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.

FICA’s Special Timing Rule

 

I do not often read ERISA cases.

ERISA deals with employee retirement plans and refers to federal law: Employee Retirement and Security Act. It is old law (1974), and provides protection for individuals enrolled in private retirement and health plans. It can be as abstruse as the tax Code, and as difficult to follow. It is more in the purview of retirement specialists and not so much that of a general tax practitioner.

What made me think about it was a reference to the Henkel case from 2015.

Henkel involved a top hat plan for selected management and other highly compensated employees. The idea behind a top hat is to provide benefits in excess of those available to employees through regular plans (think 401(k), cafeteria plans and the like.) Top hats are mostly exempt from ERISA because of that select group of covered employees, You and I are unlikely to ever be enrolled in a top hat plan.

In Henkel, select employees were covered by a nonqualified deferred compensation plan. After benefits began, the company (Henkel Corporation) reduced the monthly benefits for federal tax withholding. ERISA has restrictions on reducing someone’s benefits – hence the litigation.

The federal withholding was FICA.

There is an odd rule in the tax Code for FICA taxation of deferred compensation. What sets it up is the income taxation of the deferred compensation itself.

Generally speaking, deferred compensation will include some kind of qualifying event. For example, say that an executive is entitled to 1% of his/her 2025 division profits as compensation, payable in 2028. To be entitled to the bonus, the executive must remain employed with the company through December 31, 2026.

It is that condition subsequent that makes the income taxation tick. It would be unfair to tax the executive in 2025, as he/she may never receive a dime if they are not employed through December 2026. Let’s say that they are employed through December 2026. It would still be unfair to subject the bonus to income taxation in 2026, as there is no cash until 2028. In general (and a big general at that) the tax Code will slow the income tax horses until 2028.

But this is compensation, meaning that there will also be FICA tax due.

When is that tax due?

A reasonable person would expect the FICA and income tax to lock arms and be due at the same time.

A reasonable person would be wrong.

FICA tax will be due at the later of:

The date the employee performs the services causing the deferred compensation (in our case, 2025), or

The date on which the employee is no longer subject to a substantial risk of forfeiting the deferred compensation (in our case, 2026).

Our executive would be subject to FICA tax in 2026.

What about concern for having cash to pay the tax?

It does not appear to apply to the FICA tax, only to income tax.

In practice, this is rarely as big an issue as it may first appear. FICA is divided into two parts: the old age (which is 6.2%) and Medicare (which is 1.45%). The old age (the acronym is OASDI) cuts off at a certain dollar amount. Medicare does not cut off. Odds are that someone in a top hat plan is well over the OASDI limit (meaning no old age tax), leaving only Medicare. 

It is unlikely that one is going to do a lot of tax planning for 1.45%.

This FICA trigger is called the “special timing rule.”

There is an upside to the special timing rule, and it depends on how the deferred compensation is determined.

If one can flat-out calculate the deferred compensation (in our case, 1% of division profits), the plan is referred to as an account balance plan. Granted, one can add interest or whatever to it to allow for the passage of intervening years, but one can calculate the beginning number.

If one pays FICA on an account balance plan under the special timing rule, there is no additional FICA when the plan finally pays out. This means that interest (for example) added to the beginning number is never subject to FICA.

Sweet.

Switch this over to a nonaccount balance plan and FICA can change. FICA is calculated on the actual distribution, but one is given credit for FICA previously paid under the special timing rule. In this case, one would pay FICA on the interest added to the beginning number.

There are also different ways to calculate the FICA under the special timing rule: the estimated method, the lag method, the administrative convenience method and so on.

Throw all the above in a bag, shake thoroughly, and that is how we got the Henkel case. How can the benefits go down? Take a nonaccount balance plan, with FICA being paid later rather earlier.

Is it a reduction in benefits?

Yes and no. It is technically a reduction if one was not thinking about the FICA.

It is not however a reduction for purposes of ERISA.

Our case this time was Davidson v Henkel, USDC, Eastern District of Michigan Southern Division, Case No. 12-cv-14103.

Another Runaway FBAR Case

 

Let’s talk about the FBAR (Report of Foreign Bank and Financial Accounts). It currently goes by the name “FinCen Form 114.”

