New Tax Bill Requires Updated Planning Approach

July 21, 2025 — Sam H. Fawaz

President Trump signed into law the One Big Beautiful Bill Act (OBBBA) on July 4, 2025, after months of deliberation in the House and Senate. The legislation includes multiple tax provisions that will guide individuals, business owners, and investors in planning their finances for many years to come.

The OBBBA makes permanent most of the 2017 Tax Cuts and Jobs Act (TCJA) tax provisions that were set to expire at the end of this year, while delivering several new deductions and changes.

Many of the new and modified provisions seem simple on the surface, but will require new approaches to tax planning to optimize the benefits of various tax breaks.

On behalf of all CPA’s and accountants, and before delving into the various provisions below, I want to thank Congress for renewing the “CPA Full Employment Act,” also known as GOFA (Guaranteed Overtime for Accountants), proving once again that while tax breaks may expire, job security for tax professionals is eternal.

TCJA Expiring provisions that are now permanent

Rates and structure

The TCJA reduced the applicable tax rates for most brackets from 2018 through 2025, while increasing the income range covered by each bracket. The new legislation makes the TCJA rates and structure permanent. Individual marginal income tax brackets will remain at 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Standard deduction amounts

The TCJA established larger standard deduction amounts. The OBBBA includes an additional increase, and for 2025, the standard deduction amounts are:

  • $31,500 for married filing jointly
  • $23,625 for head of household
  • $15,750 for single and married filing separately

Personal exemptions

The TCJA eliminated the deduction for personal exemptions. The last year it was available was 2017 at $4,050 per exemption. This deduction is now permanently eliminated.

Child tax credit

Prior temporary increases to the child tax credit, the refundable portion of the credit, and income phase-out ranges are made permanent. The OBBBA increases the child tax credit to $2,200 for each qualifying child starting in 2025.

Mortgage interest deduction

The TCJA imposed a limit of $750,000 ($375,000 for married filing separately) on qualifying mortgage debt for purposes of the mortgage interest deduction. It also made interest on home equity indebtedness nondeductible. Both provisions are now permanent.

The OBBBA reinstates the previously expired provision allowing for the deduction of mortgage insurance premiums as interest (subject to income limitations), beginning in 2026.

Estate and gift tax exemption

The TCJA implemented a larger estate and gift tax exemption amount (essentially doubled it). The OBBBA increases it to $15 million in 2026 ($30 million for married couples), and it will be indexed for inflation in subsequent years.

Alternative minimum tax (AMT)

The TCJA implemented significantly increased AMT exemption amounts and exemption income phase-out thresholds. The OBBBA makes them permanent.

Itemized deduction limit

The OBBBA replaces the previously suspended (from 2018 to 2025) overall limit on itemized deductions. This was known as the “Pease limitation.”

For taxpayers with adjusted gross income (AGI) above a specified threshold (for example, in 2017, $254,200 for single filers and $305,050 for married filing jointly), the Pease limitation reduced total itemized deductions by 3% of the amount by which AGI exceeded the threshold. The haircut could not exceed 80% of the total itemized deductions.

The Pease limitation is now replaced with a percentage reduction that applies to individuals in the highest tax bracket (37%), effectively capping the value of each $1.00 of itemized deductions at $0.35.

Most taxpayers will find the new limitation more generous, as the cap only affects the highest earners.

Qualified business income deduction (Section 199A)

The TCJA created the deduction for qualified business income. The OBBBA additionally increases the phase-in thresholds for the deduction limit. A new minimum deduction of $400 is now available for specific individuals with at least $1,000 in qualified business income.

TCJA Existing provisions with material changes

The One Big Beautiful Bill Act also makes significant changes to other provisions, some of which are temporary, while others are permanent. Two of the changes that received substantial coverage leading up to passage and enactment include a temporary increase in the limit on allowable state and local tax deductions and the rollback of existing energy tax incentives.

State and local tax deduction (SALT)

The new legislation temporarily increases the cap on the SALT deduction from $10,000 to $40,000 through 2029. This increased cap is retroactively effective for the entire year 2025. The $40,000 cap will increase to $40,400 in 2026 and by 1% for each of the following three years.

The cap is reduced for those with modified adjusted gross incomes (AGI) exceeding $500,000 (tax year 2025, adjusted for inflation in subsequent years), but the limit is never reduced below $10,000. In 2030, the SALT deduction cap will return to $10,000.

Careful income and deduction planning for taxpayers around the $500,000 AGI level will be critical going forward.

Repeal and phase-out of clean energy credits

The new legislation significantly rolls back energy-related tax incentives. Provisions include:

  • The Clean Vehicle Credit (Internal Revenue Code or IRC Section 30D), the Previously Owned Clean Vehicle Credit (IRC Section 25E), and the Qualified Commercial Clean Vehicles Credit (IRC Section 45W) are eliminated effective for vehicles acquired after September 30, 2025.
  • The Energy Efficient Home Improvement Credit (IRC Section 25C) and the Residential Clean Energy Credit (IRC Section 25D) are repealed for property placed in service after December 31, 2025.
  • The New Energy Efficient Home Credit (Section 45L) will expire on June 30, 2026; the credit cannot be claimed for homes acquired after that date.
  • The Alternative Fuel Vehicle Refueling Property Credit (IRC Section 30C) will not be available for property placed in service after June 30, 2026.

Gambling losses

The new law changes the treatment of gambling losses, effective as of 2026.

Before the legislation, individuals could deduct 100% of their gambling losses against winnings (the deduction could never exceed the amount of gambling winnings). Now, a new cap limits deductions to 90%.

Bonus depreciation and Section 179 expensing

Before this legislation, the additional first-year “bonus” depreciation was being phased out, with the maximum deduction dropping to 40% by 2025.

The new legislation permanently establishes a 100% additional first-year depreciation deduction for qualifying property, allowing businesses to deduct the full cost of such property in the year of acquisition. The 100% additional first-year depreciation deduction is available for property acquired after January 19, 2025.

Effective for property placed in service in 2025, the legislation also increases the limit for expensing under IRC Section 179 from $1 million of acquisitions (indexed for inflation) to $2.5 million, and it increases the phase-out threshold from $2.5 million (indexed for inflation) to $4 million.

OBBBA New provisions

The One Big Beautiful Bill Act includes several new tax deductions intended to represent a step toward fulfilling campaign promises that eliminate taxes on Social Security, tips, and overtime. Some of these new deductions are temporary, others are permanent.

Deduction for seniors

Effective for tax years 2025–2028, the legislation creates a new $6,000 deduction for qualifying individuals who reach the age of 65 during the year. The deduction begins to phase out when modified adjusted gross income exceeds $75,000 ($150,000 for married filing jointly).

Tip income deduction, AKA “no tax on tips”

Effective for tax years 2025–2028, for the first time, tip-based workers can deduct a portion of their cash tips for federal income tax purposes. Individuals who receive qualified cash tips in occupations that customarily received tips before January 1, 2025, may exclude up to $25,000 in reported tip income from their federal taxable income. A married couple filing a joint return may each claim a deduction of up to $25,000.

The deduction phases out at a modified adjusted gross income of $150,000 for single filers and $300,000 for joint filers. This provision applies to a broad range of service occupations, including restaurant staff, hairstylists, and hospitality workers.

Overtime deduction, AKA “no tax on overtime”

A new temporary deduction of up to $12,500 ($25,000 if married filing jointly) is established for qualified overtime compensation. The deduction is phased out for individuals with a modified adjusted gross income of over $150,000 ($300,000 if married filing jointly).

The deduction is reduced by $100 for each $1,000 of modified adjusted gross income exceeding the threshold. To claim the deduction, a Social Security number must be provided. The deduction is available for tax years 2025 through 2028.

Investment accounts for children, AKA “Trump accounts”

A new tax-deferred account for children under the age of 18 is created, effective January 1, 2026. With limited exceptions, up to $5,000 in total can be contributed to an account annually (the $5,000 amount is indexed for inflation). Parents, relatives, employers, and certain tax-exempt, nonprofit, and government organizations are eligible to make contributions. Contributions are not tax-deductible.

For children born between 2025 and 2028, the federal government will contribute $1,000 per child into eligible accounts. Distributions generally cannot be made from the account before the account holder reaches the age of 18, and there are restrictions, limitations, and tax consequences that govern how and when account funds can be used. To have an account, a child must be a U.S. citizen and have a Social Security number.

Charitable deduction for non-itemizers and itemizers

The legislation reinstates a tax provision that was previously effective for tax year 2021.

A deduction for qualifying charitable contributions is now permanently established for individuals who do not itemize deductions. The deduction is capped at $1,000 ($2,000 for married filing jointly). Contributions must be made in cash to a public charity and meet other specific requirements. This deduction is available starting in tax year 2026.

