Our Tax Systems Are Fair

I still feel the need to preface every blog post with the reminder that these blog topic headings are myths, unless I indicate otherwise.  It is certainly a myth that our tax systems are fair.  Read this carefully, though; this chart doesn't show "Millionaires" as the title suggests.  This is individuals and couples who EARN $1,000,000 per year  in taxable income.  The decline shown from 2012 to 2020 occurred while the number of people in this category skyrocketed.

Here's another look at relative audit rates.  The wealthy have enjoyed the greatest decline in audit rates.  And this is primarily due to the reduced IRS funding for which they have lobbied.

So if you don't have an enrolled agent to do your taxes nor a tax law firm to fight IRS in tax court, you are an easier target.  Complex returns are more expensive to audit, especially if they end up in tax court.

We should welcome the Biden administration's increased IRS funding targeting those who owe more than $250,000 in taxes.
But why should we even care?  Well, a social and economic system based on merit and equity is simply a happier way to live and such a society is more likely to survive more than a couple hundred years.  Our ancestors came over here to escape primarily two plagues:  religious persecution, and, a society based on the accumulation of unmerited wealth, usually by inheritance.

Your Constructive Comments are Welcome!

USAfacts.org publishes facts

Usafacts.org is entirely funded by Steve Ballmer, former Microsoft CEO.  Sorry Steve, but this portrayal of Social Security needs some help.  This article is packed with myths. See the full article and my comments (click on the link below):

https://drive.google.com/file/d/11DxsJjUVSrHwG-wrmwXnhagfXk8NOONt/view?usp=sharing

Your Constructive Comments are Welcome!

Updated IRS TaxRefund Myths

(This post is copied from IRS's Tax Tips newsletter)

Issue Number:  Tax Tip 2023-38

___________________________________________________________

Don’t fall for these federal tax refund myths

Once people complete and file their tax return, many of them eagerly await any refund they may be owed. No matter how a taxpayer plans to use their tax refund, knowing fact from fiction can help manage expectations as they wait for their money. This tip dispels some federal tax refund myths that many people believe are fact, but they are pure fiction.

Myth: Calling the IRS, a tax software provider or a tax professional will provide a more accurate refund date
Many people think talking to the IRS or to their tax software provider or tax professional is the best way to find out when they will get their refund. The best way to check the status of a refund is through the “Where's My Refund?” tool or the IRS2Go app.
Taxpayers can also call the automated refund hotline at 800-829-1954 to get their refund status. This hotline has the same information as “Where's My Refund?”. There is no need to call the IRS unless “Where's My Refund?” says to do so.

Myth: “Where's My Refund?” must be wrong because there's no deposit date yet
Updates to “Where's My Refund?” ‎and to the IRS2Go mobile app are made once a day, usually overnight. Even though the IRS issues most refunds within 21 days, it's possible a refund may take longer. If the IRS needs more information to process a tax return, the agency will contact the taxpayer by mail. Taxpayers should also consider the time it takes for the banks to post the refund to the taxpayer's account. People waiting for a refund in the mail should plan for extra time.

Myth: “Where's My Refund?” must be wrong because the refund amount is less than expected
There are several factors that could cause a tax refund to be less than expected. The IRS will mail the taxpayer a letter of explanation if it makes adjustments. Some taxpayers may also receive a letter from the Department of Treasury's Bureau of the Fiscal Service if their refund was reduced to offset certain financial obligations. Before calling, taxpayers should check the “Where's My Refund” tool or wait for the letter to understand why the change occurred. This can help taxpayers know how to respond.

Myth: Getting a refund this year means there's no need to adjust withholding for tax year 2023
To avoid a surprise next year, taxpayers should make changes now. One way to do this is to adjust their tax withholding with their employer. The “Tax Withholding Estimator” tool can help taxpayers determine if their employer is withholding the right amount.

Taxpayers who experience a life event such as marriage, divorce, or the birth or adoption of a child, or are no longer able to claim a person as a dependent, are encouraged to check their withholding. Taxpayers can use the results from the “Tax Withholding Estimator” to complete a new Form W-4, Employee's Withholding Certificate, and submit it to their employer as soon as possible. Withholding takes place throughout the year, so it's better to take this step as soon as possible.

Share this tip on social media -- #IRSTaxTip: Don’t fall for these federal tax refund myths. http://ow.ly/6jvW50Nn46f

Your Constructive Comments are Welcome!

