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.
December 6, 2024, started like every other day of the past 12 years or so, with our yellow lab, “Lil’ Bit,” (a true Southerner), watching me make coffee and prepare her breakfast, all from her dog bed. Routinely, as soon as her food bowl hit the floor, she would instantly be there, as if teleported.
But this was not just another day, as she did not appear at her feeding area. When questioned, the look on her face said it all – something was wrong. Very wrong. She wouldn’t get up, and it didn’t take long for me to realize that she couldn’t stand up. Not just wouldn’t, but couldn’t.
A trip to the Emergency Vet didn’t end well. Her rear differential, as I call it, had simply worn out. The condition is common in large dogs, and she had exhibited some signs of deterioration over the past few months. But she was always ready for her daily schedule to be repeated. It was not merely a request that we take our daily walk in the late afternoon. It is something We Did. Period. Sun, heat, rain, hurricane winds, no matter what, we walked.
This is perhaps a long introduction to my real topic of the day, which is stock market volatility. Life with Lil’ Bit was a lesson in consistency and trust. The 2025 stock market is a lesson in volatility and frustration. It is extremely difficult to watch a crashing market, especially when it outlasts one session.
In my long experience as an investor and financial advisor, I grew to understand the power of long-term investing. In the period since Reagan began his 8-year stint in the White House, up until now, the Dow-Jones Industrial Average (DJIA) rose from under 1,000 to well over 40,000. That did not happen in a straight line. Think about the Crash of 1987, the attacks of 9/11, the 2008 Financial Crisis, and a host of other event-driven downturns.
In the market, making carefully planned and long-term investment choices generally begets desired results, absent emotion-driven activity. Sometimes, that requires education, patience, and maturity. In the four market days ended last Tuesday, wild drops caused many people to panic-sell. Wednesday proved that to be a bad idea when the trading session produced an unlikely Top Ten All-time up day. Selling into that would have been disastrous. Who knew?
Lil’ Bit had learned to expect consistency, which made for a wonderful and fulfilling experience for both of us. Similarly, being consistent in your market behavior pays off handsomely in the end. Prepare, and don’t panic.
Every afternoon since December 6, I have “walked the dog” at the same approximate time. Without the dog. But with consistency and great memories. I will never forget Lil’ Bit. Do the same with your long-term investments. They will reward you over time.
While it isn’t over until it’s over, we are now reasonably assured that our Personal Income Tax Rates will not increase at the end of 2025. Under the Tax Cuts and Jobs Act of 2017 (TCJA), tax rates were cut sharply and tax brackets were expanded, resulting in significant savings for most taxpayers. TCJA tax rates were scheduled to expire at the end of 2025, at which time a return to higher rates would cause taxpayers a great deal of pain.
Even worse is what a major tax increase would do to our national economy. Removing so much individual purchasing power would likely result in a recession of consequence. Had Trump been able to serve consecutive terms, TCJA would probably have been addressed years ago. Circumstances delayed the fix until this year, and our current Legislative Branch, with very narrow majorities in both the House and Senate, make passing almost anything difficult.
As financial advisors, we need reliable information in order to make effective plans for our clients and ourselves. Congress generally makes planning nearly impossible when they won’t tell us until the last minute what to expect. By far the biggest unknown is which tax rates would apply next year. While the law has not been inked yet, current progress in Congress is indicating a comfortable assumption regarding the steadiness of future tax rates.
In coming days, a framework should pass through the House of Representatives, but it will differ from the Senate version. During a process of Budget Reconciliation, the versions will come together in a grand compromise, with TCJA tax rates becoming the permanent law of the land.
In whatever final version of the Annual Budget, a variety of other changes will occur. In all likelihood, there will be a few provisions we don’t like, but the fundamentals should be conducive to planning for next year.
Last week, we discussed habits of Americans regarding taxes, and how most taxpayers will forget about the topic until next spring. We can’t be so flippant and serve our clients and radio listeners well. One of our goals is to keep people thinking and talking about taxes, with an eye toward making smart decisions.
