Living the American Dream has long been thought to mean owning your own home. I understand that sentiment as well as anyone, having been a homeowner for five decades. For many people, the American Dream doesn’t stop there. Those working for themselves often desire a level of independence and control not found in large organizations. Concurrently, most parents desire to have their children live even better than they themselves do.
While not for everybody, self-employment, in one form or another, constitutes nearly one quarter of the workplace. Having devoted my adult lifetime to avoiding having a non-family boss, I understand most of the pros and cons of self-employment. Family relationships, income taxes, flexibility, responsibility, and a host of other factors are affected by employment status. How a self-employed individual and his or her family deal with each determines the financial and emotional outcome of a lifetime’s endeavors.
Successful self-employed people have the opportunity to jump-start their children’s retirement savings before those offspring even reach age 18. Understanding both the opportunities and pitfalls of employing one’s children is crucial to success. Errors can be costly to all involved.
With summer upon us and school out of session, many people are presented with an opportunity to help their kids. Employing children in a family business also offers financial benefits to everyone involved. The kids get their first exposure to both the demands and rewards of having a job, while parents are able to reduce their own taxable income, rather than simply gifting money to those kids.
Paying post-high-school educational expenses (outside student loans) for children generally requires after-tax dollars. Parents’ tax rates are generally much higher than the rates their children pay, which can often be held at zero with careful income planning. Paying wages to the children and having them help to fund their own higher education (using their own tax rate) generates more post-tax dollars.
Individual Retirement Accounts (IRAs) require that contributions not exceed earned income. Many children do not have jobs in their high school years, and cannot contribute to IRAs. Employing children affords them the opportunity to contribute to their own IRA. Importantly, parents may gift them the money for their contributions, but so long as their kids receive a W-2 for income verification, no one cares where the deposited funds originate.
Taking advantage of opportunities presented with self-employment by hiring your own children is not without strict and numerous rules. In coming Blogs, we will discuss more opportunities and many potential pitfalls associated with hiring and paying young family employees.
At this juncture, the “One Big Beautiful Bill” budget proposal supported by the current Administration is in limbo. Following an original Trump Administration proposal, the House of Representatives dissected and reassembled various provisions, winding up with a version that passed a House vote by the slimmest of margins — 1 vote. From there, the Bill was delivered to the Senate, where it is currently undergoing increased scrutiny.
Major points of dispute fall in the arena of Tax Policy, including changes to the Individual Income Tax Form 1040. Particularly contentious is the deduction for State and Local Taxes, or SALT, which was limited for the first time in the Tax Cuts and Jobs Act of 2017, or TCJA. From the current TCJA $10,000 limit, the House version raised the SALT Deduction to $40,000, but many Senators are unhappy with that change. A compromise is imminent.
While SALT is sucking oxygen from the negotiations and media broadcasts, one interesting proposal is gaining quite a bit of bipartisan support. Originally dubbed “Money Accounts for Growth and Advancement” (MAGA), the House version substituted the moniker “Trump Savings Accounts.” This provision would apply to births in the USA during calendar years 2025 through 2028.
Every child born in that window would receive a one-time $1,000 payment, placed into an untouchable account until at least age 18. While invested in the S&P500 Index Fund (SPY), these accounts should grow substantially over the children’s developing years. This proposal may sound like a good idea, as Trump Account funds could be used for education, buying a home, or saving for retirement. Unfortunately, funding newborns with taxpayer dollars is distasteful to taxpayers.
Also, last week, I reported on a proposal within Congress to grant access to a 401(k)-style account to workers not covered at their place of employment. On its surface, that proposal seemed unique and interesting. Then I read the second paragraph, where voluntary employee deposits are matched, not by employers, but by taxpayers! As a taxpayer, I do not choose to be forced into matching contributions to other Americans’ retirement benefits. Sorry, not sorry.
Workers without a 401(k) Plan have available options. Whether Traditional or Roth IRAs, they allow us to fund our own retirements.
I do not care to become a Sugar Daddy for every child born in this country, legal and otherwise. Nor do I care to supplement retirement accounts for people I don’t even know.
The sad truth is that our government is caught in an overspending debt spiral. There is a difference between proposals that sound good and good, sound proposals.
Face it, most Americans are just plain nice people. We are a considerate and generous population. America is also a wealthy country, blessed with natural resources, educated people, and an economic system that fosters opportunity.
