September 2024 Newsletter

New Final Regs Expand on RMD Rules

IRS addresses inherited accounts

The IRS has issued comprehensive final regulations on rules pertaining to required minimum distributions (RMDs) from qualified retirement plans and traditional IRAs in the wake of recent legislation. The final regs take effect on September 17, 2024.

Background: Generally, participants in qualified retirement plans, like 401(k) plans, and traditional IRAs must begin taking RMDs once they reach a specified age and in each succeeding year. Under SECURE 2.0, a follow-up to the initial SECURE Act, the age threshold has been raised from 72 to age 73 (scheduled to increase to 75 in 2033). Similar rules apply to individuals who inherit qualified plan and IRA accounts.

In contrast, participants in Roth IRAs do not have to take lifetime distributions. However, participants in Roth 401(k) accounts, a Roth IRA-like version of a regular 401(k), were previously required to take lifetime RMDs, as were beneficiaries. Beginning in 2024, Roth 401(k) account owners no longer have to take RMDs.

RMDs are taxed at ordinary income tax rates currently topping out at 37%. The amount of each RMD is based on IRS-prescribed life expectancy tables and the value of the account on the last day of the prior year.

Previously, the penalty for failing to take timely RMDs was equal to 50% of the shortfall. Beginning in 2023, SECURE 2.0 reduces the penalty to 25% (10% if corrected promptly). Due to the COVID-19 pandemic, the IRS waived the penalty for failing to take RMDs for tax years spanning 2021 through 2024. It also extended the exemption for lifetime RMDs to participants in Roth 401(k) accounts (but not their beneficiaries).

Notably, the SECURE Act requires qualified plan and IRA beneficiaries to empty out an inherited account over a ten-year period, beginning in 2020. In the past, beneficiaries could take RMDs over their own life expectancies, creating so-called “stretch IRAs” that could defer tax for generations, but that has effectively been eliminated. However, the law creates exceptions for “eligible designated beneficiaries” (EDBs), including:

• A surviving spouse;

• A minor child (until they reach age 21);

• A disabled or chronically ill individual; and

• Any other individual who is not more than ten years younger than the IRA participant.

These beneficiaries have more favorable RMD options at their disposal. For instance, a surviving spouse can effectively treat an inherited account as their own.

Nevertheless, the law was not clear whether beneficiaries had to take RMDs over the course of ten years or if they could wait until the last year to take a lump-sum payout. Proposed regulations issued in 2022 provided that beneficiaries must take RMDs in years one through nine if the decedent had died after the initial owner had started RMDs. Reacting to negative public comments, the IRS then postponed the requirement to 2025.

New rules: Under the final regulations, IRA beneficiaries still must follow the ten-year rule as stated in the proposed regs. However, beneficiaries are allowed to skip annual RMDs that were required for accounts of owners who died in 2020 through 2023. For example, if you inherited an IRA in 2021, you must take RMDs only from 2025 through 2031.

The final regs also complicate matters by imposing special rules for beneficiaries who inherit a Roth 401(k) that constitutes the decedent’s “entire plan balance.” As a result, the account might have to be emptied out within ten years. On the plus side, the regulations provide more flexibility in allocating RMDs among multiple beneficiaries of a single account.

Wrap-up: The IRS is expected to issue additional guidance for participants and beneficiaries of qualified plans and IRAs. In the meantime, consult with your professional tax advisors concerning your situation.

Jumping Into the Gig Economy

How to land a temporary job

The “gig economy” keeps growing in leaps and bounds. According to TeamStage, more than one-third of all Americans—36% to be exact—are participating in the gig economy. If you have not joined yet, you may decide to take the plunge. And, if you are already participating, you might want to increase your activities.

Background: The gig economy is the common term for the widespread use of freelancers and others working on a part-time basis. Generally, they do not have a traditional 9-to-5 workday or anything close to it. This often affords workers with greater flexibility than a traditional role, not to mention the revenue that it can bring in.