This thing has been with us since 1970. It came to life as an effort to identify foreign financial transactions that might indicate money laundering or tax evasion. 

Sounds benign.

The filing requirement applies to a United States person, defined as

·      A citizen or resident of the U.S.

·      A domestic partnership

·      A domestic corporation

·      A domestic trust or estate

 We’ll come back that first one in a moment.

Next, one needs a financial interest or signature authority in a foreign financial account to trigger this thing.

A foreign financial account includes a bank account, which is easy enough to understand. It would also include a broker account (think Charles Schwab, but overseas). Some are not so intuitive, though.

·      A foreign insurance policy with cash value is reportable.

·      A foreign hedge fund is not.

·      A foreign annuity policy is reportable.

·      A foreign private equity fund is not.

·      A foreign cryptocurrency account is not reportable.

Some require a google search to understand what is being said.

·      A Canadian registered retirement savings plan is reportable.

·      A Mexican fondo para retiro is reportable.

Next, the foreign financial account has to exceed a certain dollar balance ($10,000) at some point during the year.

That $10,000 balance has been there for as long as I can remember. You will have a hard time persuading me that $10,000 in 1986 is the same as $10,000 now, but that number is apparently eternal and unchanging.

The $10,000 is tested across all foreign financial accounts. If it takes your fourth foreign account to put you over $10 grand, then you are over. Testing is done. All your accounts are reportable on a FBAR.

Like so many things, the FBAR started with reasonable intentions but has morphed into something near unrecognizable.

Fail to file an FBAR and the standard penalty is $10 grand. Fail to file for two years and the penalty is $20 grand. Have two foreign accounts and fail to file for two years and the penalty is $40 grand.

And that is assuming the error is unintentional. Do it on purpose and I presume they will execute you.

I exaggerate, of course. They will just bankrupt you.

It puts a lot of pressure on defining “on purpose.”

Let’s look at Osamu Kurotaki (OK).

OK was born in Japan and lives in Japan. He obtained a U.S. green card, making him a U.S. permanent resident. One of the pleasures of being a permanent resident is filing an annual tax return with the United States, irrespective of whether you live in the U.S. or not. One can talk about a foreign income exclusion or foreign tax credit – which is fine – but that annual filing makes sense only if someone intends to eventually return to the U.S. It does not make as much sense if someone does not intend to return, someone like OK.

OK paid someone to prepare his annual U.S. tax return. He found a CPA who was bilingual.

In 2021 the U.S. Treasury assessed civil penalties against OK for more than $10 million. His footfall? He failed to file FBARs. Treasury also upped the ante by saying that his failure was “willful.”

Huh?

Treasury is requesting summary judgement that OK willfully failed to file FBARs, prefers waffle over sugar cones and rooted for the Diamondbacks in the World Series. 

The Court wanted to know how Treasury climbed the ladder to get to that “willful” step.

So do I.

Here is what the Court saw:

·      OK is a Japanese speaker and does not speak English “at all.”

·      OK relied on his bilingual CPA to make sense of U.S. tax filing obligations.

·      His CPA provided annual tax questionnaires in both English and Japanese. The English was for theater, I suppose, as OK could not read English.

·      The CPA’s translation now becomes critical. Here are instructions to the FBAR in English:

U.S. taxpayers are required to report their worldwide income; that is, income from both U.S. and foreign sources.”

·      Here is the Japanese translation:

U.S. resident taxpayers are required to report their worldwide income, that is, income from both US. and foreign sources."

OK told the Court that he did not think he had a filing obligation because he was not a “U.S. resident.”

I get it. He lives in Japan. He works in Japan. His kids go to school in Japan. He is as much a “U.S. resident” as I am a Nepalese Sherpa.

Except …

OK was green card – that is, a “permanent” resident of the U.S.

Technically …

The Court cut OK some slack. Technically - and in a law school vacuum - he was a “resident.” Meanwhile - in the real world – no one would think that. Furthermore, OK hired a CPA who made a mistake. Even a trained professional erred interpreting the Treasury’s word salad. 

The Court said “no” to summary judgement.

Treasury will have to argue its $10 million-plus proposed penalty.

And I believe the Court just outlined reasonable cause.

Perhaps OK should consider turning in that green card. 

Our case this time was Osamu Kurotaki v United States, U.S. District Court, District of Hawaii.