In the aftermath of World War II, our economy boomed, our population mushroomed, and prosperity reigned supreme. Wealth was created and expanded as never before, and today Baby Boomers (born 1946-1964) are in the early stages of passing along the resultant wealth. Various estimates of the magnitude of this “great transfer” surround $100 trillion (14 total zeroes).
However, for the first time in history, Americans are beginning to doubt prospects for their offspring to live as well as (or better than) they have done. Household debt is skyrocketing, incomes are not rising as fast as in past decades, and a heavy tax burden is contributing to Americans’ changing sense of well-being and optimism. Perhaps the most insidious danger to Americans’ futures is compounding inflationary price pressures, especially over the past four years.
Today’s younger generations are struggling with financial pressures exceeding their parents’ situations. Many resort to seeking assistance from their parents, regardless of parental ability to pay. As generous, kindly people, parents often provide free rent, co-sign student loans, and/or hand out cash supplements, even while the parents are striving to save sufficient wealth for a comfortable retirement that can easily reach or exceed 30 years.
Washington, D.C., where spending other peoples’ money for decades is the norm, has placed the US in an untenable financial position. Our National Debt recently passed the $36 trillion (12 zeroes) mark, and we are hurtling toward $37 trillion. Interest on the debt now exceeds $1 trillion annually, adding to inflation and higher interest rates.
Failure to address the problem in any significant manner is the hallmark of an elected government that is more concerned with re-election than with saving the country. Elected officials curry favor with their constituents as they overspend tax revenues. At the household level, when parents curry favor with their children, there is a strong likelihood that they will punish their own future comfort and security. In both cases, these actions can best be described as being “too nice.”
For a better understanding of inflation, I suggest you go to the website chapwoodindex.com. Ed Butowski created the index years ago and updates it semi-annually. It shows that, for the most part, actual inflation in major metro areas averages over 10% annually, regardless of who is in the Oval Office. Keeping up individually means trying not to be “too nice.”
Look out for number one to ensure financial success. Maybe it will rub off on government lawmakers. (I’m not holding my breath.)
Living and working in Florida is, in many ways, its own reward. Everyone knows that we have no State Income Tax, but our state extracts operating income from residents, as well as tourists, through the Sales Tax. So, when the State says we can avoid Sales Tax on certain items at certain times of the year, we should plan our purchases accordingly.
Unknown to many shoppers, local and otherwise, Sales Tax Holidays abound in Florida’s summer months. Knowing and understanding the timing of purchases during these Sales Tax Holidays can save consumers some hard-earned cash on seasonal, but necessary, purchases. In this Blog, we will outline and explain how to save a few bucks every summer.
June brings Hurricane Season, and our annual Disaster Preparedness Sales Tax Holiday, affecting many supplies, from small (think: batteries), all the way up to $3,000 for portable generators, saving big bucks. This year’s dates are June 1 through June 14, 2025.
Our Freedom Month Sales Tax Holiday runs throughout the entire month of July, and exempts supplies for outdoor activities. Admission to many events and performances are included.
Back-to-School Sales Tax Holiday comes next, this year from July 29 to August 11. During this period, school supplies, clothing, and some devices are exempted. This one can really ring up the savings, especially if you have school-age children. Computers up to $1,500 are tax-exempt during this period.
September brings Tool Time Tax Holiday, running from September 1 to September 7. As the weather begins to become less oppressive, projects and outdoor activities require tools and supplies to complete, and this is when Floridians can reduce project costs. Manual and power tools are included.
Unless Floridians need something immediately, understanding Sales Tax Holidays is a great way for us to plan purchases and save money.
Detailed information regarding Florida’s Sales Tax Holiday website can be found at floridarevenue.com/Pages/SalesTaxHolidays.aspx. Items and price points qualifying for each category are listed and clearly explained, with PDF pages available for reference while shopping. For each Holiday, click on the “Consumers” tab for non-business shopping guides, then on the PDF.
Years of inflation have made necessary items more expensive than ever. Also escalating over time have been sales tax percentage increases, which were frequently pitched to voters under the guise of “helping the children.” As a result, Sales Tax Holidays pay larger dividends to shoppers than ever before.
We love our home state, but we don’t feel the need to shower it in extra financial affection.
“We love paying taxes”, said no one ever. “The price of living in a free society,” say many. However, some taxes are worse than others, and one largely unknown and clandestine tax has achieved Adam’s dubious distinction of “most despised.” IRMAA (“Erma,” we call her in jest) is Social Security’s method of charging an income tax on recipients of monthly Retirement Benefits who, in the opinion of the Agency, apparently have “higher-than-needed” incomes.
