I want to share with you our Blog from last month in case you missed it.

When a software creator such as Apple or Microsoft makes changes to their main platform or operating system, they either adjust the number before the decimal of the system or afterward. One might expect, when going from Windows 10.1 to 10.2, to have minor incremental changes, but going from 10 to 11 to have more major changes in how the platform looks and operates. The same is true for phones and tablet operating systems.

However, it's hard to say that the same is true for Congress, given that many bills are not revisited within the same structural framework, and so often get a new name or acronym rather than being considered an update of an earlier bill. For example, in 2019, Congress passed the Setting Every Community Up for Retirement Enhancement Act, generally known by its initials as the "SECURE Act." A wide range of changes were covered in that legislation, including postponing Required Minimum Distributions until the taxpayer reaches age 72 (the old rule had been 70 1/2) and the elimination of the "stretch" treatment for an inherited IRA. That legislation enjoyed bipartisan support and has been considered a success.

In 2022, Congress developed four new bills addressing various aspects of qualified retirement plans. Ideas from all four proposals were consolidated into the SECURE Act 2.0, which then became Division T of the "Consolidated Appropriations Act, 2023" (the omnibus budget bill enacted just before Christmas).

Is this SECURE Act 2.0 really a major platform change with new features, or more a collection of minor adjustments to the existing code?

Here are some of the biggest adjustments within the existing framework:

  • Another RMD postponement. Beginning in 2023, the age for starting Required Minimum Distributions is lifted to 73. On January 1, 2033, the age goes to 75.

Additional consideration: This change does not affect the "charitable IRA rollover," under which those who are 701/2 may arrange for a direct transfer of up to $100,000 from an IRA to a qualified charity. Also, that $100,000 limit is now indexed for inflation.

  • Larger "catch-up" contributions. Those who are 50 and older are permitted an extra $1,000 on their IRA contribution limit. Although the basic IRA contribution limit is indexed for inflation, the extra "catch-up" contribution has not been. Beginning in 2024, it will be. What's more, beginning in 2025 the "catch-up" contribution limit will be boosted to $10,000 for those who are 60, 61, 62, and 63.
  • Reduced penalty for failure to take an RMD. What happens if someone fails to receive a Required Minimum Distribution? A 50% excise tax is applied to the amount that should have been distributed. Beginning in 2023, that tax is reduced to 25%, and if the taxpayer makes a timely correction, the tax is reduced to 10%.
  • Penalty-free distributions in some circumstances. Beginning immediately, premature distributions to terminally ill persons will no longer be subject to the 10% penalty tax. Beginning in 2024, survivors of domestic abuse will be permitted to withdraw the lesser of $10,000 or 50% of their retirement plan account without the 10% tax penalty. Income taxes will apply but can be refunded if the amounts withdrawn are repaid within three years.

Here are some completely new additions to the framework:

  • Matching student loan payments. Recent college grads who are still paying off their student loans at the start of their careers may find it difficult to defer any of their earnings into an employer's retirement plan. Failure to contribute would be unfortunate, because then they miss out on the employer match for retirement deferrals, which can be helpful in pushing to get started on a financially responsible track. Under the new law, employers may condition the 401(k) matching contribution on an employee's student loan payments.
  • 529 plan rollovers. What happens when there is money left in a 529 education savings account when the beneficiary graduates? Tax penalties apply if the funds are not used for qualified education expenses. Beginning in 2024, 529 plan beneficiaries may roll up to $35,000 of their leftover funds into a Roth IRA under certain conditions. The account needs to have been in existence for at least 15 years.

Given minor and major adjustments to the current system we are familiar with, this likely does deserve to be called SECURE Act 2.0, and most of the adjustments will be good for retirees. Just like a major operating system update, it's likely that some things you were once familiar with are harder to find at first. It's also true that how you go about retirement planning should be adjusted for the newer tools in place.

For example, at first glance, the higher RMD postponement means that those who can delay their retirement plan distributions will have more years of tax-deferred growth. However, the eventual RMDs will be larger each year, which could mean higher income taxes on them. Even if it's not required to take RMDs earlier, you might still want to do so based on your current and expected tax brackets.

I hope that you found reading this informational Blog worthwhile.
FAMOUS WILL FOR THE MONTH LINDA McCARTNEY
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Among other reasons, Linda McCartney's Will is interesting because she uses testamentary trusts to virtually eliminate federal estate taxes, at least while her husband, Paul McCartney, is alive. ©LIVING TRUST NETWORK
In the Informational Article, Retirement Planning read about how a majority of retirees regret not saving enough for retirement. Younger people need to receive more information on the longevity risk in retirement while there is still time for them to do something about it. In the Tax Rates and Charitable Giving article a study finds that changes in tax rates may affect the timing of charitable gifts, but not total giving.

Two weeks ago, people gathered at Gobbler's Knob as members of Punxsutawney Phil's "inner circle" summoned him from his tree stump at dawn to learn if he had seen his shadow. According to folklore, if he saw his shadow there will be six more weeks of winter. If he didn't, spring comes early.

"We have passed the darkness of night but now see hope and morning's bright light. But now when I turn to see there's a perfect shadow cast of me. Six more weeks of winter there will be!" Phil saw his shadow. Oh no!

Sincerely,
Ira J. Brower, Founder
Retirement Regrets
Although everyone knows that it's important to save for retirement, it is a hard habit to acquire and maintain. That accounts for the success of 401(k) plans, in which the retirement contribution happens before the paycheck is received. Still, the employer plan is just one leg of the three-legged stool needed for financial security in retirement--the other two legs are Social Security and private, after-tax savings.

