Mar 17

The estate tax is a tricky beast. Just 15 years ago, Federal estate taxes kicked in at $650K of an estate’s value. This may seem like a large sum, but consider it included all that you leave behind. Your home, saving, retirement accounts, and perhaps the biggest item, life insurance. Biggest, because even if you are just starting out, newlyweds with no savings yet might easily decide to each have $1M life insurance policies. Just putting this number into perspective.

The exemption amount grew each year, up to $3.5M in 2009, and then the tax was repealed for 2010. As a Klingon might have said “This is a good year to die.” It might have been, expect the step up in basis was suspending that year so beneficiaries of those who passed in 2010 were in a unique position, having to research basis for their windfall. 2011 saw the return of the estate tax with a $5M exclusion, and a generous ‘second to die’ provision, in effect, allowing the spouse to pass along the $5M from the first spouse for a $10M total. In 2013, the exclusion was $5.25M.

Now, the 2015 proposed budget….. let me say this, in 2010 when congress was debating what to do, I suggested they pick a number, and offer a modest inflation rate, but stop the crazy swings up and down. They don’t listen. I am seeing a proposal to roll back the exclusion to the 2009 number of $3.5M, no inflation adjustment. It keeps the spouse portability, fortunately.

I see this as upsetting to those it impacts, but I’m sure that couples with $7M in gross assets including insurance, aren’t going to get much sympathy from my readers. If you fall near this number, it’s time to start gifting the $14K/yr to your loved ones.

This bit of new code could have been avoided. The budget could have simply frozen the number at 2014 levels $5.375M (I believe) and stop messing around. And for Pete’s sake, stop calling any code “permanent.” That’s just nonsense.

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Mar 15

I’m back with another proposed change to the tax code pulled from the 2015 Federal Budget.

The current law states that a surviving non-spouse beneficiary under a tax-favored employer retirement plan may roll over assets to an IRA only by means of a direct rollover and that a surviving non-spouse beneficiary under an IRA may move assets to a non-spousal inherited IRA only by means of a direct trustee-to-trustee transfer. This is in contrast to a spouse’s ability to use a 60-day rollover.

The Budget author acknowledges that this difference between how a spouse may treat an inherited IRA vs how a non-spouse is forced to treat it “serve little purpose and generate confusion among plan and IRA
administrators and beneficiaries.”

You might think I’d consider this minor, but it really isn’t. It’s the only bit of code I’ve seen that was written simply to avoid the confusion contained in the original tax code. No change in revenue to the government save for a loss of the penalties it would otherwise have received. I wont hold any hope for this to set a precedent for more cleaning up of our incomprehensible tax code, but it’s there, it’s a start, and a kudo to whoever wrote it.

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Mar 13

What? First I told you that the 2015 Federal Budget proposed RMDs for the Roth IRA, and now I’m saying no RMDs at all. Well, sort of.

The proposal eliminates the RMD from tax favored accounts (IRAs, 401(k)s etc.) if the prior year end balance was $100K or lower. To add a bit of complexity, it’s not a step function, it phases over $100K – $110K, so if your balance were exactly $105K, half the RMD calculated must be taken. More complex? Ok, the numbers will be indexed for inflation.

My assessment of the impact of this proposal? Needless. I look at any changes to the code and ask who it will help and who will it hurt. This will benefit the rare individual who has a sub-$100K IRA, but no need to withdraw any money. When you consider this, it’s an odd combination. I’m not going to lose sleep over this, only observe that the addition of more rules is counterproductive, and I’ll be on the lookout for the unintended consequence that will result – a well meaning retiree hoping to keep her IRA in tact, and passing it on to her kids, who are in the 28% tax bracket, while she might have just taken her RMDs out at 15%.

On a lighter note, I started this series mentioning the Budget and the Treasury’s General Explanations. Today, I discovered another document in the series, the 1438 page Appendix.  A warning, it’s 13.2MB, so be patient if you are going to download it. It gave a remarkably in depth overview of where the money is going. Kind of like your household budget if you add quite a few zeroes.

More to come….

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Mar 11

The budget is out. No, I’m not coming out with my personal budget. It’s a strange mix of stuff on both ends of the spectrum. And I think other people’s budgets are boring, do you really care that my daughter’s dance classes are a priority? I didn’t think so. I’m talking about the budget we should all be interested in, the U.S. Budget. It has something for everyone, and by that, I mean everyone will find something they don’t care for.

Budget2015In case you can’t sleep at night, Fiscal Year 2015 Budget of the U.S. Government can be downloaded right from the White House web site. If that’s not enough, the Treasury offers an even longer (297 pages vs 218) General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals. I’m still sifting through both documents, and hoping for a Cliff Notes version that will just list the potential changes to the tax code.

Over the next few articles, I plan to highlight what I’ve found, along with comments on the proposed changes. The first -

Harmonize MRD requirements for tax-favored retirement accounts. – this proposal add an RMD to the Roth IRA account. You might know that the Traditional IRA has a provision in which Required Minimum Distributions must be taken the year after one turns 70-1/2. I found it curious that when the Roth IRA was introduced in 1998, it offered a remarkable feature, no RMDs. This created an amazing opportunity for those wishing to leave a significant sum of money to their heirs, with no income tax bill. Note – the Roth inheritance can still trigger the estate tax, but as the funds are post tax, the beneficiary can withdraw money with no income tax due. This opportunity is scaled back by this proposal, as now the Roth IRA will have a post 70-1/2 RMD for those attaining age 70-1/2 after Dec 31, 2014.

My assessment of the impact of this proposal? Minimal effect. The RMD triggers no tax, nor does it pull in other money, such as Social Security benefits to be taxed (yet). If at 71, I take my withdrawals and invest in a stock fund, I need to deal with the dividends, but the capital gain can remain deferred until I pass. On my passing, my beneficiaries get a stepped up basis, so even if we are talking say, a million dollars, a 2% dividend is $20K, and the tax on it, $4000 maximum. Not a million per year, a cumulative million dollars no longer in the Roth, but taken out over more than a decade. The average taxpayer wont lose sleep over this one.

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Nov 07

As exciting as the new tax table was for me, the retirement limit announcement produced a hollow thud.

You see, for 2014, the 401(k), 403(b), 457, and Government TSP are all unchanged at $17,500 limit, with a $5,500 catch-up provision for those 50 and older.

The IRA limit is also unchanged at $5,500 with a $1,000 catch-up for 50 and older. The phaseout for IRA deductibility for a single filer covered by a workplace retirement plan is between $60,000 and $70,000, and for married filing joint, between $181,000 and $191,000. The AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly.

For those in that phaseout range, these numbers are important. Above or below them, and you’re not impacted at all.

This lack of an increase comes thanks to a low CPI inflation rate, which is either good, or if you are a conspiracy theorist, is purposely understated to keep Government programs COLAs from increasing too much. Either way, the numbers are out.

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