Ten Questions Retirees Must Be Able to Answer

These are the ten questions.  Below that are questions expanded and, in some cases, answered as well.
The specific and complete answers depend on your particular situation, goals, plans, income and financial assets.  I didn't make these up out of thin air; these are the questions that are actually on the minds of retirees and the worries they reflect.  My mission with a financial plan is to reduce worry and increase confidence.

1. How much can I safely withdraw? 
   Probably more than you think and more than your current brokerage is telling you you can.  After all, if your balance is shrinking due to spending, their income is shrinking too.  There are a lot of moving parts to answering this question and lots of opinions in my profession about each of those parts:  inflation, taxes, regulatory risk, volatility, market corrections, health care expenses.  Because this is a relatively complicated question, I focus on a cash flow plan as the foundation of every retiree's plan.
2. How long will my money last?
   Unless one of your goals is to leave an inheritance, what if you knew that your money would last as long as you will?  We can't know for sure but we can manage longevity risk.
3. Can I guarantee I won't run out of money?
   Yes. You can.
4. Can I protect my assets from losses?
   Yes.  You can.
5. How much tax will I pay?
   We can only guess based on current and projected tax policy.  Will required minimum distributions (RMD) age be pushed out to age 75?  Or even eliminated?  The key is, this is an important question to ask!  I have yet to meet with a new client who even has an estimate of their lifetime cumulative tax bill.  Believe me, seeing that number really motivates people to do tax planning.  Because you can not only significantly reduce your lifetime tax bill, you can reduce or eliminate the risk of future higher taxes.
6. How much could I lose in the next crash?
   Everything we recommend to clients in my firm must be based on evidence, on data.  In some cases the best, and only, data we have is historical with just a hint of future expectations.  It is essential to know not only the maximum drawdown risk in your portfolio but also the annual volatility as well.  Either one can decimate your cash flow plan.
7. Can I reduce my fees?
   Maybe.  Maybe not.  The question implies that you already know the fees you're paying.  Very few do because total fees include more than just the AUM (assets under "management" [quotes mine]) fees on your statement.  The key is, are you getting commensurate benefits for those fees?
8. Is it OK to start spending?
   What is the ideal spend down order of my assets?  Should I spend taxable money first or taxed money first?  When?  Why?  The only rational way to answer this question is to test alternatives to see which has the best results.  For your situation.
9. What if one of us dies?
   It comes as a shock for the surviving spouse to realize they don't get to keep both Social Security benefits when the other spouse dies. Will there be sufficient savings to make up the difference?  Will the survivor's monthly income needs stay the same?
10. What's the best way to leave assets to my beneficiaries.
    An indirect answer to this is the worst way to leave assets to beneficiaries:  In a pre-tax retirement account.  Unless you are the surviving spouse, the beneficiary will probably have to liquidate the account within 10 years.  This regimen makes it difficult to do any tax planning, especially if your adult child is successful in their own right.  One of the best ways to leave money to your children is with a Roth IRA.  Real estate and brokerage accounts have advantages also with the step-up in basis but it's becoming clear that Congress intends to limit or eliminate that tax dodge.

So, if you don't know the answers to any of these questions or even are unable to answer one of them, think about how you would feel if you could.

Your Constructive Comments are Welcome!

HEALTHCARE WILL BE YOUR BIGGEST RETIREMENT EXPENSE

 The truth of this blog heading depends, of course, on the health and wealth of the individual.  But it is still rarely true.  In the plans I've developed, Taxes usually exceed projected health care costs 3 to 1.  I think a lot of health care cost calculators are unjustifiably alarmist for the purpose of selling insurance.  For example AARP's calculator said my health care costs would be close to $800,000 during my lifetime.

Huh?  If I met my maximum OOP every year for the rest of my life that would only add up to about $120,000.  Oh, you know, I'll bet they're referring to the total healthcare cost before insurance.  So why didn't they just say that?  How many age 65+ people are completely uninsured?

Vanguard Health Care Cost Estimator, on the other hand, seems to be more accurate.  I urge you to try it.  I plugged in all my details and here's what it churned out:

 

So that's a bit less than $120,000 in today's dollars.  And far less than the terrifying $800,000 generated by AARP's calculator. 
 