It is bad enough that taxation of Social Security benefits is already skewed by income. Benefits are either not taxed at all (for lowest income Americans), or half taxable (for mid-range incomes), or 85% taxable for higher income people. This is a significant disparity already, but IRMAA makes the matter even worse.
According to the Social Security Administration, the government pays 100% of Medicare “A” (hospital charges) for almost all Americans. They also subsidize about 75% of Medicare “B” (doctors, etc.) premiums for 90%+ of enrollees. The others (7% to 10%) are charged a higher percentage of actual Part “B” costs, simply because they have higher incomes and are therefore assumed to be able to cover more of their own medical expenses.
For 2025, the base monthly cost of Medicare “B” is $185.00 per enrollee, and for optional Medicare “D” prescription drug plan, $36.78. For Medicare enrollees who are also collecting Social Security monthly retirement benefits, Medicare premiums (plus IRMAA charges when applicable) are deducted from monthly benefit payments. Out of sight, out of mind, unfortunately.
Everyone should have an online Social Security account, regardless of their age. It is incumbent on every individual to verify their own earnings record at Social Security, as that will determine their Primary Insurance Amount (PIA). Errors along the way may be difficult to correct later.
The biggest problem is that the application of IRMAA surcharges is based on the recipient’s income from 2 years earlier. This is due to the lag between earning money and filing Personal Tax Returns on those earnings. By the time IRMAA charges are determined, the recipient’s circumstances may have changed dramatically. For enrollees whose income has fallen recently due to changes such as retirement, there is a procedure to reduce or eliminate IRMAA charges.
Social Security has a Form called SA-44, Medicare Income-Related Monthly Adjustment Amount – Life-Changing Event, which is used to request a reduction or elimination of IRMAA charges. Qualifying events include Marriage or Divorce, Death of a Spouse, Work Reduction or Stoppage, Loss of Income-Producing Property, Loss of Pension Income, and/or Employer Settlement Payment. For Medicare enrollees who incur a qualified event and reduced annual income, use the SA-44 process to adjust your dreaded tax (even retroactively to January or the actual date of the event).
Tinkering with the U.S. Tax Code is seemingly a hobby for elected officials in Washington, D.C. In 2017, the newly minted Trump (45) Administration was determined to make changes far beyond tinkering. The goal was to reform the Tax Code, cut taxes for nearly all Americans, including corporations, and make filing our Tax Returns easier through simplification. It worked reasonably well.
Then House Speaker Paul Ryan had a dream wherein most Americans could file their annual Tax Returns “on a postcard.” When the resultant Tax Cuts and Jobs Act of 2017 (TCJA) was passed, Ryan claimed victory on his lifelong dream.
Anyone who has ever prepared a Tax Return understands that little could be further from the truth. Shortening Page 1 of the 1040 Individual Return by adding pages of Schedules and Forms did little or nothing to make Tax Returns shorter.
On a brighter note, a parallel goal of TCJA was to cut the number of taxpayers utilizing Itemized Deductions, in favor of selecting a new, larger, Standard Deduction. In this pursuit, lawmakers were extremely successful, as 61% of former itemizers switched to using the Standard Deduction. For these taxpayers, recordkeeping was greatly simplified.
Fast forward to 2025, and the second Trump (47) Administration is once again touting changes to the U.S. Tax Code. Congress is fighting it out in both chambers, and the exact result will likely not be unveiled until early summer. At this moment, some changes seem inevitable. Information being leaked from inside Congress is pointing to at least one change that could require preparation for affected taxpayers to take full advantage of the change.
TCJA limited the State and Local Tax (SALT) Deduction to $10,000 annually for every taxpayer, who can be a single filer or a married couple filing jointly. For people in high-tax states, this limit caused many citizens to switch over to the Standard Deduction. Since the SALT deduction limit is likely to be increased dramatically, some of these folks will find itemizing to be practical again.
Itemizing deductions requires far more comprehensive record-keeping substantiating claims made on Personal Tax Returns. No one can tell yet when the new SALT limit will apply, but there is a chance that it will be effective for Tax Year 2025. On that chance, anyone who is close to being able to itemize should be paying close attention to their own organizing and record-keeping.
These changes will mostly apply to high-income taxpayers living in high-tax states. However, people with expensive homes, high medical expenses, and/or large purchases (such as vehicles), there may present an opportunity for savings.