For itemizers, the legislation introduces a “haircut” to charitable contributions, equivalent to 0.5% of adjusted gross income, similar to the 7.5% haircut for medical expenses.

These provisions possibly make donor-advised funds and qualified charitable distributions (from IRAs for those age 70.5 or older) more critical than ever to incorporate into charitable giving strategies and planning.

Car loan interest deduction, AKA “no tax on car loan interest”

For tax years 2025–2028, interest paid on car loans is now deductible for certain buyers.

Beginning in 2025, taxpayers who purchase qualifying new vehicles assembled in the United States for personal use may deduct up to $10,000 in annual interest on a qualifying loan.

The deduction is phased out at higher incomes, starting at a modified adjusted gross income of $100,000 (single filers) or $200,000 (joint filers).

529 Education Savings Plans

Section 529 college savings accounts are expanded in three critical ways:

First, you can withdraw up to $20,000 per year tax-free for K-12 schooling beginning in 2026, an increase of $10,000 from the current annual cap. As always, there is no limit on the amount of tax-free withdrawals that can be used to pay for college.

Second, more K-12 expenses are covered. It used to be that distributions for K-12 education were tax-free only if used to cover tuition. Now covered are costs of tuition, materials for curricula and online studying, books, educational tutoring, fees for taking an advanced placement test or any exam related to college admission, and educational therapies provided by a licensed provider to students with disabilities. This easing begins with distributions from 529 accounts made after July 4, 2025.

Third, certain post-high school credentialing program costs are eligible for payment via 529 plans. This expansion supports individuals pursuing alternative educational and career pathways outside of traditional degree programs. Eligible costs typically include:

  • Tuition, books, and required fees for credentialing and licensing programs.
  • Testing fees to obtain or maintain a professional certification or license.
  • Continuing education costs needed to renew or maintain specific credentials.
  • Supplies and equipment required for a recognized credentialing program.

1099 Reporting

A 2021 law required third-party settlement networks to send 1099-Ks to payees who were paid more than $600 for goods and services. The OBBBA repeals this change and restores the prior reporting rule. Third-party networks are now required to send 1099-Ks only to payees with over 200 transactions who were paid more than $20,000 in a calendar year.

The filing threshold for 1099-MISC and 1099-NEC forms increases from $600 to $2,000, effective with forms sent out in 2027 for tax year 2026. This figure will be indexed for inflation. The $600 reporting threshold has not changed since 1954, even though prices have increased by about 1095% since then.

But wait….there’s more …

The One Big Beautiful Bill Act includes broad and sweeping changes that will have a profound impact on tax planning. The legislation is over 800 pages long, and we have only scratched the surface here.

While income and estate tax provisions are highlighted in this summary, the legislation also makes fundamental changes that impact areas such as healthcare, immigration, and border security, as well as additional tax changes. Further information and details will be forthcoming in the coming weeks and months. There are numerous unanswered questions that will be addressed through Congressional technical corrections, IRS Bulletins, and upcoming regulations.

As always, if you have questions about how these changes affect your specific situation, please don’t hesitate to contact us. Although I expect a jump in my overtime this year as a result of this tax bill, the no-tax-on-overtime provision does not apply to yours truly. I guess that’s the price to pay for having a job for life.

Sam H. Fawaz is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We begin with a thorough assessment of your unique personal situation. There is no rush and no cookie-cutter approach. Each client’s financial plan and investment objectives are unique.

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Does the new Social Security ID Verification Affect You?

June 25, 2025 — Sam H. Fawaz

This spring, the Social Security Administration (SSA) announced that some individuals who want to claim Social Security benefits or change their direct deposit account information will need to prove their identity in person at a local Social Security field office.

According to the SSA, stronger identity verification procedures are needed to prevent fraud. The new rule is already confusing, partly because of its hasty rollout, so here are answers to some common questions and links to official SSA information.

Who will need to visit a Social Security office to verify their identity?

This new rule only affects people without or who can’t use their personal mySocialSecurity account. If you already have a mySocialSecurity account, you can continue to file new benefit claims, set up direct deposit, or make direct deposit changes online — you will not need to visit an office.

You must visit an office to verify your identity if you do not have a mySocialSecurity account and you are:

· Applying for retirement, survivor, spousal, or dependent child benefits

· Changing direct deposit information for any type of benefit

· Receiving benefit payments by paper check and need to change your mailing address

You don’t need to visit an office to verify your identity if you are applying for Medicare, Social Security disability benefits, or Supplemental Security Income (SSI) benefits — these are exempt from the new rule, and you can complete the process by phone.

If you’re already receiving benefits and don’t need to change direct deposit information, you will not have to contact the SSA online or in person to verify your identity. According to the SSA, “People will continue to receive their benefits and on time to the bank account information in Social Security’s records without needing to prove their identity.” There’s also no need to visit an office to verify your identity if you are not yet receiving benefits.

The SSA has also announced that requests for direct deposit changes (online or in person) will be processed within one business day. Before this, online direct deposit changes were held for 30 days.

What if you don’t have a mySocialSecurity account?

You can create an account anytime on the SSA website, ssa.gov/myaccount. A mySocialSecurity account is free and gives you access to SSA tools and services online. For example, you can request a replacement Social Security card, view your Social Security statement that includes your earnings record and future benefit estimates, apply for new benefits and set up direct deposit, or manage your current benefits and change your direct deposit instructions.

To start the sign-up process, you will be prompted to create an account with one of two credential service providers, Login.gov or ID.me. These services meet the U.S. government’s identity proofing and authentication requirements and help the SSA securely verify your identity online, so you won’t need to prove your identity at an SSA office. You can also use your existing Login.gov or ID.me credentials if you have already signed up with one of these providers elsewhere.

If you’re unable or unwilling to create a mySocialSecurity account, you can call the SSA and start a benefits claim; however, if you’re filing an application for retirement, survivor, spousal, or dependent child benefits, your request can’t be completed until your identity is verified in person. You may also start a direct deposit change by phone and subsequently visit an office to complete the identity verification step. You can find your local SSA office using the Social Security Office Locator at ssa.gov.

To complete your transaction in one step, the SSA recommends scheduling an in-person appointment by calling the SSA at (800) 772-1213. However, you may face delays. According to SSA data (through February), only 44% of benefit claim appointments are scheduled within 28 days, and the average time you’ll wait on hold to speak to a representative (in English) is 1 hour and 28 minutes, though you can request a callback (74% of callers do). These wait times will vary, but are likely to worsen as the influx of calls increases and the SSA experiences staffing cuts.

What if your Social Security account was created before September 18, 2021?

Last July, the SSA announced that anyone who created a mySocialSecurity account with a username and password before September 18, 2021, would need to begin using either Login.gov or ID.me to continue accessing their Social Security account. If you haven’t already completed the transition, you can find instructions at ssa.gov/myaccount.

How can you help protect yourself against Social Security scams?

Scammers may take advantage of confusion over this new rule by posing as SSA representatives and asking individuals to verify their identity to continue receiving benefits. Be extremely careful if you receive an unsolicited call, text, email, or social media message claiming to be from the SSA or the Office of the Inspector General.

Although SSA representatives may occasionally contact beneficiaries by phone for legitimate business purposes, they will never contact you via text message or social media. Representatives will never threaten you, pressure you to take immediate action (including sharing personal information), ask you to send money, or say they need to suspend your Social Security number. Familiarize yourself with the signs of a Social Security-related scam by visiting ssa.gov/scam.

Sam H. Fawaz is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and their financial plan and investment objectives are different.

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Hidden Risks of Naming a Trust as Your IRA or 401(k) Beneficiary

May 4, 2025 — Sam H. Fawaz

EXECUTIVE SUMMARY

Naming your trust as the beneficiary of your IRA or 401(k) can be a powerful estate planning tool, but it comes with significant complexities and trade-offs.

Recent IRS regulations, particularly the final regulations issued in July 2024, have made several significant changes affecting individuals who have named a trust as the beneficiary of their IRA or 401(k). These changes address required minimum distributions (RMDs), beneficiary classifications, documentation requirements, and tax implications.

If you have a trust, it may no longer be prudent to name your trust as your 401(k) or IRA beneficiary. You may need to consult with your estate planning attorney to confirm that naming your trust as the beneficiary is still a valid designation.

If your trust document is over five years old, you may need to consult your estate planning attorney to modify your trust or update your beneficiary designations to avoid unintended accelerated distribution timeframes or subject the distributions to steep trust tax rates.

Before discussing the latest tax regulations and the implications of naming a trust as your IRA or 401(k) beneficiary, let’s look at the pros and cons of doing so:

PROS OF NAMING A TRUST AS AN IRA BENEFICIARY

• Control Over Distributions: A trust allows you to set specific terms for how and when assets are distributed. This is particularly useful if your beneficiaries are minors, have special needs, or may not be financially responsible [9][10][11][12].

