding posts that discuss options the owner can use to minimize the tax burden. If that’s not an option, you might want to take some advice from our first president, George Washington. He said, ”…make them believe, that offensive operations often times, is the surest, if not the only (in some cases) means of defense.”
Most of you who will inherit your parent’s IRAs can’t afford the Sneaky Tax. I hope you will join us in sending a shot across the bow to our representatives in Washington. We have started a petition that we will forward to every legislator in the United States, and hope to collect as many signatures from across the country as we can. Please forward this to everyone you know who might be affected by the Sneaky Tax, and ask them to sign our petition, and join our Facebook Group.
Thanks for reading, and stop back soon!
Action you can take:
Forward this petition to all of your friends’
Join our Facebook Group and for a limited time get a FREE advanced reader copy of my upcoming book dedicated to stopping the sneaky tax.