With turmoil in the markets right now, we look for opportunities. Potentially profitable elements of a 2026 Plan include tax loss harvesting, whereby taxpayers can sell a security at a loss, which is “banked” until needed. The loss carry-forward can be used to offset other capital gains, or used to directly reduce tax liability in 2026 and beyond, up to $3,000 annually. Sellers need to be aware of “Wash Sale” rules, requiring a minimum of 31 days before repurchasing the same security.
In any market, being pro-active can produce future benefits.
With the rapid approach of Tax Filing Day (April 15, 2025, for Tax Year 2024), many Americans are hauling shoeboxes full of receipts to their kitchen tables, computer desks, or Tax Preparer’s offices. While the arrival of Tax Filing Day waits for no one, procrastinators abound, adding to the seasonal chaos.
We would be remiss if we didn’t mention that any taxpayer can file for an extension to the filing date. This is done using Form 4868, available at the website www.irs.gov. The filing extension is for 6 months, but there is a catch. All funds owed to the IRS for Tax Year 2024 remain due on April 15, 2025. Failure to get the money in on time will results in Interest charges and Late Fees. Knowing how much is actually due is the responsibility of the taxpayer.
These next 2 weeks present a great learning opportunity regarding your own tax situation, with an eye toward helping yourself, now and in future Tax Years. Here are a few reminders and pointers, for present and future consideration. These are just the “low-hanging fruit” in an educational process.
Deductible 2024 IRA deposits can be made until Tax Filing Day, saving tax dollars immediately. All or part of a Tax Refund can be deposited directly to a new or existing IRA. Also, consider making 2025 IRA Contributions as soon as possible, thereby providing more time for your IRA investments to grow in a tax-deferred environment.
Speaking of IRAs, if one spouse is not earning income, he or she may be eligible to open a Spousal IRA based on the earned income of the working spouse. The same tax deductibility applies, as does the tax-deferred growth for future years. This presents a win-win situation with no downside considerations.
Earned Interest on cash in taxable accounts can be increased using a High-Yield Savings Account at a prominent financial institution. With today’s rates, you generally earn more interest every month than you will in a conventional bank account over the entire year. After all, we should all have an Emergency Fund anyway, so why not maximize income on the “parked” funds?
Claiming the Standard Deduction, rather than itemizing deductions, is becoming the norm, as today’s historically large Standard Deduction frequently exceeds the value of itemized expenses. Due to the status of IRA Contributions as “above-the-line” deductions, these contributions reduce Taxable Income in addition to the Standard Deduction, making them more valuable than ever.
If you are owed a substantial Tax Refund, you have been loaning money to Uncle Sam for free. Changes in tax withholding can easily correct this situation.
If you are like most people, once your Tax Return is filed, all attention to learning more about your taxes gets put on hold until this time next year. Do it now to help yourself forever. April 15th waits for no one.
Inflationary pressures are diminishing, but in their wake lies an overall price level considerably higher than existed in our pre-COVID-19 environment. Rising prices were leaving most Americans behind, as wages were (and always are) slow to react to ongoing inflationary pressure. Over time, the situation is correcting, as market forces are pulling earnings upward. Good news, generally, but unintended consequences abound.
Demographics are particularly interesting in this era, as the Baby Boomer generation reaches traditional retirement age in astounding numbers. Statisticians tell us that 10,000 to 12,000 Americans turn age 65 daily, and most use that milestone to enroll in Medicare. Concurrently, many Boomers retire, cut back on working, and/or begin planning for their post-career life.
Medicare is not free to Americans, although “Part A” (Hospitalization) is generally included with enrollment. But the considerable cost is for “Part B” (Doctors, etc.) and “Part D” (optional Prescription Drug Plan). Social Security deducts Medicare costs from monthly Retirement Benefits.
While convenient, payroll deduction too often results in “out of sight, out of mind” thinking, whereby recipients lose track of their own actual costs. Prior to 2003, understanding the cost of Medicare was less important, as every recipient paid the same monthly premium. Then, Congress introduced us all to IRMAA, the Income-Related Monthly Adjustment Amount.