• Protection for Vulnerable Beneficiaries: Trusts can protect beneficiaries who are minors, disabled, or have issues with creditors, addiction, or poor financial decision-making [9][13][14][11][12].

• Asset Protection: A trust can safeguard assets from a beneficiary’s creditors, divorce, or lawsuits [10][12].

• Estate Planning for Blended Families: Trusts can ensure assets are distributed according to your wishes, such as providing for a spouse during their lifetime with the remainder going to children from a previous marriage [13][14][10][12].

• Privacy: Distributions through a trust avoid probate, keeping your estate details private [10].

• Special Needs Planning: A properly structured trust can provide for a beneficiary with special needs without disqualifying them from government benefits [14][10][11].

• Contingency Planning: Trusts can specify what happens if a beneficiary dies before receiving their full share, offering more control over the ultimate disposition of assets [12].

CONS OF NAMING A TRUST AS AN IRA BENEFICIARY

• Accelerated Taxation and RMD Rules: Trusts are subject to RMDs based on the oldest beneficiary’s life expectancy, which can accelerate withdrawals and taxes compared to naming individuals directly [9][13][11].

Under the SECURE Act, most non-spouse beneficiaries, including trusts, must withdraw the entire account within 10 years, eliminating the “stretch IRA” (explained below) in most cases [14][10][11].

• Potential for Higher Taxes: Trusts reach the highest federal income tax rate much faster than individuals. If the trust accumulates income instead of distributing it, this can result in significantly higher taxes [15][10].

• Loss of Spousal Rollover: Naming a trust as beneficiary means a surviving spouse cannot roll the account into their own IRA, losing the ability to defer taxes over their lifetime [14].

• Increased Complexity and Cost: Administering a trust as a retirement account beneficiary involves more paperwork, legal compliance, and potentially higher administrative costs [13][15][10].

• Risk of Non-Compliance: If the trust is not drafted correctly as a “see-through” (or “look-through”) trust (see below), it may trigger even more accelerated distribution rules, such as the five-year distribution rule [15][11].

• Plan Restrictions: Some employer plans may not allow trusts as beneficiaries or may require lump-sum distributions, which could trigger full immediate taxation [13].

• No Probate Avoidance for Trust Assets: While retirement accounts avoid probate when a beneficiary is named, naming a trust does not provide additional probate avoidance for the retirement account, though it does for assets distributed from the trust [11].

When Naming a Trust as Beneficiary Makes Sense

• You have minor, disabled, or financially irresponsible beneficiaries.

• You want to control the timing and amount of distributions.

• You need to protect assets from creditors or divorce.

• You have a blended family and want to ensure specific inheritance outcomes.

• You have a beneficiary who relies on government benefits.

When It May Not Be Advantageous

• Your beneficiaries are financially responsible adults.

• You want to maximize tax deferral and minimize complexity.

• Your spouse is the primary beneficiary and would benefit from rollover options.

KEY TAX CHANGES AND THEIR EFFECTS

Before the SECURE Act, passed in December 2019, IRA beneficiaries enjoyed a long “stretch” of time to take distributions from the IRAs they inherited. Beneficiaries could distribute the inherited IRA assets over the remainder of their lifetimes using the IRS RMD rules.

That stretch was largely eliminated for most IRA beneficiaries who inherited an IRA from a decedent starting in 2020. The IRS took over 4 1/2 years from the passage of the SECURE Act to finalize regulations surrounding distributions from post-2019 inherited IRAs.

1. Required Minimum Distributions (RMDs) and the 10-Year Rule

As mentioned above, the SECURE Act and its subsequent regulations essentially eliminated the “stretch IRA” for most non-spouse beneficiaries, including trusts, replacing it with a 10-year payout rule. This means that, in most cases, all funds in an inherited IRA or 401(k) must be distributed by the end of the 10th year following the account holder’s death.

If the account owner died after their required beginning date (RBD), annual RMDs must be taken during years 1–9, with the entire balance distributed by year 10.

If the account owner died before their required beginning date (RBD), annual required minimum distributions (RMDs) are not required in years 1–9. Instead, the entire inherited IRA or retirement account balance must be distributed by the end of the 10th year following the year of the original owner’s death. Depending on the size of the IRA and the beneficiary’s tax bracket, taking some distributions in years 1-9 may be prudent, even if not required.

The RBD for most IRA owners is age 70-1/2 to 73 (soon to be 75). Remember that the “M” in RMD is the minimum you must distribute. Depending on the size of the IRA, more than the minimum distribution will often make more sense.

Only “Eligible Designated Beneficiaries” (EDBs), such as spouses, minor children (until age 21), disabled or chronically ill individuals, or beneficiaries less than 10 years younger than the decedent, can still use the stretch distribution based on their life expectancy.

2. Trust Types and Beneficiary Analysis

The IRS continues to recognize “see-through” (or “look-through”) trusts, which allow the trust’s individual beneficiaries to be treated as the IRA’s beneficiaries for RMD purposes.

To qualify as a see-through trust under IRS rules, the trust must meet specific criteria that allow its beneficiaries to be treated as direct beneficiaries of an inherited IRA or 401(k). These requirements ensure the trust can utilize stretch distributions or the 10-year rule based on beneficiary status (i.e., EDB or non-EDB).

Here are the key requirements of a see-through trust:

a. Validity Under State Law

The trust must be legally valid in the state where it was created. This typically requires proper execution, witnessing, and notarization of the trust document.

b. Irrevocability Upon Death

The trust must be irrevocable from inception or upon the account owner’s death. Revocable trusts that convert to irrevocable status at death are acceptable.

c. Identifiable Beneficiaries

All trust beneficiaries must be clearly named, identifiable, and eligible individuals (e.g., people, not charities or other entities). This ensures the IRS can “see through” the trust to determine distribution timelines based on beneficiary life expectancies or the 10-year rule.

If a trust is not a see-through trust, it may be considered a:

  1. Conduit Trust: All IRA distributions must be immediately passed to beneficiaries. Taxes are paid at the beneficiaries’ individual rates, but the 10-year rule generally applies unless all beneficiaries are EDBs.

OR

  1. Accumulation (Discretionary) Trust: Distributions are retained in the trust, which pays taxes at higher trust tax rates. All trust beneficiaries are considered when determining the payout period, and the 10-year rule usually applies.

The Final Regulations allow trusts that split into separate subtrusts for each beneficiary upon the account holder’s death to apply RMD rules based on each subtrust’s beneficiary status. This can preserve stretch treatment for EDBs even if other beneficiaries are subject to the 10-year rule.

3. Documentation Requirements

For IRAs, the IRS has eliminated the requirement for trustees to provide detailed trust documentation to the IRA custodian. Now, only a list of trust beneficiaries and their entitlements may be required, greatly simplifying compliance for see-through trusts.

Some documentation requirements remain for 401(k) and other employer plans, but they have been simplified.

4. Tax Consequences

As mentioned above, trusts reach the top income tax bracket much faster than individuals. In 2024, trust income over $15,200 is taxed at 37%, whereas individuals do not hit this rate until much higher income levels. This can result in significantly higher tax bills if IRA distributions are accumulated in a trust rather than paid to beneficiaries.

Lump-sum distributions or failing to comply with the new rules can result in accelerated taxation and potential penalties.

5. Special Provisions and Clarifications

The IRS clarified that if a trust divides into separate subtrusts immediately upon the account owner’s death, each subtrust is analyzed separately for RMD purposes.

If trust terms or beneficiaries are modified after the account owner’s death (by September 30 of the following year), these changes will affect RMD calculations as if they were always part of the original trust.

Payments made “for the benefit of” a beneficiary (such as to a custodial account for a minor) are treated as direct payments to the beneficiary for RMD purposes.

PRACTICAL CONSIDERATIONS

Most trusts named as IRA or 401(k) beneficiaries will now face the 10-year payout rule, with fewer opportunities for long-term tax deferral.

Under the new rules, trusts must be carefully analyzed and possibly restructured to maximize tax efficiency and achieve estate planning goals.

Simplifying documentation requirements reduces administrative burdens for IRA trusts, but not necessarily for employer plans.

High trust tax rates make accumulation trusts less attractive for holding retirement assets over the long term.

ACTION MAY BE REQUIRED

If your IRA or 401(k) names your trust as a beneficiary, it’s advisable to consult with your estate planning attorney to ensure that, in light of the recent tax regulations, naming the Trust as beneficiary is still prudent.

If you’re unsure whether your trust is considered a see-through trust, consult with your estate planning attorney to determine if the trust must be modified to ensure that the 10-year distribution for beneficiaries remains intact. Otherwise, that 10-year period might be inadvertently shortened to five years, or worse, subject distributions to overly steep trust tax rates.