Taxes, on the other hand, take up the slack.  Below is a typical cumulative income tax projection that I create for clients.  (Here in Portland, OR we should probably include property taxes too as they average $500/mo. and increase about 3%/yr.  This is especially draining for fixed income folks.  But that's not included in the chart below).  Total tax bill for this client- without any strategizing -by 2040 is $837,000!!
Do you think it's essential, then, to have a retirement cash flow plan that factors in taxes?  A specific, written retirement cash flow plan is the only "insurance" for reducing that gigantic tax bill.

Your Constructive Comments are Welcome!

EVERYONE SHOULD DO ROTH CONVERSIONS

I should point out, again, that the titles of these blogs are Financial Myths.  Especially this one.
Conversions from your pre-tax retirement accounts such as:

• Traditional IRA
• SEP IRA
• 401k
• 403b
• SIMPLE IRA
• TSA. etc.

must be calculated every year to be sure you don't bump yourself up into the next tax bracket . . . except sometimes.  For example, raising your Federal marginal tax rate from 10 to 12% isn't a big deal, normally.  Unless you're on Social Security and that causes your Social SEcurity to become taxable.  At higher income levels it's not a disaster if the Roth conversion bumps you from 22% to 24%, the upper limit of which is $164,925 for single filers, $329,850 for joint filers.

But assuming Roth conversions make tax sense, what do you do with the money?  Where do you invest it?  How?  In many cases the answers are diametrically opposed in terms of investment strategy.  Let's focus on two examples:

**Background #1:  You don't really need the money in your $500,000 IRA that you rolled out of your 401k when you quit work at age 60.  But you know it is a disaster to pass pre-tax retirement accounts to your kids.  Until age 70 you plan to live off cash, capital gains and rental income.  When you start Social Security at 70 you plan to stop taking capital gains in order to reduce its taxation.  (You're delaying Social Security until 70 because when you took the https://www.livingto100.com/ calculator it indicated your mortality age at 94, well past the breakeven age of 83)
Your Roth Conversion Strategy-
a. Convert as much as you can each year up to the top of your 24% bracket.  Why?  Because taxes are going up. 
b. This is also your gift to your kids, taking care of the taxes for them.
c. Invest very aggressively for the long term.  This will easily recoup the taxes you've paid.
Now you'll have a spending cushion that you can tap if you need it without affecting your Social Security taxation.  And when the kids inherit, they'll pay no tax on the Roth funds.

**Background #2:  You've been very conservative in savings and budgeting and if you can just meet your budget throughout retirement you'll be OK.  You need every penny, can't afford losses, and want the assurance of adequate, guaranteed lifetime cash flow.  You quit work at 60 because it was killing you.  You have a nice pension which, right now, is enough to meet your budget.  But it has no inflation protection.  You still have great longevity.  You plan to spend down your excess cash savings to bridge the gap between age 67-70.
Your Roth Conversion Strategy-
a. Convert just enough each year to stay in the 12% bracket.
b. Over the next ten years put it into a Roth IRA income annuity that accepts premiums after the first year. 
c. Once your Social Security kicks in you will need to reduce or stop the conversions to keep Social Security totally or at least partially tax free.
d. Turn on the annuity income in 15-20 years, which will be tax-free and guaranteed to last your lifetime.  It will also have no effect on taxation of your Social Security benefits.  And it will be welcome step-up in income for your later years.  In the meantime your principal and interest credits are protected.

Naturally, all the rules could change in the ensuing years.  Or even this year.  And there are a virtually infinite number of "Backgrounds" we could consider.  I like these because they're based on real people and result in vastly different strategies.  Disclaimer:  Even if one of these examples mirrors your situation exactly I haven't detailed every thing you need to consider because I risk making this blog a sleep aid.  It is well worth the time and expense to consult with your adviser to be sure you make no mistakes.

Your Constructive Comments are Welcome!

Financial Advisers Keep Their Clients From Procrastinating

Well, all know this isn't true.

But it isn't your fault.  This last year Gary Duell was the procrastinator.  None of the smartest people in the room (not including yours truly) could agree on what was going to happen and what to do about it.