Today, everyone pays the same Medicare “B” base premium, which is currently $185.00/month. Based on household income, IRMAA can raise that monthly premium by up to $443.90. This staggering increase is camouflaged as a “Medicare surcharge,” but in reality, IRMAA is another form of Income Tax.
By the way, IRMAA also applies to “Part D,” whether or not coverage applies to the participant. This can add another $85.80 monthly. Ouch!
Due to timing considerations, IRMAA charges are calculated on income from 2 years prior. In the interim, many people experience dramatic changes in income, through retirement, loss of a spouse, divorce, or other factors recognized by Medicare as “life-changing events.” Anyone experiencing a qualified life-changing event is no longer required to pay IRMAA surcharges. Receiving an immediate surcharge reduction can save 2 years of unnecessary higher payments.
Every Medicare recipient should understand what they are paying, and if they are being overcharged for IRMAA, take swift action to eliminate the excess premium cost. This is done using Form SSA-44, which is available at ssa.gov, the Social Security website. Instructions are included.
Lacking either a bipartisan agreement or a Supermajority (60 or more in one political party), U.S. Senators are required to fabricate new and unusual ideas to justify passing a budget. Since neither of those possibilities currently exist, current budgeting discussions are messy and contentious. Rhetoric from Capitol Hill is frequently confusing for taxpayers and financial professionals, who wind up in a state of flux when trying to plan ahead for personal and corporate taxation.
Under the leadership of President Trump 45, TCJA (Tax Cut and Jobs Act of 2017) was implemented, effective for tax years beginning on or after January 1, 2018. This true tax cut left nearly every taxpayer with substantial tax reductions on their 1040 Individual Income Tax Returns (some high-income people in high-tax states lost out). TCJA Income Tax Rates are slated to expire and then increase back to 2017 levels at the end of Tax Year 2025.
Should the TCJA expiration date (12/31/2025) not be pushed forward or eliminated, Income Tax Rates will revert to the higher 2017 levels. Most Americans would suffer a large increase in their 2026 Federal Income Taxes. Recent studies by tax analysts estimate a resulting average 22% increase in Americans’ income taxes. Comprehending the political oratory on both sides is challenging to American taxpayers, and can be confusing.
Here lies the rub. Conservatives are stressing that current income tax rates should remain the same into 2026, and preferably be made permanent. In this scenario, taxpayers would incur no tax changes in 2026 or beyond, unless calls for further changes get passed by Congress later.
Too many elected officials start with the assumption that 100% of our income is their money. What they allow us to keep is called a “tax expenditure.” Absurd? Sure, but factual, nonetheless. We need to get truth in labeling into government.
Senate Democrats have adopted the assumption that potentially higher tax rates in 2026, due to the scheduled expiration of TCJA, are already the law of the land. According to them, letting TCJA Income Tax Rates expire would increase revenues to the Treasury by more than $4.6 Trillion over 10 years.
The Democrat party line says that any foregone revenue must be offset by other taxes or spending cuts, and they detest reductions in spending. Therefore, if any other scenario is implemented, such as an extension of TCJA, it would represent, to them, an unacceptable tax expenditure for the Government. This is ludicrous, as their revenue going forward would not change from 2025.
Simply stated, TCJA needs to be made permanent. Otherwise, we will all receive a large tax increase. End of discussion.
Roth IRA Conversion decisions have always been complicated and subjective, based on expectations for changes to the U.S. Tax Code, plus a variety of personal considerations. Prior to passage of SECURE ACT 1.0 in 2019, Roth IRA Conversions could be Recharacterized (reversed in whole or in part), in the year following the Conversion. Elimination of that provision elevated uncertainty of Roth Conversion outcomes.
One primary justification for Roth Conversions involves anticipation of tax rates rising in the future. Pay tax now, save tax later. Unless Congress acts during 2025, personal income tax rates, lowered by TCJA (Tax Cuts and Jobs Act of 2017), will increase in 2026. That would favor 2025 Roth Conversions. However, since the 2024 election, there is a smaller likelihood of tax rates rising any time soon.