Whether you have a trust or have named your trust as a beneficiary of your IRA or 401(k), now is a good time to check the beneficiary designations on all of your retirement accounts and insurance policies to ensure they are up to date and reflect all of your recent life changes. If something should happen to you, your loved ones will be most grateful.

Sam H. Fawaz is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and their financial plan and investment objectives are different.

1-8. Deleted

9. https://www.voya.com/blog/retirement-account-pros-and-cons-naming-trust-beneficiary

10. https://www.markruizlaw.com/should-your-living-trust-be-the-beneficiary-of-your-ira-or-401-k-pros-and-cons-explained

11. https://www.investopedia.com/ask/answers/09/trust-beneficiaries.asp

12. https://www.drobnylaw.com/articles/designating-a-trust-as-beneficiary-of-individual-retirement-account-benefits

13. https://www.myubiquity.com/resources/can-a-trust-be-a-beneficiary-of-a-401-k-plan

14. https://www.katz-law-firm.com/can-a-trust-be-the-beneficiary-of-an-ira/

15. https://caryestateplanning.com/blog/should-i-have-a-trust-as-my-ira-beneficiary/

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Essential Year-End Tax Planning Tips for 2024

November 30, 2024 — Sam H. Fawaz

Tax planning becomes essential for individuals and businesses as the year ends. Proactively managing your finances before the calendar flips to 2025 can help minimize your tax burden and set you up for a financially secure new year.

Many clients submit their information yearly to have us optimize their 2024 and future years’ taxes. Proactively estimating and making side-by-side multi-year tax projections has permanently saved some clients thousands of dollars in taxes.

Here are some things to consider as you weigh potential tax moves between now and the end of the year.

1. Consider deferring income to next year

The old rule used to be “defer income.” The new rule is “time income.”

Consider opportunities to defer income to 2025, especially if you may be in a lower tax bracket next year.

For example, you may be able to defer a year-end bonus or delay the collection of business debts, rent, and payments for services. Doing so may enable you to postpone tax payments on the income until next year.

If you have the option to sell real property on a land contract rather than an outright sale, that can spread your tax liability over several years and be subject to a lower long-term capital gain rate (which could be as low as 0%.) On the other hand, if you’re concerned about future tax rate hikes, an outright sale or opting out of the installment method for a land contract sale can ease the uncertainty that you’ll pay higher rates on the deferred income.

If your top tax rate in 2024 is lower than what you expect in 2025 (say, because you are retiring or because of significant gains or a big raise or bonus expected in 2025), it might make sense to accelerate income instead of deferring it.

Be mindful of accelerating or bunching income, which can potentially 1) increase the taxability of social security income, 2) increase Medicare premiums, 3) raise your long-term capital gains rate from 0% to 20%, or 4) decrease your ACA health insurance premium credit.

2. Time your deductions

Once again, the old rule used to be “accelerate deductions.” The new rule is “time deductions.”

If appropriate, look for opportunities to accelerate deductions into the current tax year, especially if your tax rate will be higher this year than next.

If you own a business and are in a high tax bracket, consider accelerating business equipment purchases and electing up to a full expense deduction (via bonus depreciation or Section 179 expensing.)

If you itemize deductions, making payments for deductible expenses such as qualifying interest, state, and local taxes (to the extent they don’t already exceed $10,000), and medical expenses before the end of the year (instead of paying them in early 2025) could make a difference on your 2024 return.

For taxpayers who typically itemize their deductions, the strategy of “bunching” deductions can significantly impact them. Instead of spreading charitable contributions, medical expenses, and other deductible costs across multiple years, consider consolidating them into one year. By “bunching” these deductions, you may exceed the standard deduction threshold and maximize your itemized deductions for the year.

For example, if you typically donate $2,000 annually to charity but are not receiving a tax benefit because you are utilizing the standard deduction, consider making multiple years of contributions in 2024. This could help you exceed the standard deduction amount, allowing you to itemize your deductions and providing more tax benefits (see below.)

For those with significant medical expenses, it’s important to note that only the portion of medical expenses exceeding 7.5% of your adjusted gross income (AGI) can be deducted. If you’re close to reaching that threshold, consider scheduling medical procedures, doctor visits, or purchasing necessary medical equipment before the year ends. Remember that medical expenses are only deductible in the year they are paid, so timing matters.

3. Make deductible charitable contributions

Making charitable donations can reduce your taxable income while supporting causes that matter to you.

If you itemize deductions on your federal income tax return, you can generally deduct charitable contributions, but the deduction is limited to 60%, 50%, 30%, or 20% of your adjusted gross income, depending on the type of property you give and the type of organization to which you contribute. Excess amounts can be carried over for up to five years.

You can use checks or credit cards to make year-end contributions even if the check does not clear until shortly after year-end or the credit card bill does not have to be paid until next year.

As you consider year-end charitable giving, there are a few strategies to keep in mind:

  • Qualified Charitable Distributions (QCDs): If you’re 70½ or older, you can direct up to $105,000 (2024 limit) from your IRA to a charity as a QCD. This donation counts toward your required minimum distribution (RMD) and is excluded from your taxable income (and can reduce the taxation of social security income.) QCDs cannot be counted as deductible charitable donations.
  • Donor-Advised Funds (DAFs): DAFs allow you to make a significant charitable contribution in 2024 and receive the tax deduction now while deciding which charities to support over the next several years. This is a strategy to help with the bunching of itemized deductions described earlier.
  • Appreciated Stock Donations: Donating appreciated stocks that have been held for over one year instead of cash generally provides a double benefit. It allows you to avoid paying capital gains tax on the appreciation while receiving a charitable deduction equal to the investment’s fair market value.

4. Bump up withholding to cover a tax shortfall

If it looks as though you will owe federal income tax for the year, consider increasing your withholding on Form W-4 for the remainder of the year to cover the shortfall. Time may be limited for employees to request a Form W-4 change and for their employers to implement it in 2024.

The most significant advantage in doing so is that withholding is considered to have been paid evenly throughout the year instead of when the dollars are taken from your paycheck. This approach can help you avoid or reduce possible underpayment of estimated tax penalties.

Those taking distributions from their IRAs can also request that up to 100% of the distribution be paid toward federal and state income tax withholding to help avoid underpayment of estimated tax penalties.

These increased withholding strategies can compensate for low or missing quarterly estimated tax payments.

5. Save more for retirement

Deductible contributions to a traditional IRA and pretax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2024 taxable income. Consider doing so if you still need to contribute up to the maximum amount allowed.

For 2024, you can contribute up to $23,000 to a 401(k) plan ($30,500 if you’re age 50 or older) and up to $7,000 to traditional and Roth IRAs combined ($8,000 if you’re age 50 or older). The window to make 2024 employee contributions to an employer plan generally closes at the end of the year, while you have until April 15, 2025, to make 2024 IRA contributions.

Various income limitations exist for eligibility to make traditional and Roth IRA contributions. Regardless of your income, however, you can make a non-deductible IRA contribution. Such a contribution can be subsequently converted to a Roth IRA at little or no tax cost for many (this is known by many as the “back-door” Roth.) If a Roth IRA conversion doesn’t make sense, the non-deductible contribution adds cost basis to your traditional IRA, reducing future taxation of IRA distributions or Roth conversions. Note that Roth contributions are not deductible and Roth-qualified distributions are not taxable.

Speaking of Roth Conversions, if you expect your tax rate to be higher in future years, or you’re in a low tax bracket in 2024, converting some or all your traditional (pre-tax) IRA or 401(k) funds into a Roth IRA in 2024 may be beneficial. While this conversion triggers taxes now, it can reduce future tax liabilities, as qualified withdrawals from a Roth IRA are tax-free.

Owners of small businesses with retirement plans may have until the due date of their tax returns (plus extensions) to make some retirement plan contributions. Check with your tax advisor for your particular small-business retirement plan.

Some small business retirement plans must be set up by 12/31/2024 to allow for a deduction for the 2024 tax year.

If you have a small business, check with your tax advisor to ensure your retirement plan deductions are correctly balanced with the qualified business income deduction, assuming your small business is eligible.

6. Take required minimum distributions

If you are 73 or older, you generally must take required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (special rules may apply if you’re still working and participating in your employer’s retirement plan.)

If you reach 73 in 2024, you must begin taking minimum distributions from your retirement accounts (traditional IRAs, 401(k)s, etc.) by April 1, 2025. However, delaying the 2024 RMD until 2025 will require you to include both the 2024 and 2025 RMDs into 2025 income.

You must make the withdrawals by the required date—the end of the year for most individuals. The penalty for failing to do so is substantial: 25% of any amount you failed to distribute as required (10% if corrected promptly).

