Trump Savings Accounts

 

I was reading someone somewhere complaining about Michael and Susan Dell’s recent donation of $6.25 billion. 

The bitter are always with us, unfortunately. 

But it gives us a chance to talk about the new Trump savings accounts. I see that we even have a new tax form to (possibly) bulk-up our 2025 Form 1040 return.

What are they?

The Trump accounts are a twist on an IRA.

What is the twist?

One does not need earned income to contribute to a Trump account.

Anything else?

Trump accounts cease to be Trump accounts when the beneficiary turns age 18. These things are intentionally designed for infants, children and young adults who (likely) have not started working.

How are infants and children going to know how to open this account?

They do not need to. Their parent (more precisely, the person who can claim them on a tax return) will do so for them.

How will the parent/person do this?

Two ways:

·      There is a new tax form (Form 4547 - get it?)

·      There will be a new tax portal (trumpaccounts.gov) 

 

Will this account be with the government itself?

The Treasury will create the account with a “designated financial agent.” No, I do not know what that means. I do see where one can thereafter move the account - say to Fidelity, Schwab or Vanguard (as examples) - should one wish.

How do you know one can move the account?

Because I was looking at an ad from one of the investment companies.

What about free money?

Children born between January 1, 2025, and December 31, 2028 will be eligible for a $1,000 seed contribution from the Treasury. There are requirements, such as a social security number, of course.

This period (2025 to 2028) BTW is called the “pilot program.”

What if the family makes too much money?

The “too much money” thing does not apply to the $1,000.

What is the July 4, 2026 date I have read about?

None of the government’ $1,000 seeding will occur before July 4, 2026.

What if you were born before 2025?

You still qualify to establish a Trump account, as long as you are under the age of 18 at the end of the year. You won’t get that $1,000, though.

Big deal. Why all this hullabaloo for $1,000?

One can put more than a $1,000 into the account.

The annual limit is $5 grand, and the $1 grand seed money does not count toward the $5 grand.

An employer can also put in $2.5 grand annually, but that $2.5 counts toward the overall $5 grand.

Who can contribute?

Parents of course, but also grandparents, other family members, and friends.

And Michael and Susan Dell.

Who qualifies for the Michael and Susan Dell Donation?

The $250 Dell donation reaches children age 10 and under but not eligible for the $1,000 Treasury seed contribution.

There is also an income test, although the test is by zip code and not household. The test is $150,000 or less of median income. Note that a child may qualify even if living in a wealthy household, if the median (not average) income for the zip code is $150,000 or less. The reverse is also true, of course.

What if I cannot put in $5 grand every year?

Put in what you can. Skip a year. Do not make the perfect the enemy of the possible.

Is there a tax deduction for this?

In general: no. Think of it as a Roth contribution.

I am uncertain about the employer ($2.5 grand) contribution, though. Generally, such expenses are deductible by an employer. I however expect that it will also be taxable to the employee, meaning that someone somewhere is paying tax.

Is there another way to get money into the account?

Yes. There is the usual stuff, such as rolling an account from one investment company to another.

The one that intrigues me is a contribution from a 501(c)(3) tax exempt. There is no explicit limit on these contributions, other than the overall (c)(3) requirement to benefit broad categories of beneficiaries and not just the select fortunates.

This, BTW, was the Dell contribution we referred to above: a $6.25 billion donation to contribute $250 each to 25 million children age 10 and under.

What if my parent/person fails to open an account?

Supposedly, the Treasury will open one if the child otherwise qualifies.

You think so?

Consider me cynical at the moment.

How is this thing taxed?

It is not: think IRA.

When can the child get to the money?

Figure that the child cannot until he/she turns age 18. If he/she can, something terrible has happened.

What about after age 17?

Then the Trump account gets wonky.

Supposedly this thing becomes a “regular” IRA account.

OK, but it would be a “regular” IRA account with nondeductible contributions in it. In tax lingo, we call this a “nondeductible” IRA, which has greatly lost favor since people have had access to Roth IRAs. Distributions from a Roth are (generally) tax-free. Distributions from a nondeductible are partially tax-free. There is even a tax form (Form 8606) for nondeductibles to track the numbers between taxable and nontaxable.

Inside wonk: you would not believe how difficult it can be to get (some) tax preparation software to run an IRA distribution through Form 8606 to calculate the taxable portion. I have seen more than one staff accountant give up in frustration.