As soon as final regulations are released, including both actual provisions and application dates, we will report to our readers and listeners. Maximizing benefits from the latest round of tax reform will take many shapes, and we can assist your tax planning (not tax preparation or advice) efforts along the way.
Americans are very generous, every year giving away more than Half a Trillion Dollars (that is only individual giving, and does not include corporations, foundations, and others). Donors ask little in return, but the IRS does allow us to take a tax deduction for our contributions to Qualified Charities, which are defined in IRS Publication 78. History has shown that tax deductibility is not the primary motivation for our generosity, but it remains a motivator to many taxpayers.
Since passage of the Tax Cuts and Jobs Act of 2017 (TCJA), fewer Americans have been itemizing tax deductions. One of the primary goals of TCJA was to increase the proportion of tax filers who take the Standard Deduction, which was increased significantly. Mission accomplished.
Unfortunately, deductibility of our collective generosity was rendered useless to the non-itemizers, so creative tax preparers popularized use of an obscure tax provision called the Qualified Charitable Distribution (QCD), which had been part of the U.S. Tax Code on and off since 2006. QCDs were designed to ease the tax burden for IRA owners who had attained the age at which annual taxable Required Minimum Distributions (RMDs) began (70-1/2 at the time).
QCDs allow an IRA custodian (Schwab, Fidelity, etc.) to send money directly to the Qualified Charity, reducing the taxable RMD by the amount of the donation. Specifically, the QCD amount counts as part of the RMD, lowering the taxable income of the IRA owner, dollar-for-dollar, up to a generous limit.
Subsequent changes in the Tax Code raised the age for RMDs, but the IRS retained QCD availability for anyone 70-1/2 or older. Since Americans’ generosity seldom extends to paying more than the minimum allowable Federal Income Tax, QCDs have become a popular method of coupling charitable intentions with legal tax minimization.
For several years, IRA custodians had no responsibility for reporting QCD amounts when they sent annual 1099 Forms to report taxable IRA distributions. There has never been a code on the 1099 Form indicating that any portion of the funds withdrawn during the year should be excluded from income. The burden of reporting QCDs to tax preparers fell on taxpayers themselves, many of whom failed to report the QCD amount to tax preparers, and hence lost the tax reduction. This has now been addressed by the IRS.
Beginning with tax returns filed for the 2025 tax year, 1099s from custodians will now include a code “Y” to designate a QCD-style withdrawal. While taxpayers retain ultimate responsibility for their own QCD reporting, tax preparers will be quick to incorporate the new QCD reporting system. Discuss your QCD withdrawals with your preparer anyway, and we will all benefit from improved information sharing.
Wishing and hoping won’t make it come true, whatever “it” may be. Compounding clichés, I’ll also stipulate that if something sounds too good to be true, it is likely not true. The investment world is rife with sales pitches for products that sound too good to be true. “Always forward, never backward,” “Up but never down,” “Never lose money,” etc. are prime examples.
For a skeptic like me (who is also a fiduciary financial advisor), these commercials and sales pitches are difficult to accept passively. Federal financial regulators monitor what fiduciary advisors are allowed to say and do with respect to securities law compliance. Insurance products are regulated by the States, so insurance salespeople are subject to far less stringent compliance standards.
My dad used to say that there were three kinds of lies: white lies, damn lies, and statistics. In recent years, a fourth category has become perhaps the most insidious of all—lies of omission. In other words, it isn’t what is said that counts, so much as what is held back. This is the preferred lie in annuity sales.
We recently encountered a sales pitch for an Equity-Indexed Annuity (EIA) product, which is a somewhat complicated contract with some features beyond the scope of this Blog. It is not the product itself I am criticizing today, but rather the way it was being sold. I’ll save product details for another day.
The following are a few highlights from the sales pitch to illustrate my point regarding lies of omission.
- (Said) annuity investment returns are market-based; (Unsaid) credited gains are a fraction of equity market growth
- (Said) owners participate in equity market gains; (Unsaid) credited annual value increases are capped for most EIAs
- (Said) purchasers earn a “reasonable” rate of return; (Unsaid) the term “reasonable” is defined by the insurance company, rather than the buyer
- (Said) purchasers never lose money, because in down years the value remains steady; (Unsaid) this is financed by a cap on annual growth
- (Said) the insurance company pays for the sales commission; (Unsaid) buyers are locked into the contract until the commission is amortized
- (Said) equity markets often crash; (Unsaid) equities rise 70% of the time, and fall back only 30%, averaging 10%+ annual returns over time
Today’s analysis is intended only to educate the audience how to listen to annuity sales pitches with a skeptical ear. These products serve a purpose for some people and for some situations.