In 2024, the IRS finalized somewhat complicated regulations relating to RMDs from inherited IRAs after December 31, 2019.

In general, under the SECURE Act, unless an exception applies, the entire balance of a traditional or Roth IRA must be fully distributed by the end of the 10th year after the year of death.

In addition, depending on the age of the original IRA owner, heirs must take an RMD every year until the 10th year, when the remaining account balance must be distributed. These rules require careful and sometimes complex, multi-year planning for large inherited IRAs, so it’s essential to consult your tax advisor.

Review your accounts to ensure you’ve met your RMD requirement for the year, and if applicable, consider making charitable contributions through a QCD.

7. Weigh year-end investment moves

I often tell folks, “You should not let the tax tail wag the investment dog.” That means that you shouldn’t let tax considerations drive your investment decisions.

With that in mind, lower-income taxpayers may be subject to a 0% long-term capital gains rate for up to about $47K of taxable income for single filers and $94K for joint filers. For “kids” under 26, up to $2,600 of long-term capital gains are taxed at 0% if filed on their own tax returns (not filed with parents’ returns.)

Regardless, it’s worth considering the tax implications of any year-end investment moves that you make. For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all those gains by selling losing positions (also known as tax loss harvesting.)

Any capital losses over and above your capital gains can offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or be carried forward to reduce your taxes in future years.

Wash sale rules prevent investors from selling an investment at a loss and re-purchasing the same or substantially similar security within 30 days in any of their or spouse’s accounts (including retirement accounts). Doing so invalidates the loss for the current year, and the loss deduction is suspended until the new security is ultimately sold. If you wait 31 days to repurchase the same (or substantially similar security), the wash sale rules do not apply.

Digital assets like Bitcoin are not subject to wash sales rules, so there’s no harm in harvesting a loss and then immediately re-purchasing the same digital asset if desired.

8. Contribute to 529 Education Savings Plans

If you’re planning to save for education expenses, the end of the year is an excellent time to consider contributions to a 529 education savings plan. There is no federal tax deduction for 529 plan contributions, but the account grows tax-free if the funds are used for qualifying educational purposes.

Many states offer a limited tax deduction or credit for 529 plan contributions (some states even allow for a deduction for a 529 plan rollover from another state’s 529 plan.) In many states, contributing to a 529 plan you don’t own (say for a sibling, grandkid, nephew, niece, cousin, or friend) also allows for a state tax deduction.

There’s a five-year “super-funding” strategy for those needing to accelerate their college funding. This strategy allows you to contribute up to five years’ worth of gifts to a 529 plan in a year ($90,000 for individuals, $180,000 for married couples). A gift tax return must be filed, but it may not be taxable if this is the only gift made to that person in the current year. This can be a great way to accelerate your child’s education savings.

With the ability to 1) fund private K-12 education, 2) repay some student loans up to $10,000, and 3) rollover some leftover 529 plan funds to a Roth IRA after college graduation, worries about overfunding a 529 education savings plan are far less than they used to be.

In summary, year-end tax planning is a valuable opportunity to control your finances and reduce your taxable income for the year. Reviewing your financial situation, consulting with your tax advisor, and implementing these year-end strategies will ensure that you enter 2025 knowing you’ve made proactive decisions to optimize your tax savings.

Don’t hesitate to contact us if you would like to discuss a tax plan that fully utilizes all available strategies.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.

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The Outlook for Social Security and Medicare

May 31, 2024 — Sam H. Fawaz

In a recent survey, 87% of Americans said that Congress should act now to shore up the Social Security program rather than waiting 10 years to find a solution. The sooner they do, the better.

Each year, the Social Security and Medicare trust fund Trustees provide detailed reports to Congress that track the programs’ current financial condition and projected financial outlook. These reports have warned for years that the trust funds would be depleted in the not-too-distant future, and the most recent reports, released on May 6, 2024, show that Social Security and Medicare continue to face significant financial challenges.

The Trustees of both programs continue to urge Congress to address these financial shortfalls soon so that solutions will be less drastic and may be implemented gradually.

Despite the challenges, it’s important to remember that neither of these programs is in danger of collapsing completely. The question is what changes will be required to rescue them.

More Retirees and Fewer Workers

The fundamental problem facing both programs is the aging of the American population. Today’s workers pay taxes to fund benefits received by retirees, and with lower birth rates and longer life spans, fewer workers pay into the programs, and more retirees receive benefits for a longer period. In 1960, there were 5.1 workers for each Social Security beneficiary; in 2024, there were 2.7, projected to drop steadily to 2.3 by 2040.

Dwindling Trust Funds

Payroll taxes from today’s workers and income taxes on Social Security benefits go into interest-bearing trust funds. During times when payroll taxes and other income exceeded benefit payments, these funds built up reserve assets. But now, the reserves are being depleted as they supplement payroll taxes and other income to meet scheduled benefit payments.

Social Security Outlook

Social Security consists of two programs, each with its own trust fund. Retired workers, their families, and survivors receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program, and disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program.

The OASI Trust Fund reserves are projected to be depleted in 2033, unchanged from last year’s report. At that time, incoming revenue would pay only 79% of scheduled benefits. Reserves in the much smaller DI Trust Fund, which is on stronger footing, are not projected to be depleted during the 75 years ending in 2098.

Under current law, these two trust funds cannot be combined, but the Trustees also provide an estimate for the hypothetical combined program, referred to as OASDI. This would extend full benefits to 2035, a year later than last year’s report, at which time, incoming revenue would pay only 83% of scheduled benefits.

Medicare Outlook

Medicare also has two trust funds. The Hospital Insurance (HI) Trust Fund pays for inpatient and hospital care under Medicare Part A. The Supplementary Medical Insurance (SMI) Trust Fund comprises two accounts: one for Medicare Part B physician and outpatient costs and the other for Medicare Part D prescription drug costs.

The HI Trust Fund will contain surplus income through 2029 but is projected to be depleted in 2036, five years later than last year’s report. At that time, revenue would pay only 89% of the program’s costs. Overall, projections of Medicare costs are highly uncertain.

The SMI Trust Fund accounts for Medicare Parts B and D are expected to have sufficient funding because they are automatically balanced through premiums and revenue from the federal government’s general fund. Still, financing must increase faster than the economy to cover expected expenditure growth.

Possible Fixes

Based on this year’s report, if Congress does not take action, Social Security beneficiaries might face a benefit cut after the trust funds are depleted. Any permanent fix to Social Security would likely require a combination of changes, including:

• Raise the Social Security payroll tax rate (currently 12.4%, half paid by the employee and half by the employer). An immediate and permanent payroll tax increase to 15.73% would be necessary to address the long-range revenue shortfall (or 16.42% if the increase starts in 2035).

• Raise the ceiling on wages subject to Social Security payroll taxes ($168,600 in 2024).

• Raise the full retirement age (currently 67 for anyone born in 1960 or later).

• Change the benefit calculation formula.

• Use a different index to calculate the annual cost-of-living adjustment.

• Tax a higher percentage of benefits for higher-income beneficiaries.

Addressing the Medicare shortfall might necessitate spending cuts, tax increases, and cost-cutting through program modifications.

Based on past changes to these programs, future changes are likely to primarily affect future beneficiaries and have a relatively small effect on those already receiving benefits. While neither Social Security nor Medicare is in danger of disappearing, it would be wise to maintain a strong retirement savings strategy to prepare for potential changes that may affect you in the future.

Many people believe the social security system will not be around when it’s their turn to collect benefits. I don’t believe that to be the case. Based on everything I’ve studied, I believe Congress will act, but not any sooner than they have to, or perhaps when it becomes a crisis. And when they do, combining some or all of the above techniques will extend the social security fund and medicare benefits for many more decades. There’s no rush, in my opinion, to collect benefits as soon as possible out of fear of the system running out of money.

You can view a summary of the 2024 Social Security and Medicare Trustees Reports and a full copy of the Social Security report at ssa.gov. You can find the full Medicare report at cms.gov.

All projections are based on current conditions, subject to change, and may not come to pass.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.

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Year-end 2022 Tax and Financial Planning for Individuals

November 30, 2022 — Sam H. Fawaz

As we wrap up 2022, it’s important to take a closer look at your tax and financial plans and review steps that can be taken to reduce taxes and help you save for your future. Though there has been a lot of political attention to tax law changes, inflation and environmental sustainability, political compromise has led to smaller impacts on individual taxes this year.

However, with the passage of the Inflation Reduction Act of 2022, there are new tax incentives for you to consider. There are also several tax provisions that have expired or will expire soon. We continue to closely monitor any potential extensions or changes in tax legislation and will update you accordingly.