 

Now that a major source of craziness will largely be out of the picture, I'm more comfortable with recommendations for this year:

 

1. Focus on Goals and Cash Flow-  block out the massive media intrusions into your lizard brain, the eat, lust, fight, flight instincts.  Focus on your goals and the plans in place- or that we're working on -to achieve them.  Review your budgets and determine which expenses are in your control and which don't contribute to your goals.  Then eliminate them.
2. Manage Risk- note that I don't say avoid risk, commonly defined as volatility.  As I say repeatedly in my classes, when you're accumulating savings volatility is your friend due to dollar cost averaging.  When you're spending, or on the cusp of spending, your retirement funds then volatility is your enemy.  Manage where and to what degree you allow volatility in your portfolio.  This usually consists of either algorithm-based risk managed ETF and/or third party backed guarantees.
3. Remember Taxes!  Taxes, not healthcare, will be your largest retirement expenditure (on average).  Do you have a plan for future [higher] taxation?
   
4. Be a perpetual student.  Recent studies have shown investors procrastinate 5-10 years before implementing our advice.  That hasn't been my experience.  But I get chagrined if my clients wait 5-10 months!  Especially now.  So never stop listening and learning.
   
5. Seek good returns but follow evidence and ethics.  As data becomes easier and easier to collect and analyze, the bad actors in our economy will be taken out of the game.  It's inevitable.  I am really encouraged by the surge in ESG, SR & Impact investing.  Most of us know without being told that lying, cheating and stealing never work out well in the end.  Companies that foist their costs onto the environment or other people will either evolve or die.  Don't invest in them.
   
6. Take care of your physical, mental and social health.  Without a mind and body it's tough to enjoy anything.  Keeping connected to others, to nature and things outside yourself, your odds are improved!
   

Your Constructive Comments are Welcome!

MYTH: Social Security is in Trouble

This is a solid, proven myth.  The only trouble Social Security is in is the same trouble it's been in since before it was signed into law 84 years ago:  ignorant, malicious attacks by self-righteous ideologues.

As quoted in Social Security Works: 
The most important takeaways from the 2019 Trustees Report are that (1) Social Security has a large accumulated surplus, and (2) Social Security is extremely affordable. In three-quarters of a century, in 2095, Social Security will constitute just 6.07 percent of GDP. That is considerably lower, as a percentage of GDP, than Germany, Austria, France, and most other industrialized countries spend on their counterpart programs today.
The 2019 Trustees Report projects Social Security’s cumulative surplus to be $2.9 trillion. It shows that Social Security is fully funded until 2035, 93 percent funded for the next 25 years, 87 percent funded over the next 50 years, and 84 percent funded over the next 75 years.
Yet, like a malignancy, a thoroughly inaccurate New York Times article spread until one newspaper headline said Social Security would be insolvent in 6 months.

Your Constructive Comments are Welcome!

IRS Makes It Easy to Pay Your Federal Student Tax On The Phone

Well, that's a myth.  There is no such thing as a "Federal Student Tax " (other than the larcenous interest rates they charge students)  But here are some recent things scammers do that IRS definitely will NOT do:

• Demanding immediate tax payment for taxes owed on an iTunes gift card.
• Soliciting W-2 information from payroll and human resources professionals (IR-2016-34) 
• “Verifying” tax return information over the phone (IR-2016-40) 
• Pretending to be from the tax preparation industry (IR-2016-28) 

IRS Warns of Latest Scam Variation Involving Bogus “Federal Student Tax”

IR-2016-81, May 27, 2016                                                                                   

WASHINGTON — The Internal Revenue Service today issued a warning to taxpayers about bogus phone calls from IRS impersonators demanding payment for a non-existent tax, the “Federal Student Tax.”

Even though the tax deadline has come and gone, scammers continue to use varied strategies to trick people, in this case students. In this newest twist, they try to convince people to wire money immediately to the scammer. If the victim does not fall quickly enough for this fake “federal student tax”, the scammer threatens to report the student to the police.

“These scams and schemes continue to evolve nationwide, and now they’re trying to trick students,” said IRS Commissioner John Koskinen. “Taxpayers should remain vigilant and not fall prey to these aggressive calls demanding immediate payment of a tax supposedly owed.”

Scam artists frequently masquerade as being from the IRS, a tax company and sometimes even a state revenue department. Many scammers use threats to intimidate and bully people into paying a tax bill. They may even threaten to arrest, deport or revoke the driver’s license of their victim if they don’t get the money.

The IRS urges taxpayers to stay vigilant against these calls and to know the telltale signs of a scam demanding payment.

The IRS Will Never:

• Call to demand immediate payment over the phone, nor will the agency call about taxes owed without first having mailed you a bill.
• Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.
• Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
• Require you to use a specific payment method for your taxes, such as a prepaid debit card.
• Ask for credit or debit card numbers over the phone.