A study from the National Bureau for Economic Research looked at the regrets expressed by a sample of 1,764 persons over age 50. Two thirds were already retired. Some 57% reported that they regretted not having saved more for retirement. The next largest regret, at 40%, was not buying long-term care insurance, followed by 37% who believed that they should have stayed longer in the workforce. A lifetime annuity provides guaranteed monthly payments throughout retirement, and 33% wished that they had purchased such a plan. 23% regretted not delaying their Social Security benefits to get a larger monthly payment, and 10% regretted that they had become financially dependent upon others.

The study participants were divided into three groups. The first group was a control, the second had subjective information on longevity, and the third had objective information on longevity, the likely length of their retirements based upon actuarial tables. Interestingly, with more information at hand the amount of regret rose. Regret for not having long-term care insurance doubled, and regret for not having an annuity rose by 2.4 times.

The bottom line would seem to be that younger people need to receive more information on the longevity risk in retirement while there is still time for them to do something about it. Coupled with tax incentives for retirement savings, such education could help more people have more secure retirements.

(February 2023)
© 2023 M.A. Co. All rights reserved.
Tax Rates and Charitable Giving
In the Tax Cuts and Jobs Act of 2017, several changes were made that could have had an effect upon charitable giving. The standard deduction was nearly doubled, and the deduction for state and local taxes was capped at $10,000. The result was a dramatic decline in the number of taxpayers who itemize their deductions. In 2017, 38 million taxpayers claimed a charitable deduction, and in 2018 that fell to 15 million. Most of the drop was at the lower end of the income scale. Of course, the absence of a tax deduction says nothing about whether a charitable gift was made--tax benefits are not the motivation for most charitable gifts.
At the upper end, the top tax rate was reduced from 39.6% to 37%, which meant that the net tax savings from a charitable gift was slightly reduced. The tax reform also lifted the cap on the amount of the charitable deduction, from the prior 50% of adjusted gross income to 60%.

A study by the Tax Foundation, reported last December, found that these changes did not have a major effect on overall charitable giving, but that there were important timing effects. Many taxpayers accelerated their charitable giving into 2017, before the tax rate change was implemented. Overall charitable tax deductions jumped by 9% in 2017 compared to 2016. For the $200,000 to $500,000 bracket the increase was 14%, and for the $500,000 to $1 million group deductible charitable gifts rose by 18%. 

For the $1 million to $10 million group, deductions for charitable gifts rose by a whopping 72% in 2017! This was followed by a drop in 2018, suggested that many gifts had been accelerated for tax advantage.

In the aggregate, charitable giving has held fairly steady after the tax reform. According to the Giving USA 2022 report, which covers total charitable giving (not just claimed tax deductions), on an inflation-adjusted basis individual charitable gifts went from $315 billion in 2016 to $335 billion in 2017 and $321 billion in 2018. For comparison, total individual charitable gifts were $327 billion in 2021 (latest data available).

Since the reduction of the top income tax rates in 1981, the report notes, total individual charitable giving has grown by 138% after adjusting for inflation. The study concludes: "Over the long run, tax policies that grow after-tax incomes and the economy do more to boost charitable giving than policies that try to incentivize people to be charitable." 

(February 2023)
© 2023 M.A. Co. All rights reserved.
Family Farms and the Estate Tax
Merle Parks left the bulk of his estate, which included a farm, to his nephew Ronald. Merle died on September 19, 2003. At that time, the federal estate tax exemption was only $1 million. The estate tax return for Merle was due six months later, but the estate asked for a six-month extension, which is automatically granted. Nevertheless, the estate made a $333,959 prepayment of the expected estate tax liability in June 2004. No estate tax return was filed at that time.

For reasons not explained in the Court's decision, the estate tax return was not filed until February 2010, more than five years after the extension for filing expired. The return reported a gross estate of some $1.7 million, a taxable estate of $1.6 million, and an election for special use valuation of the farm property under the tax code's §2032A. That tax code provision allows for farm property to be valued for its agricultural use, rather than its fair market value, which is often far higher. The purpose of the provision is to allow farm property to stay within the family, but a number of requirements must be met to prove that the heirs will continue the farm.

Based upon these final values, and allowing for the special use value reduction, the estate asked for a tax refund of $87,838 from the 2004 payment. Two years later, in 2012, the IRS did much more than deny the refund. The Service stated that five years was too long to wait to make the election for special use valuation, that additional taxes of $199,111 were due, as well as a late filing penalty of $27,818.25. 

The estate did not pay the additional tax. In 2021 the U.S. brought a civil action to collect the taxes through a judicial seizure and sale of the farm property. The defendants admitted that estate tax return was late, but argued that an election of special use valuation on a late return is still valid, provided that the return is the first estate tax return filed. Both sides asked that the case be dismissed in their favor.

After a long and careful examination of the history of the law and Regulations on valuing farm property for the federal estate tax, the District Court held that the special use election was not invalid for being late, just as the estate had argued. However, it was not a total win for the estate. The IRS continues to have the ability to prove at trial that the estate has not met the other technical requirements for the election, such as qualified uses of the property and material participation in farming by the heirs. With interest, as of the time of the decision, the amount at issue has grown to $433,654.66.

Thus, more than 19 years after his death, the federal estate tax on Merle Parks' farm property remains unsettled. 
(February 2023)
© 2023 M.A. Co. All rights reserved.
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