Here’s a look at some potential planning ideas for individuals to consider as we approach year-end:

Charitable Contribution Planning

If you’re planning to donate to a charity, it may be better to make your contribution before the end of the year to potentially save on taxes. There are many tax planning strategies related to charitable giving. For example, if you give gifts larger than $5,000 to a single organization, consider donating appreciated assets (such as collectibles, stock, exchange-traded funds, or mutual funds) that have been held for more than one year, rather than cash. That way, you’ll get a deduction for the full fair market value while side-stepping the capital gains taxes on the gain.

Because of the large standard deduction, most people no longer itemize deductions. But bunching deductions every other year might give you a higher itemized deduction than the standard deduction. One way to do this is by opening and funding a donor-advised fund (DAF). A DAF is appealing to many as it allows for a tax-deductible gift in the current year for your entire contribution. You can then grant those funds to your favorite charities over multiple years. If you give $2,000 or more a year to charity, talk to us about setting up a DAF.

Qualified charitable distributions (QCDs) are another option for certain taxpayers (age 70.5+) who don’t typically itemize on their tax returns. If you’re over age 70.5, you’re eligible to make charitable contributions directly from your IRA, which essentially makes charitable contributions deductible (for both federal and most state tax purposes) regardless of whether you itemize or not. In addition, it reduces future required minimum distributions, reducing overall taxable income in future years. QCDs keep income out of your tax return, making income-sensitive deductions (such as medical expenses) more viable, lowers the taxes on your social security income, and can lower your overall tax rate. They may also help keep your Medicare premiums low.

Last year, individuals who did not itemize their deductions could take a charitable contribution deduction of up to $300 ($600 for joint filers). However, this opportunity is no longer available for tax year 2022 (and future years).

Note that it’s important to have adequate documentation of all donations, including a letter or detailed receipt from the charity for donations of $250 or more. That letter/receipt must include your name, the taxpayer identification number of the institution, the amount, and a declaration of whether you received anything of value in exchange for the contribution.

Required Minimum Distributions (RMDs)

Tax rules don’t allow you to keep retirement funds in your accounts indefinitely. RMDs are the minimum amount you must annually withdraw from your retirement accounts once you reach a certain age (generally age 72). The RMD is calculated and based on the value of the account at the end of the prior tax year multiplied by a percentage from the IRS’ life expectancy tables. Failure to take your RMD can result in steep tax penalties–as much as 50% of the undistributed amount.

Retirement withdrawals obviously have tax impacts. As mentioned above, you can send retirement funds to a qualified charity to satisfy the RMD and potentially avoid taxes on those withdrawals.

Effective for the 2022 tax year, the IRS issued new life expectancy tables, resulting in lower annual RMD amounts. We can help you calculate any RMDs to take this year and plan for any tax exposure.

Digital Assets and Virtual Currency

Digital assets are defined under the U.S. income tax rules as “any digital representation of value that may function as a medium of exchange, a unit of account, and/or a store of value.” Digital assets may include virtual currencies such as Bitcoin and Ethereum, Stablecoins such as Tether and USD Coin (USDC), and non-fungible tokens (NFTs).

Unlike stocks or other investments, the IRS considers digital assets and virtual currencies as property, not as capital assets. As such, they are subject to a different set of rules than your typical investments. The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services, or holding such currencies as an investment, generally have tax impacts –– and the IRS continues to increase its scrutiny in this area. We can help you understand any tax and investment consequences, which can be quite convoluted.

Energy Tax Credits

From electric vehicles to solar panels, “going green” continues to provide tax incentives. The Inflation Reduction Act of 2022 included new and newly expanded tax credits for solar panels, electric vehicles, and energy-efficient home improvements. The rules are complex, and some elements of the law are not effective until 2023, so careful research and planning now can be beneficial. For example, previously ineligible electric vehicles are now eligible for credits, while other eligible vehicles are now ineligible for credits if they don’t contain the right proportion of parts and assembly in the United States.

Additional Tax and Financial Planning Considerations

We recommend that you review your retirement plans at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional individual retirement accounts (IRAs), Roth IRAs, and company retirement plans. It’s also advisable to take advantage of and maximize health savings accounts (HSAs), which can help you reduce your taxes and save for medical-related expenses.

Also, if you withdrew a Coronavirus distribution of up to $100,000 in 2020, you’ll need to report the final one-third amount on your 2022 return (unless you elected to report the entire distribution in 2020 or have re-contributed the funds to a retirement account). If you took a distribution, you could return all or part of the distribution to a retirement account within three years, which will be a date in 2023.

We can work with you to strategize a plan to help restore and build your retirement savings and determine whether you’re on target to reach your goals.

Here are a few more tax and financial planning items to consider and potentially discuss with us:

  • Life changes –– Let us (or your current financial planner) know about any major changes in your life such as marriages or divorces, births or deaths in the family, job or employment changes, starting a business, and significant capital expenditures (such as real estate purchases, college tuition payments, etc.).
  • Capital gains/losses –– Consider tax benefits related to harvesting capital losses to offset realized capital gains, if possible. Net capital losses (the result when capital losses exceed capital gains for the year) can offset up to $3,000 of the current year’s ordinary income (salary, self-employment income, interest, dividends, etc.) The unused excess net capital loss can be carried forward to be used in subsequent years. Consider harvesting some capital gains if you have a large capital loss from the current or prior years.
  • Estate and gift tax planning –– There is an annual exclusion for gifts ($16,000 per donee in 2022, $32,000 for married couples) to help save on potential future estate taxes. While you can give much more without incurring any gift tax, any total annual gift to one individual larger than $16,000/$32,000 requires the filing of a gift tax return (with your form 1040). Note that the filing of a gift tax return is an obligation of the giver, not the recipient of the gift. The annual exclusion for 2023 gifts increases to $17,000/$34,000.
  • State and local taxes –– Many people are now working from home (i.e., teleworking). Such remote working arrangements could potentially have state or local tax implications that should be considered. Working in one state for an employer located in another state may have unexpected state tax consequences. Also, ordering merchandise over the internet without paying sales or use tax might obligate you to remit a use tax to your home state.
  • Education planning –– Consider a Section 529 education savings plan to help save for college or other K-12 education. While there is no federal income tax deduction for the contributions, there can be state income tax benefits (full or partial deductions) for doing so. Funds grow tax-free over many years and can be distributed tax-free when used for qualified education purposes. Lower-income taxpayers (less than $85,800 if single, head of household, or qualifying widow(er); $128,650 if married filing jointly) can redeem certain types of United States savings bonds tax-free when redeemed for college.
  • Updates to financial records –– Tax time is the ideal time to review whether any updates are needed to your insurance policies or various beneficiary designations (life insurance, annuity, IRA, 401(k), etc.), especially if you’ve experienced any life changes in the past year.
  • Last Call for 401(k), 403(b) & Other retirement Plan Contributions –– Once the calendar turns to 2023, it’s too late to maximize your employer plan contributions. It may not be too late to make sure that you’ve contributed the $20,500 maximum (plus $6,500 for those age 50 and older) to the plan. Review your last pay stub and check with your human resources or retirement plan website to see if you can still increase your current year contributions (don’t forget to reset the percentage in early 2023). Remember, if you’ve worked for more than one employer in 2022, your total contributions via all employers cannot exceed the annual maximum, so you must monitor this. For IRAs, you have until April 18, 2023, to make up to a $6,000 contribution for 2022 (plus a $1,000 catch-up contribution for those age 50 and older)
  • Roth IRA conversions –– Depending on your current year’s highest tax rate, it may be prudent to consider converting part of your traditional IRA to a Roth IRA to lock in lower tax rates on some of your pre-tax retirement accounts. A conversion is nothing more than a taxable distribution from your IRA which is immediately deposited into your Roth IRA (while income taxes apply, no early withdrawal penalty applies). Roth conversions can help reduce future required minimum distributions and help keep future Medicare premiums lower.  The ideal time to consider Roth conversions is after you retire and before you start collecting your pension or social security checks (or whenever your income is much lower in any particular year).
  • Estimated tax payments –– Review your year-to-date withholding and estimated tax payments to assess whether a 4th quarter 2022 estimated tax payment might be required. An easy way to do this is to compare the total tax line on your 2021 income tax return with your total withholding and estimated payments (total payments) made to date. If your total payments made to date are at least 110% of your 2021 total tax, chances are, you are adequately paid in. While you may owe some tax with the filing of your 2022 return (due on April 18, 2023), you likely won’t owe any penalties for underpayment of estimated tax. Similarly, you may not need to pay 110% of last year’s tax if your income has decreased substantially versus the prior year.

Year-End Planning Means Fewer Surprises

Whether it’s working toward a tax-optimized retirement or getting answers to your tax and financial planning questions, we’re here to help. As always, planning can help you anticipate and minimize your tax bill and position your family and you for greater financial success.