If you get a phone call from someone claiming to be from the IRS and asking for money and you don’t owe taxes, here’s what you should do:

• Do not give out any information. Hang up immediately.
• Contact TIGTA to report the call. Use their IRS Impersonation Scam Reporting web page or call 800-366-4484.
• Report it to the Federal Trade Commission by visiting FTC.gov and clicking on “File a Consumer Complaint.” Please add “IRS Telephone Scam” in the notes.
• If you think you might owe taxes, call the IRS directly at 1-800-829-1040.

More information on how to report phishing or phone scams is available on IRS.gov.

Your Constructive Comments are Welcome!

All Advisers Are Well-Versed On Distributions From Retirement Plans

Yes this is a myth.  And here's a case in point from IRA guru Ed Slott's recent article in Financial Planning magazine.  The Greens were awarded $50,000 by the arbitrator!

PRACTICE

FINRA Award Goes to Client After Advisor’s Tax Oversight

By Ed Slott
April 11, 2016

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Subpar tax advice from advisors can lead to big rewards for clients — but not the kind of rewards you want them to reap.

In a recent FINRA case, an elderly woman and her daughter were awarded more than $50,000 for what an arbitrator deemed insufficient advice regarding the tax consequences of an IRA distribution. 

The payment was awarded even though the claimants had only suffered an increase in taxes of about $9,000 as a result of the total distribution of a roughly $30,000 IRA CD, and despite the fact that no investment had been purchased from the advisor in question.

How did this happen?

Marilyn Green, the elderly woman in question, owned a CD in an IRA that was held with Bank United. As Marilyn was already in her 80s and suffering from dementia and depression, her financial affairs were largely tended to by her daughter, Melissa Green, who had been granted power of attorney.

Sometime close to the CD’s maturity date, Melissa Green discussed her mother’s CD with Samuel Izaguirre, a Fort Lauderdale-based registered representative of LPL Financial. LPL and Izaguirre had entered into an agreement with Bank United to provide investment advice and brokerage services to its clientele.

THE RECOMMENDATION

During Melissa’s conversation with Izaguirre, he recommended that Melissa withdraw the approximately $30,000 held in the maturing IRA CD and place the funds in a personal checking account. He did not provide any information with respect to the potential tax consequences of such a transaction.

Following Izaguirre’s advice, in August of 2014 Melissa closed the IRA CD and transferred the funds to her mother’s personal checking account.

The following year, when Melissa visited her mother’s tax preparer to complete her 2014 return, she learned that the $30,000 IRA distribution resulted in roughly $9,000 of additional income taxes. Melissa was not happy, and the Greens filed a complaint that ultimately made its way to a FINRA arbitrator.

Your Constructive Comments are Welcome!

I CAN'T AFFORD TO SAVE ANY MONEY THIS YEAR

The heading of this post is, as usual, a myth.  You can save money this year.  Thanks to WealthManagement.com for some of these tips:

1. I think all parents of college-bound kids are aware of the FAFSA.  There is no charge for this application for student aid.  And the early bird gets the worm; funds are limited.
2. Start or increase your 401(k) contributions, especially if you're not taking full advantage of  company matching.
3. Consider Traditional or Roth IRA contributions, especially for non-working spouses and your kids.  If your kids have earned income, the full amount (up to $5500) can be shunted into a Roth IRA.  IRA planning is complex and the best strategies depend on a careful analysis of your retirement expectations.
4. Max out Health Savings Account contributions ($3350 for singles, $6650 for couples and families).  As with IRAs if you're over age 50 you can kick in an extra $1000/yr.  This money can be triple tax free!:  Contributions are deductible, earnings are tax-deferred, and withdrawals are tax-free if used for legitimate medical expenses (see IRS pub. 969).
5. If you did a Roth conversion at the peak of the market in 2015, you have until 10/15/2016 to re-do it.  If your Roth is worth less than when you converted, you un-convert or "recharacterize" it, and then reconvert at the lower value thereby reducing your tax bill accordingly.
6. Have a neutral, unbiased, fiduciary adviser (like me) analyze the fees and expenses in your portfolio.  This is especially important in the later years when you should be conservatively allocated because taxes and fees from excessive turnover can consume your earnings. 

Your Constructive Comments are Welcome!