I suppose Congress may further clarify/change the rules for this age-18 flip. I would like to see the flip go to full-Roth and not to this nondeductible-IRA yahtzee, but we will see.

A positive, though: since it flips to a “regular” IRA, you can make annual IRA contributions to it, if you wish. You will need earned income, of course.

Are there penalties for distributions?

You are not supposed to access IRA monies before age 59 ½. If you do, the distributions (adjusting for that wonky nondeductible IRA arithmetic) will be taxable.

In addition to income tax and unless for several permitted purposes (first house, higher education, adoption expenses and so on), there will also be a 10% penalty.

What does CTG think?

You can tell Trump accounts took water during passage of the One Big Beautiful Bill. There is stuff to both like and dislike.

Me? In general, I like.

Let’s say that you can put away $1,000 per year for 18 years. Add the government’s $1,000 seed. Assume market rate of returns, low investment fees and the money remaining untouched (remember: it is not taxed while within the IRA) for 40 to 50 years.

What an incredible gift and legacy to a grandchild.

Your 2020 Tax Return and the Stimulus Payments

 

Let’s talk about your 2020 personal tax return and the two stimulus payments that you (may have) received.

The first round of stimulus checks was up to $1,200 for each spouse and $500 for each qualifying child.

The second round was up to $600 for each spouse and qualifying child.

So, if you have two qualifying kids and qualified for the maximum, you would have received $5,800 ($3,400 plus $2,400) between the two rounds.

How do you not qualify for the maximum?

One way is easy: you had too much income.

The second way is nonintuitive: the child was over age 16. A qualifying child means a child under the age of 17. Seems odd to me to exclude a high school senior, but there it is.

Let’s talk about the first non-qualification: income.

Let’s use a married couple with two qualifying children as our example.

The income limit for marrieds is $150,000. Past that point the stimulus check goes away by a nickel on the dollar. The maximum for two spouses is $2,400, so we can calculate this as follows:

                      $2,400 divided by .05 = $ 48,000

                      $150,000 plus 48,000 = $198,000

All right, the stimulus for marrieds burns-out at $198,000, right?

Nope.

Why?

Because of the qualifying children.

Each of the kids adds another $10,000 to the phaseout range.

We have two kids. That means $20,000 added to the $198,000, totaling $218,000 before we burn-out of stimulus altogether.

Are we stilling phasing-out at a nickel on the dollar?

Let’s check.

           $218,000 – 150,000 = $68,000

           $3,400 divided by 68,000 equals $0.05.

Yep, nickel on the dollar.

You received the first stimulus check in April, 2020. Remember that tax returns were automatically extended until July 15, 2020 because of COVID. The odds were extremely good that the IRS was not basing its calculations on your 2019 return, because your 2019 return had not been prepared, much less filed. For most of us, the IRS was looking at our 2018 tax return.

Let’s continue.

You received your second stimulus check very late in December, 2020 or (more likely) January, 2021 – but the income phaseout range was the same.

What did change was the tax year the IRS was looking at. By December, 2020 you would have filed your 2019 tax return (let’s skip paper filings that may not have been processed by then, or we are going to drive ourselves crazy).

If your income went up from 2018 to 2019, you would have climbed the phaseout range. You might have received a first stimulus check, for example, but not qualified for a second one. It could have gone the other way, of course, if your income went down in 2019. 

Now your 2020 tax return lands on my desk and we need to settle-up on the stimulus.

How do we settle-up?

We run through the income phaseout range … again.

Using your 2020 tax return this time.

Did you notice we are doing the calculation three times using income from three different tax years?

Yep, it’s a pain.

Mind you, if you have modest income, I know that you received the maximum stimulus.

Conversely, if you made bank, I know that you received no stimulus.

Fall in between – or have wildly varying income – and I you need to tell me the amount of your stimulus checks.

Let’s go through a quick example, using our married couple with two qualifying children.

Their 2018 adjusted gross income was 201,000.

Here is the first stimulus:

phaseout start			150,000.00
phaseout end		198,000.00
add: 2 children		20,000.00
			218,000.00
				68,000.00
2018 AGI			201,000.00
				51,000.00
First stimulus		2,400.00
		1,000.00
			3,400.00	times	51,000.00	=	2,550.00
					68,000.00
			(2,550.00)
			850.00

They would have received $850.

Their 2019 adjusted gross income was $320,000.

Way over the income limit. There was no second stimulus.

Their 2020 tax return lands on my desk. Their adjusted gross income is $104,000.