If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

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Common Tax Scams to Beware Of

March 30, 2022 — Sam H. Fawaz

According to the Internal Revenue Service (IRS), tax scams tend to increase during tax season and times of crisis. Now that tax season is in full swing,  the IRS is reminding taxpayers to use caution and avoid becoming the victim of a fraudulent tax scheme.   Here are some of the most common tax scams to watch out for.

Phishing and text message scams

Phishing and text message scams usually involve unsolicited emails or text messages that seem to come from legitimate IRS sites to convince you to provide personal or financial information. Once scam artists obtain this information, they use it to commit identity or financial theft. The IRS does not initiate contact with taxpayers by email, text message, or any social media platform to request personal or financial information. The IRS initiates most contacts through regular mail delivered by the United States Postal Service.

Phone scams

Phone scams typically involve a phone call from someone claiming that you owe money to the IRS or you’re entitled to a large refund. The calls may show up as coming from the IRS on your Caller ID, be accompanied by fake emails that appear to be from the IRS, or involve follow-up calls from individuals saying they are from law enforcement. These scams often target more vulnerable populations, such as immigrants and senior citizens, and use scare tactics such as threatening arrest, license revocation, or deportation.

Tax-related identity theft

Tax-related identity theft occurs when someone uses your Social Security number to claim a fraudulent tax refund.  You may not even realize you’ve been the victim of identity theft until you file your tax return and discover that a return has already been filed using your Social Security number.  Or the IRS may send you a letter indicating it has identified a suspicious return using your Social Security number.  To help prevent tax-related identity theft, the IRS now offers the Identity Protection PIN Opt-In Program.  The Identity Protection PIN is a six-digit code that is known only to you and the IRS, and it helps the IRS verify your identity when you file your tax return.

Tax preparer fraud

Scam artists will sometimes pose as legitimate tax preparers and try to take advantage of unsuspecting taxpayers by committing refund fraud or identity theft. Be wary of any tax preparer who won’t sign your tax return (sometimes referred to as a “ghost preparer”), requires a cash-only payment, claims fake deductions/tax credits, directs refunds into his or her own account or promises an unreasonably large or inflated refund. A legitimate tax preparer will generally ask for proof of your income and eligibility for credits and deductions, sign the return as the preparer, enter a valid preparer tax identification number, and provide you with a copy of your return.   It’s important to choose a tax preparer carefully because you are legally responsible for what’s on your return, even if it’s prepared by someone else.

False offer in compromise

An offer in compromise (OIC) is an agreement between a taxpayer and the IRS that can help the taxpayer settle tax debt for less than the full amount that is owed. Unfortunately, some companies charge excessive fees and falsely advertise that they can help taxpayers obtain larger OIC settlements with the IRS.  Taxpayers can contact the IRS directly or use the IRS Offer in Compromise Pre-Qualifier tool to see if they qualify for an OIC.

Unemployment insurance fraud

Typically, this scheme is perpetrated by scam artists who try to use your personal information to claim unemployment benefits. If you receive an unexpected prepaid card for unemployment benefits, see an unexpected deposit from your state in your bank account, or receive IRS Form 1099-G for unemployment compensation that you did not apply for, report it to your state unemployment insurance office as soon as possible.

Fake charities

Charity scammers pose as legitimate charitable organizations in order to solicit donations from unsuspecting donors. These scam artists often take advantage of ongoing tragedies and/or disasters, such as a devastating tornado, war or the COVID-19 pandemic. Be wary of charities with names that are similar to more familiar or nationally known organizations. Before donating to a charity, make sure it is legitimate, and never donate cash, gift cards, or funds by wire transfer.  The IRS website has a tool to assist you in checking out the status of a charitable organization.

Protecting yourself from scams

Fortunately, there are some things you can do to help protect yourself from scams, including those that target taxpayers:

  • Don’t click on suspicious or unfamiliar links in emails, text messages, or instant messaging services — visit government websites directly for important information
  • Don’t answer a phone call if you don’t recognize the phone number — instead, let it go to voicemail and check later to verify the caller
  • Never download or open email attachments unless you can verify that the sender is legitimate
  • Keep device and security software up-to-date, maintain strong passwords, and use multi-factor authentication
  • Never share personal or financial information via email, text message, or over the phone

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

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Year-End Tax & Financial Planning Strategies for 2021

December 12, 2021 — Sam H. Fawaz

As we wrap up 2021, it’s important to take a closer look at your tax and financial plans. This year likely brought challenges and disruptions that significantly impacted your personal and financial situation –– a continued global pandemic, several significant natural disasters, new tax laws, and political shifts. Now is the time to take a closer look at your current financial and tax strategies to make sure they are still meeting your needs, as well as take any last-minute steps that could save you money.

We’re here to help you take a fresh look at the health of your tax and financial well-being, so here’s an overview of some opportunities to consider as we approach year-end.

Key tax considerations from recent tax legislation

Many tax provisions were implemented under the American Rescue Plan Act that was enacted in March 2021. This act aimed to help individuals and businesses deal with the COVID-19 pandemic and its ongoing economic disruption. Also, some tax provisions were passed late in December 2020 which will equally impact this upcoming filing season. Below is a summary of the highlights in recent tax law changes to help you plan.

Economic impact payments (EIPs)

The American Rescue Plan Act created a new round of EIPs that were sent to qualifying individuals. As with last year’s stimulus payments, the EIPs were set up as advance payments of a recovery rebate tax credit. If you qualified for EIPs, you should have received these payments already. However, if the IRS owes you more, this additional amount will be captured and claimed on your 2021 income tax return.

If you received an EIP as an advance payment, you should receive a letter from the IRS. Keep this for record-keeping purposes to help you determine any potential adjustment at tax time. Be sure to give this letter to your tax preparer.

Child tax credit

As part of the American Rescue Plan Act, there were many important changes to the child tax credit, such as:

  • The amount has increased for certain taxpayers (from $2,000 per child to $3,000-$3,600 depending on the child’s age)
  • It is fully refundable (meaning that taxpayers will receive a refund of the credit even if they don’t owe the IRS any taxes)
  • It may be partially received in monthly payments (which should have started in July 2021)
  • Is applicable to children age 17 and younger in 2021

The IRS began paying half of the credit in advance monthly payments beginning in July. Some taxpayers chose to opt out of the advance payments, and some may have complexities that require additional analysis. We’ll be here to help you navigate any questions to make sure that you get the most benefit for your family.

Charitable contribution deductions

Individuals who do not itemize their deductions can take a deduction of up to $300 ($600 for joint filers). Such contributions must be made in cash and made to qualified organizations. Taxpayers who itemize can continue to deduct qualifying donations. In addition, taxpayers can claim a charitable deduction of up to 100% of their adjusted gross income (AGI) in 2021 (up from 60%). There are many tax planning strategies in this area we can discuss with you, such as donating appreciated securities, which gets you a deduction for full fair market value while avoiding recognition of capital gain income on the securities donated.

Another one of those strategies, for those who are quite charitably inclined and regularly give $1,000 or more per year in cash donations to qualified charities, you may want to consider a donor-advised fund, especially if the total of all your other itemized deductions are close to or just around your standard deduction amount. Making a contribution to a donor-advised fund allows you to deduct your full contribution to the fund while making grants to various charities over any number of years in the future. Bunching these contributions into one year can make a big difference in your tax bill.

Required minimum distributions (RMDs)

RMDs are the minimum amount you must annually withdraw from your retirement accounts (e.g., 401(k), 403(b) or IRA) if you meet certain criteria. For 2021, you must take a distribution if you are age 72 by the end of the year (or age 70½ if you reached that age before Jan. 1, 2020). Planning ahead to determine the tax consequences of RMDs is important, especially for those who are in their first year of RMDs. If you’re currently a client, we have already addressed these for 2021.

Unemployment compensation

Another thing to note that’s different in 2021 is the treatment of unemployment compensation. There is no exclusion from income. The $10,200 income tax exclusion that a taxpayer may have received in 2020 is no longer available in 2021. We can help you plan for any potential impacts of this change.

State tax obligations related to teleworking arrangements

The pandemic has spawned changes in how people work, and more people are permanently working from home (i.e., teleworking). Such remote working arrangements could potentially have tax implications that should be considered by you and your employer.

Virtual currency/cryptocurrency

Virtual currency transactions are becoming more common. There are many different types of virtual currencies, such as Bitcoin, Ethereum, and non-fungible tokens (NFTs). The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services, or holding such currencies as an investment, generally have tax impacts. We can help you understand those consequences, especially since most crypto brokers won’t be sending you a 1099 form for 2021.

Additional tax and retirement planning considerations

We recommend that you review your retirement situation at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional IRAs, Roth IRAs, and company retirement plans. It’s also advisable to take advantage of health savings accounts (HSAs) that can help you reduce your taxes and save for your future. If you’re self-employed, setting up a self-employed retirement plan may have to happen before the calendar year turns to 2022. We can help you determine whether you’re on target to reach your retirement goals or help you set up a company (or solo) retirement plan.