Among various tax proposals floating around Washington is a call for a national Flat Tax System. Long touted by the likes of Steve Forbes, the Flat Tax would tax all income above a certain base amount at a single rate. Under a Flat Tax System, there would be no tax-based incentive to perform Roth Conversions.
Consideration for Roth Conversions today also involve the taxpayer’s location within a tax bracket. For instance, a couple filing jointly with taxable income up to $96,950 (in 2025) is in the 12% tax bracket. After reaching that level, the next dollar earned (“marginal dollar”) is taxed at 22%. Logically, many taxpayers try to do Conversions on enough cash to “fill up” their tax bracket.
However, it is even more complicated than it appears on paper, because once taxable income reaches $96,951, capital gains, which are not taxed for those in the lowest 2 brackets, jump to 15%. Hence, effective tax rates rise sharply.
For older taxpayers, who may be close to Medicare age, or already receiving Medicare benefits, additional costs for Medicare Premiums must be factored into the decision. IRMAA, which stands for Income Related Monthly Adjustment Amounts, are additional income taxes charged by Medicare to people earning over $250,000 (for Married Filing Jointly). There are several IRMAA brackets, each with escalating (progressive) costs, and they are not linked to Individual Tax Brackets. This requires a thorough Roth Conversion analysis to include effects of additional income on IRMAA brackets.
Further complicating Roth Conversion decisions are tax changes for beneficiaries of IRAs in a post-SECURE ACT America. Under the old rules, inheritors of Roth IRAs had to take Required Minimum Distributions, or RMDs, starting the year after death, but “stretched” over their own life expectancies. Today, most beneficiaries have only a 10-year window to drain the account.
Making a confident Roth Conversion decision involves a complex analysis of the Tax Code, as well as personal preferences and expectations. Consultation with a qualified Certified Financial Planner® is highly recommended.
Last week, we discussed our transformed and renamed Federal Department of Government Efficiency (DOGE), which, under the leadership of Elon Musk, is charged with slashing waste, fraud, and abuse from federal expenditures. In recent days, the recreated Department has identified more than $65 Billion (9 zeros) of expense boondoggles for termination. Musk and his minions are barely out of the starting gate. They are aiming for a minimum of $1 Trillion (12 zeros) in permanent cuts to the budget.
Recently, Musk proposed rebating of a portion of DOGE savings to taxpayers by sending every taxpayer (defined as a person or married couple who file one tax return) $5,000. Last week, I explained why I am totally against the concept of a DOGE-created refund. My reasoning was made clear in Part 1 of this Blog Post on our website, which everyone should read before passing judgement.
Rather than merely complaining to our audiences, I offer a separate proposal, right here in Part 2 of this Blog miniseries. We the People of this magnificent country are in possession of assets of value nearly beyond comprehension. Included are 2.27 billion acres of land, which represents about 27% of the U.S. total land mass. Of that, the vast majority is in the Western states, which account for approximately 92% of Federal Government land ownership.
On top and underneath our billions of acres lie countless natural resources, with potential value in trillions of dollars. Throughout decades of growth in the environmental movement, most of these lands have been rendered off limits to miners, drillers, and other entities seeking to turn natural resource assets into streams of revenue. Under our new “Trump Administration 2.0,” federal lands (and some bodies of water) are being opened (and reopened) for exploration and productive applications. Some forested acres will also become available for lumber production. All this will be closely monitored by the new EPA.
Since national assets belong to us (as citizens of the USA), we should rightly share in the profits derived from production and sale of energy and minerals. My proposal would pay a portion of proceeds to taxpayer/owners for the value of their resources as sold, similar to the DOGE proposal that I do not support.
As a bonus, the U.S. would also restore our national position of energy independence and dominance. One obvious side effect would be reduction of costs for energy, building materials, food, and so on. As transportation costs are reduced, every American reaps a benefit.
Americans have been suffering the ravages of government-induced inflation for several years, so we could all use the money. However, doling out borrowed money to taxpayers fails to pass the smell test regarding the National Debt. My concept accomplishes the dual goals of debt reduction and taxpayer compensation, with fairness to all.