Gig jobs are often associated with drivers for hire and temporary landlords, but the landscape is more expansive than that. You can find gig jobs in virtually every type of work, including high-level executive and IT jobs and positions for physicians and attorneys.

Typically, gig workers do not receive a salary like employees. They may be paid a flat rate on a per-project or contractual basis. In some cases, it may even be a one-shot deal. Because they are not usually treated as employees of the company, no tax is withheld from the compensation the gig worker receives.

This arrangement can be attractive to employers as well. They do not have to offer costly fringe benefits—including health insurance coverage and retirement plan benefits—to these workers like they do for regular employees. When the work is complete, employers are free to renew their services or move on.

Of course, being a gig worker results in some tax complications. Essentially, you are considered to be a self-employed individual, so you must report the amounts you are compensated for work as taxable income. In addition, you may be responsible for quarterly estimated tax payments (although this may be reduced or eliminated by withholding from a traditional job).

On the other hand, you may be able to deduct some of your expenses to offset the tax liability from your self-employment. This includes business expenses like travel costs, supplies and equipment needed to perform the job. The same basic tax rules for qualified expenses apply to gig workers.

Fortunately, finding part-time employment is easier than it was in the past due to technological invocations. Consider these practical suggestions:

• Identify your targets. Research the industry or profession you expect to work in and take aim.

• Hone your talents. Develop the skillset you will need even if it means taking on some “grunt work” in the short term.

• Showcase your talents. Provide a resume, portfolio and/or CV that emphasizes your work experience, education and skills.

• Browse jobs online or through apps. Use the technology at your disposal for job searches.

• Network yourself. This old-fashioned method stills works well if you can benefit from referrals and recommendations.

Reminder: Without employee fringe benefits, you must “make your own way” with health insurance and other essentials for your situation. Thus, you may consider using a gig economy job to supplement, not replace, a regular job. Take all factors into account.

Keys to Mortgage Interest Deductions

Coping with the latest tax rules

Mortgage interest rates have been dropping through the summer. As of August 5, 2024, the average rate on a 30-year fixed rate mortgage was 6.95%, the lowest it has been in a year. Accordingly, this may be a good time to purchase the dream home you always wanted or downsize to a smaller place. But what about taxes?

Fortunately, many homeowners can write off all their mortgage interest expenses if they itemize deductions on their personal tax returns. Despite recent legislation, the tax law boundaries remain relatively generous.

Main tax rules: Prior to the Tax Cuts and Jobs Act (TCJA), you could deduct mortgage interest paid on your principal residence and one other home (e.g., a vacation home) as either acquisition debt or home equity debt, or both, within certain limits.

1. Acquisition debt: This constitutes debt where the mortgage proceeds are used to buy, build or substantially improve a qualified residence. Usually, acquisition debt represents the main part of a mortgage interest deduction. The interest was deductible on loans up to $1 million.

2. Home equity debt: When permitted by state law, you could deduct the interest on home equity loans secured by a qualified residence, regardless of how the proceeds were used. Home equity debt deductions were limited to interest paid on the first $100,000 of debt. Plus, the loan amount could not exceed your equity in the home.

In addition, mortgage interest deductions were subject to the “Pease Rule,” along with certain other itemized deductions. This rule reduced deductions for certain high-income taxpayers.

However, beginning in 2018, the TCJA imposed these other restrictions.

• The threshold for deducting interest paid on acquisition debt was lowered from $1 million to $750,000 for loans originating after December 15, 2017 (or April 1, 2018, if there was a binding contract in place before December 16, 2017). Thus, existing homeowners were “grandfathered in” under the prior rules for acquisition debt. Alternatively, you can still benefit under the $750,000 threshold.

• The deduction for interest paid on home equity debt was suspended from 2018 through 2025. It does not matter when you acquired the residence. Currently, the deduction is scheduled to return in 2026.

• In conjunction with other TCJA changes for itemized deductions, the Pease rule was suspended for 2018 through 2025. It is also set to return in 2026, absent any further legislation.