Way below the income limit. Full stimulus.

Two qualifying kids. The maximum over two rounds of stimulus would be $3,400 plus $2,400 = $5,800.

They already received $850 per above.

That means a $4,950 credit on their 2020 individual tax return. I look like a hero.

But why? After all, their 2019 income was over $300 grand – way above the range for receiving any stimulus.

The quirky thing is that the stimulus is based on one’s 2020 tax return. Congress however wanted the money out as fast as possible. The stimulus had an income test, though, so the first option was to do the calculation on one’s 2019 tax return. When that option proved unworkable, the second option was to use 2018. It was messy but quick, and one would settle-up when filing the 2020 tax return.

Congress realized that settling-up could mean repaying some of the stimulus money. Since that somewhat negated the purpose of a stimulus, Congress decided that the gate would only swing one way. If one did not receive enough stimulus, then one could claim the shortfall on the 2020 return. If one was overpaid, well … one got to keep the money. 

It was a win:win.

Not so much for the accountant, though.

Roth IRA Recharacterizations Are Going Away

You may have heard that there has been a tax change in the land of Roth IRAs. It is true, and the change concerns recharacterizations.

And what does that seven-syllable word mean?

Let’s say that you have $50,000 in a traditional (or “Trad”) IRA. “Traditional” means that you got to deduct the money when you put it in. You did so over several years, and you now have – after compounding - $50 grand. Congrats.

You read that this thing is a tax bomb waiting to go off.

How?

Simple. It will be taxable income when you take it out. That is the bargain with the government: they give you the deduction now and you give them the tax later.

You decide to convert your “Trad” into a Roth. That way, you do not pay tax later when you take the money out.

You find out that it is pretty easy to convert, irrespective of what you hear on radio commercials. Let’s say your money is with Vanguard or T Rowe Price. Well, you call Vanguard or T Rowe and explain what you are up to. They will explain that you need a Roth IRA account. You will then have two IRA accounts:

          CTG Reader Traditional IRA, and

          CTG Reader Roth IRA

There is $50 grand in the Traditional IRA account.

You convert.

There is now $50 grand in the Roth IRA and $-0- in the Traditional IRA accounts.

You did it. Good job.

BTW you just created $50 grand of taxable income for yourself.

How? Well, you converted money from an IRA that would be taxable someday to an IRA that will not be taxable someday. The government wants its money someday, and that someday is today.

You didn’t think the government would go away, did you?

Let’s walk this thing forward. Say that we go into next year and your Roth IRA starts tanking. It goes to $47 grand, then $44 grand. The thing is taking on water.

It is time to do your taxes. You and I are talking. We talk about that $50 grand conversion. You tell me about your fund or ETF slipping. I tell you that we are extending your return.

Why?

That is what changed with the new law.

For years you have had until the date you (properly) file your return to “undo” that $50 grand conversion. That is why I want to extend your return: instead of having to decide on April 15, extending lets you wait until October 15 to decide. You have another six months to see what that mutual fund or ETF does. 

Let's say that we wait until October 8^th and the thing has stabilized at $43 grand.

You feel like a chump paying tax on $50 grand when it is only worth $43 grand.

I have you call Vanguard or T Rowe and have them move that money back into CTG Reader Traditional IRA. Mind you, this has to be done by October 15 as the tax extension will run out. We file your return by October 15, and it does NOT show the $50 grand as income.

Why? You unwound the transaction by moving the money back to the Traditional account. Think of it as a mulligan. The nerd term for what we did is “recharacterization.”

It is a nice safety valve to have.

But we will soon have recharacterizations no more. To be accurate, we still have it for 2017 returns but it goes away for later tax years. Your 2017 return can be extended until October 15, 2018, so October 15, 2018 will be extinction day for recharacterizations. It will just be a memory, like income averaging.

BTW there is a variation on the above that will continue to exist, but it is only a distant cousin of what we discussed. Let’s go to your 2018 tax return. In March, 2019 you put $5,500 in a Roth IRA. You will still be able to reverse that $5,500 back to a regular IRA by October 15, 2019 (remember to extend!).

But the difference is that the distant cousin is for one year’s contribution only. You will not be able to take a chunk of money that you have accumulated over years, roll it from a Trad to a Roth and have the option to recharacterize back to a Trad in case the stock market goes wobbly.

Sad in a way.