Estate Planning sounds like a fancy term for wealthy people making expensive plans. While the term does include making complex arrangements for wealth preservation and transfer, Estate Planning for everyday Americans is also important. And, far too often, it is neglected. In a recent study, only 1/3 of Americans were found to have even the most basic Estate Planning documents.
Americans of modest means also control assets, including real property, financial assets, and digital assets. Each and every one of us would be comforted with knowledge that, when the time comes, our assets will be treated and divided according to our wishes, and that forms the basis of Estate Planning.
In a nation of laws, everything (including death) has a default mode, which is whatever current law dictates. Fortunately for us, those laws include following our directives, assuming they are known, legally documented, and clear. For most folks, directing disposition of our assets can be as simple as preparing a Last Will & Testament (Will). The basic Will is a written instruction for people and courts as to what we wish to happen when the unthinkable (but inevitable) occurs.
Making a Will is a good idea, as it avoids the necessity of subjecting our assets to the current default laws in our state of residence. Chances are strong that the default disposition of our assets would not emulate our expressed wishes. That is what a Will does, clearly and easily. But a Will alone is often not the easiest, best, and most thorough method of expressing our complete wishes and concerns.
When a Will is left as the sole directive of a deceased’s estate, the process enters a Probate process in a Court specially designed for this purpose. Everything is made public, and a Probate Attorney directs the process. For a fee, of course, which is often substantial.
Adopting a Revocable Living Trust is the answer for many people who wish to avoid the Probate Process. A carefully drafted Living Trust not only directs the process according to the terms of the Trust, but does so directly, averting Probate. The Trust is flexible and easily altered at any time with a simple amendment.
The Living Trust is often supplemented by a “Pour-Over Will,” which is a simple Will that directs any and all property inadvertently left out of the Trust to immediately be rolled in for Estate purposes.
It is often said that no one can get out of this life alive. Next best, perhaps, is to leave the world in an organized manner. When you decide that you need a way to direct your assets, there’s a Will for that. Possibly more, but at a minimum draft a Will. Follow your state’s rules to make it legitimate.
With April 15th (Tax Filing Day) in the rear-view mirror, I can understand anyone who doesn’t care to even think about taxes for a while. However, the nascent IRS Direct File program is reportedly on the DOGE elimination list, and I couldn’t be happier to have read the news. Touted as a “free government service,” the Direct File System would allow some taxpayers to file their annual returns using an IRS internal online system.
A quick Internet search on “free tax filing” will produce many providers. The free feature is not unique to the government Direct File program.
For several months, I have been complaining about the IRS Direct File plan, which offers free tax preparation and filing to a growing number of Americans. In my opinion, this Boondoggle, which is being funded by the inappropriately named Inflation Reduction Act, presents a blatant conflict of interest. Direct File allows a government entity to oversee its own revenue sources. What could possibly go wrong?
Paid Professional Tax Preparers, including CPAs and others, owe a fiduciary obligation to the taxpayers they serve. As fiduciaries, Professional Tax Preparers are required to place the interests of their clients (taxpayers) ahead of any personal interest, much like fiduciary rules for fee-only Certified Financial Plannerâ Professionals. We are not able to prepare Tax Returns, but we will work with your professionals.
Looking deeper into this complex situation, how “free” is a government-provided service, such as Direct File, that requires the IRS to hire, train, and maintain thousands of new employees? Who ultimately pays for the salaries and benefits? Further, what will these employees do during the non-filing seasons? Increased audits?
Everyone knows the sinking feeling that comes over a taxpayer upon finding an envelope in the mail with the dreaded IRS logo on the upper left. There is no secret as to why. The IRS is an exception to our democratic system of law and order, in that when the IRS accuses a taxpayer of wrongdoing, the burden of proof is on the taxpayer. With an IRS accusation, you are guilty until proven innocent. This is antithetical to our way of life and can result in a requirement for the accused taxpayer to essentially prove a negative.
Most of us do the right thing every year, as we report our income, pay the taxes due according to the law, and compensate our hired Tax Preparer Professionals if needed. Lather, rinse, and repeat annually.
For now, we’ll bid the Direct-File IRS system a comforting farewell.