Typically, these revised rules still give most homeowners plenty of leeway. Plus, you can take advantage of a special tax break: If you take out a new home equity loan or line of credit and use the proceeds for significant home improvements, the debt may be treated as an acquisition debt instead of a home equity debt. Reason: The debt is being incurred to “substantially improve” a qualified residence. Therefore, itemizers can add this mortgage interest to their deductible total.

What if you refinance an existing acquisition debt in 2024? The interest on the new loan remains deductible subject to the TCJA rules, but refinancings of pre-2018 loans are generally grandfathered under prior law.

Final words: Maximize mortgage interest deductions available under the current tax rules. When warranted, contact your professional tax advisor for guidance.

Avoid Six Common Investment Mistakes

Do’s and don’ts for equities investors

We all make mistakes, but some are worse than others. For instance, the types of errors you might commit as an investor could haunt you for years, especially with the recent stock market volatility. Practical advice: Do not keep making the same investment mistakes over and over again.

Of course, that is easier said than done. To help you out, here are six “do’s and don’ts” for investors in equities to follow.

1. DO remain diversified. No matter what the numbers say, you should not sink all your dollars into a single investment. Although diversification offers no guarantee of success in a declining market, it remains a viable way of reducing overall investment risk. Build a balanced portfolio with the assistance of your investment advisers.
   

2. DON’T be inpatient. You cannot expect “instant gratification” whenever you invest. Adopt a view of the long term and try to stay consistent with your overall plan despite any ups and downs in the short term. Recognize that you may have to hold assets for a period of time for the best results.

3. DO adapt to what the numbers are telling you. For instance, if you have a favorite stock that is consistently underperforming, you should not continue to “throw good money after bad.” Take your lumps and move on. Similarly, do not allow emotion to rule the stocks you decide to keep for the future.

4. DON’T overemphasize past performance. Are you familiar with the boilerplate language found in most investment-related documents? It states that, “Past performance is no guarantee of future results” (or something to that effect). You probably do not pay much attention to it, but it is true. Instead of relying strictly on past performance, evaluate current and future prospects.

5. Do factor in taxes. One important thing to remember as an investor is that it is how much you keep, not how much you earn, that really matters. Depending on the type of investment, and the timing of gains and losses, taxes may dilute a significant portion of your earnings. On the other hand, careful tax planning could result in gains that are offset by losses. Keep tax consequences in mind for investment decisions.

6. DON’T engage in “market timing.” Typically, market timing is based on acquiring stock when you think it will go up and selling stock when it you think it will go down. It may work sometimes, but it can also backfire if your expectations are not met. It makes more sense to build a balanced portfolio based on your particular needs and tolerance for risk.

It also helps to develop an overall investment plan rather than taking a random approach. With professional assistance, you can cut down or eliminate those mistakes that have plagued you in the past.

Run for the Tax Gold

The U.S. took home 126 medals from the Paris Olympics. Do the athletes owe any tax on this hardware?

Under a 2016 federal law, athletes are generally exempt from paying tax on the value of their medals or other prize money received from the U.S. Olympic Committee. But other income received by athletes, like wages, remains taxable.

Note: For the first time, track and field gold medalists in Paris were awarded $50,000 for their efforts (split evenly among relay team members), The tax exemption applies to these winnings.

Facts and Figures

Timely points of particular interest

 Early IRA Withdrawals—The IRS has issued new guidance on exceptions to the early withdrawal penalty for IRA owners. Normally, you would owe a 10% tax penalty, on top of regular income tax, for traditional IRA withdrawals before age 59½. But the SECURE 2.0 law carved out new exceptions for emergency personal expenses and for victims of domestic abuse. These changes take effect in 2024.

Noncompete Agreements—On August 20, 2024, a federal judge in Texas barred the “final rule” recently issued by the Federal Trade Commission (FTC) that would have banned employers from requiring employees to sign legally-binding noncompete agreements. This prohibition, which was scheduled to take effect on September 4, 2024, is now effectively overturned. The FTC says it is considering an appeal. Note: The ban would not have applied to certain high-ranking officers.