Tax Loss Harvesting

With another good year for the markets, you may have realized and cashed in some significant capital gains in taxable accounts. To help offset these realized gains, engaging in capital loss harvesting, at year-end, involves selling taxable investments that are currently showing an unrealized loss, in order to “harvest” that loss to offset the gains. You can deduct total losses equal to your current net capital gain plus $3,000 to offset other ordinary income (e.g., salary, pensions, social security IRA distributions, etc.). Keep in mind that investments sold at a loss (or substantially similar ones) cannot be repurchased for at least 31 days or the tax “wash sale” rules apply to suspend the loss realized (and you can’t repurchase the same securities in your IRA or 401(k) either for at least 31 days).

Other Ideas

Here are a few more tax and financial planning items to discuss with us:

  • Let us (or your planner) know about any major changes in your life such as marriages or divorces, births or deaths in the family, job or employment changes, starting a business or significant expenditures (real estate purchases, college tuition payments, etc.).
  • Make sure you’re appropriately planning for estate and gift tax purposes. There is an annual exclusion for gifts ($15,000 per donee, $30,000 for married couples) to help save on potential future estate taxes and avoid the need to file gift tax returns.
  • Consider Section 529 college savings plans to help save for education; there can be federal and potentially state income tax benefits to do so, and we can help you with any questions.
  • Consider any updates needed to insurance policies or beneficiary designations.
  • Evaluate the tax consequences of converting part or all of traditional IRAs to Roth IRAs.
  • Review withholding and estimated tax payments and assess any liquidity needs.

Looming potential tax legislation

With potential tax changes looming as Congress debates proposals in President Biden’s “Build Back Better” agenda, there remains uncertainty in how this will impact taxpayers. As legislation continues to evolve, and if it passes, we’ll communicate to you how changes impact your tax and financial plan.

Some provisions are retroactive to January 1, 2021, and may have a material effect on the final 2021 (and future) tax years.

The most significant provision, which affects most clients, is the potential increase in the state and local tax itemized deduction, currently limited to $10,000 per year. If an increase to this limit is enacted (very likely), it will allow for at least a maximum of $20,000-$40,000 deduction for state and local taxes. For this reason, if you have any state or local income or property taxes that can be paid in either 2021 or 2022, please wait as long as possible to pay them, pending legislation passage and additional guidance that we will communicate soon after the passage of 2021 tax legislation.

Year-end planning equals fewer surprises

There are many other opportunities to discuss as year-end approaches. And, many times, there may be strategies such as deferral or acceleration of income, prepayment or deferral of expenses, etc., that can help you save taxes and strengthen your financial position.

Fraudulent activity remains a significant threat

Our firm takes data security seriously and we think you should as well. Fraudsters continue to refine their techniques and tax identity theft remains a significant concern. Beware if you:  

  • Receive a notice or letter from the IRS regarding a tax return, tax bill or income that doesn’t apply to you
  • Get an unsolicited email or another form of communication asking for your bank account number, other financial details or personal information
  • Receive a robocall insisting you must call back and settle your tax bill

Make sure you’re taking steps to keep your personal financial information safe. Let us know if you have questions or concerns about how to go about this.  

If you would like to review your current investment portfolio or discuss any year-end financial or tax planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

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Required Minimum Distributions Are Back in 2021

November 17, 2021 — Sam H. Fawaz

As we approach the end of 2021, now might be a good time to take a closer look at a few developments surrounding Required Minimum Distributions (RMDs).

What Are RMDs?

Once you reach age 72, you are required to take minimum distributions from your traditional IRAs and most employer-sponsored retirement plans. (RMDs are not required from an employer plan if you are still working at the company sponsoring the plan and you do not own more than 5% of the company.) You can always take more than the required amount if you choose.

The portion of an RMD representing earnings and tax-deductible contributions is taxed as ordinary income, unless the RMD is a qualified distribution from a Roth account. Failing to take the full amount of an RMD could result in a penalty tax of 50% of the difference.

Generally, RMDs must be taken by December 31 each year. You can delay your first RMD until April 1 following the year in which you reach RMD age; however, you will then need to take two RMDs in one year — the first by April 1 and the second by December 31. (If you reached age 72 in the first half of 2021, different rules apply; see below.)

You may want to weigh the decision to delay your first RMD carefully. Taking two distributions in one year might bump you into a higher income tax bracket for that year.

New RMD Age and a 2020 Waiver Add Complexity

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 raised the minimum RMD age to 72 from 70½ beginning in 2020.  That means if you reached age 70½ before 2020, you are currently required to take minimum distributions.

However, there was a pandemic-related rule change in 2020 that might have affected some retirement savers who reached age 70½ in 2019. To help individuals manage financial challenges brought on by the pandemic, RMDs were waived in 2020, including any postponed from 2019. In other words, some taxpayers could have benefited from waiving both their 2019 and 2020 RMDs.

Anyone who took advantage of the 2020 waiver should note that RMDs have resumed in 2021 and need to be taken by December 31. The option to delay to April 1, 2022, applies only to first RMDs for those who have reached or will reach age 72 on or after July 1, 2021.

New Life Expectancy Tables

The IRS publishes tables in Publication 590-B that are used to help calculate RMDs. To determine the amount of a required distribution, you would divide your account balance as of December 31 of the previous year by the appropriate age-related factor in one of three available tables.

Recognizing that life expectancies have increased, the IRS has issued new tables designed to help investors stretch their retirement savings over a longer period of time. These new tables will take effect for RMDs beginning in 2022. Investors may be pleased to learn that calculations will typically result in lower annual RMD amounts and potentially lower income tax obligations as a result. The old tables still apply to 2021 distributions, even if they’re postponed until 2022.

If you are a current client of YDFS and you haven’t taken your RMD for 2021, we will be in touch over the next couple of weeks to discuss your options and requirements.

If you would like to review your current investment portfolio or have more questions about RMDs, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

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Medicare Open Enrollment for 2022 Begins October 15

October 13, 2021 — Sam H. Fawaz

Medicare beneficiaries can make new choices and pick plans that work best for them during the annual Medicare Open Enrollment Period. Each year, Medicare plan costs and coverage typically change. In addition, your health-care needs may have changed over the past year. The Open Enrollment Period — which begins on October 15 and runs through December 7 — is your opportunity to switch your current Medicare health and prescription drug plans to ones that better suit your needs.

During this period, you can:

  • Switch from Original Medicare to a Medicare Advantage Plan
  • Switch from a Medicare Advantage Plan to Original Medicare
  • Change from one Medicare Advantage Plan to a different Medicare Advantage Plan
  • Change from a Medicare Advantage Plan that offers prescription drug coverage to a Medicare Advantage Plan that doesn’t offer prescription drug coverage
  • Switch from a Medicare Advantage Plan that doesn’t offer prescription drug coverage to a Medicare Advantage Plan that does offer prescription drug coverage
  • Join a Medicare prescription drug plan (Part D)
  • Switch from one Part D plan to another Part D plan
  • Drop your Part D coverage altogether

Any changes made during Open Enrollment are effective as of January 1, 2022.

Review Plan Options

Now is a good time to review your current Medicare benefits to see if they’re still right for you. Are you satisfied with the coverage and level of care you’re receiving with your current plan? Are your premium costs or out-of-pocket expenses too high? Has your health changed?  Do you anticipate needing medical care or treatment, or new or pricier prescription drugs?

If your current plan doesn’t meet your health-care needs or fit your budget, you can switch to a new plan. If you find that you’re satisfied with your current Medicare plan and it’s still being offered, you don’t have to do anything. The coverage you have will continue.

Information on Costs and Benefits

The Centers for Medicare & Medicaid Services (CMS)  has announced  that the average monthly premium for Medicare Advantage plans will be $19,  and the average monthly premium for Part D prescription drug coverage will be $33.  CMS will announce 2022 premiums, deductibles, and coinsurance amounts for the Medicare Part A and Part B programs soon.

Where Can You Get More Information?

Determining what coverage you have now and comparing it to other Medicare plans can be confusing and complicated. Pay attention to notices you receive from Medicare and from your plan, and take advantage of available help. You can call 1-800-MEDICARE or visit the Medicare website, medicare.gov, to use the Plan Finder and other tools that can make comparing plans easier.

You can also call your State Health Insurance Assistance Program (SHIP) for free, personalized counseling. Visit shiptacenter.org or call the toll-free Medicare number to find the phone number for your state.

You can find more information on Medicare  benefits in the Medicare & You 2022 Handbook on medicare.gov.

If you would like to review your current investment portfolio or discuss any health insurance concerns, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

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