Individual Changes In The New Tax Bill

We have a new tax bill, and it is considered the most significant single change to the tax Code over the last 30 years. Here are some changes that may affect you:

·     Your tax rate is likely going down. A single person making $150,000, for example, will see his/her rate dropping from 28% to 24%. A married couple making $250,000 will see their rate drop from 33% to 24%. Whether married or not, the top rate has gone from 39.6% to 37%.

·     You will lose your personal exemptions next year. For 2017 the exemption amount is $4,050 for you, your spouse and every tax dependent. 

·      To make up for the loss of the personal exemptions, your standard deduction is going up in 2018. A single taxpayer will increase from $6,350 to $12,000. A married taxpayer will go from $12,700 to 24,000.

·      Many of your itemized deductions will be limited or go away altogether next year:

o   For 2017 you can deduct interest on up to $1 million on a mortgage used to buy your home.  In 2018 that limit will drop to $750,000.

o   For 2017 you can deduct interest on (up to) $100,000 of home equity loans. In 2018 you will be unable to deduct any interest on home equity loans.

o   For 2017 you can deduct your state and local income and real estate taxes, without limit. In 2018 the maximum amount you can deduct is $10,000.

o   For 2017 you can deduct a personal casualty loss (such as a car flooding), subject to a $100-deductible-per-incident and-10%-of-income threshold. You will not be able to deduct such losses in 2018, unless you are in a Presidentially-declared disaster zone.

o   For 2017 you can deduct contributions up to 50% of your income. In 2018 that increases to 60%.

o   If your contribution provides the right to purchase seat tickets to an athletic event – say to Tennessee or Ole Miss – you can presently deduct a percentage of that contribution.  In 2018 you will not be able to deduct any portion.

o   In 2017 you can deduct employee business expenses, certain similar or investment expenses, subject to a 2% disallowance. Starting in 2018 no 2% miscellaneous deductions will be allowed.

·     Medical expenses – for some reason – go the other way. Congress reduced the threshold from 10% to 7.5%, and it made the change retroactive to January 1, 2017. It is one of the few retroactive changes in the bill, and it will exist for only two years – 2017 and 018.

·     Get divorced and you might pay alimony. For 2017 you can deduct alimony you pay, and your ex-spouse has to report the same amount as income. Get divorced in 2019 or later, however, and your alimony will not be deductible, and it will not be taxable to your ex-spouse.

·      Move in 2017 and you may be able to deduct your moving expenses. There is no deduction if you move in 2018 or later.

·      You still have the alternative minimum tax to worry about in 2018, but the exemption amounts have been increased.

·      If you own a business, chances are the new tax law will affect you. For example,

o   If you own a C corporation, you will now pay tax at one rate – 21%. It does not matter how big you are. You and Wells Fargo will pay the same tax rate.

o   If you are self-employed, a partner or a shareholder in an S corporation, you might be able to subtract 20% of that business income from your taxable income. There are hoops, however. The new law will limit your deduction if you do not have payroll or have no depreciable assets, although you can avoid that limit if your income is below a certain threshold.

·     Your kid will provide a larger child tax credit. The credit is $1,000 for 2017 but will go to $2,000 in 2018.

What can you do now to still affect your taxes?

·      Rates are going down. Delay your income if you can.

·      For the same reason, accelerate your expenses, especially if you are cash-basis.

·      Prepay your real estate taxes. Yes, that means pay your 2018 taxes by December 31.

·      Pay your 4^th quarter state (and city) estimated tax by December 31. You may even want to sweeten it a bit, although the tax bill does not permit one to prepay all of 2018’s state tax by December 31.

·      Remember that you are losing your 2% miscellaneous deductions next year. If you use your car for work and are not reimbursed, you will lose out. It is the same for an office-in-home. 

·   Congress is limiting or taking away many popular itemized deductions and replacing them with a larger standard deduction. This means your remaining deductions – mortgage interest, taxes (what’s left) and contributions are under pressure to exceed that standard deduction. If you do not think you will be able to itemize next year, you may want to accelerate your contributions to 2017. Remember that the check has to be in the mail by December 31 to claim the deduction in 2017.

There are some surprises to be had, folks. I was looking at an estimated 2018 workup for a routine-enough-CPA-firm client. The result? An over 16% tax increase. What caused it? The loss of the personal exemptions. It was simply too much weight for the increased standard deduction and slightly lower tax rates to pull back up. 

I hope that is not the norm. This is a hard-enough job without having that conversation.