Our transformed and renamed United States Digital Service, a Department founded by President Obama in 2014, is now operating under the moniker Department of Government Efficiency (DOGE). Until recently, “government efficiency” was an oxymoron, eliciting derisive smiles from taxpayers everywhere. The reborn agency is headed by Elon Musk, who is working for us without compensation.
Having hit the ground running, DOGE has so far identified and recommended for eradication more than $55 Billion (9 zeros) of eye-popping and jaw-droppingly ridiculous expenditures. They’ve only just begun, and have targeted at least $1 Trillion (12 zeros) for permanent elimination during the 18 months of DOGE’s self-imposed (initially, anyway) shelf life.
This past week, Musk himself floated a trial balloon regarding rebating of a portion of the savings to taxpayers by sending every taxpayer (defined as one person or a couple filing one tax return) $5,000. I am totally against the concept of a refund. Before outrage begins, let me explain my reasoning.
In fiscal 2025, the U.S. Government will take in about $5 Trillion in Total Revenue, but will spend about $6.8 Trillion, leaving a Budget Deficit for this fiscal year of around $1.8 Trillion. Since the lion’s share of government expenditures are mandatory (examples include Social Security payments and interest on our National Debt), all the money collected from taxpayers is applied to necessities. Discretionary expenditures, including excesses being identified by DOGE, are paid from funds that are either borrowed or created out of thin air, using an “electronic printing press” at the Federal Reserve (FED).
The $1.8 Trillion in excess spending WAS NOT taken from taxpayers, and should not be returned to them. Rather, it was borrowed or created, and added to the involuntary debt load we taxpayers are forced to accept and pass along to subsequent generations. In my opinion, DOGE has no business sending the money to people who didn’t supply it and didn’t want it to be borrowed or spent in the first place.
Until spending is reduced, and/or government revenues increase by the $1.8 Trillion shortfall, Budget Deficits will continue. Until then, our annual shortfall will add to the National Debt. Only when an actual Budget Surplus is realized in any fiscal year will the Current Year Deficit go negative and, consequently, the National Debt go down. A surplus only exists when revenue comes in higher than expenditures. What a concept!
As much as we could all use a cash rebate to help offset the ravages of inflation, we must decide as a nation where our priorities lie. Only once the budget is brought into balance, could further savings could be split between taxpayer rebates and debt reduction. For a better solution, check next week’s Blog on this website.
Recent crypto purveyors have been touting tax advantages of holding actual cryptocurrency in IRAs. It should come as no surprise that crypto “investing” in Retirement Accounts is fraught with rules and regulations. And, of course, costs.
Setting aside (for now) my opinions regarding crypto as an investment, here are a few things potential crypto investors should understand before making a purchase in an IRA.
- Only earned cash can be used to fund an IRA (no crypto)
- Owning crypto in an IRA requires a cash contribution, followed by a purchase made within the IRA
- IRS prohibits “collectibles” to be purchased in most IRAs, as well as life insurance, real estate, and certain other non-traditional assets
- Crypto falls into the questionable area between allowed vs. unallowed IRA assets
- Because of these rules, specialized custodians have sprung up to accommodate people who want to own alternative investments within their IRAs
- Due to the specialized nature of the custodians, custodial fees and expenses for these IRAs tend to be considerably higher than those for their mainstream counterparts
- Expect more regulations to be implemented soon, with unpredictable results (exposure to crypto is already available in some ETFs)
The IRS has long realized the universal benefits of Americans directing their own retirement assets. This is demonstrated through Congressional legislation authorizing IRAs, 401(k)s, and other tax-advantaged Retirement Accounts. Most of these accounts offer some degree of owner-investing direction, but Congress has strictly limited some risky investments from being held in those accounts.
In exchange for Americans deferring taxation on the income they contribute to Qualified Retirement Accounts, IRS is making sure that the account balances will not be squandered through complex, risky, and misunderstood investments. For that, they should be applauded.
The nascent crypto market can be accessed today, but the reason for excluding these assets from the mainstream of available Retirement Account assets should give pause to every crypto investor.