A tax expert who taught both of us used the phrase “as you’ll remember” when either of us would forget a key point in the tax analysis we might be doing. His other favorite saying was “the government is always your partner.” He meant that we should not forget the payment of taxes. Income incurs taxes, so don’t forget to pay on time and include them in your analysis.
To keep a steady stream of income coming into the US Treasury, your “partner” probably shouldn’t change the rules of the game too many times, should probably be polite and civil, and should probably be fairly clear about what they expect.
New Retirement Plan Rules
We’re not quite sure what the government has against retirement plans, but two recent changes to long-established rules raise the question. We’ve previously discussed changes made to inherited IRAs, which were once a staple of Americans’ estate planning but now no longer last for the life expectancy of the beneficiary, perhaps a generation. They are now limited, in most cases, to ten years. The other major retirement plan change came recently to 401(k)s. Because Americans’ peak earnings and savings years come close to retirement, “catch-up” payments to 401(k)s and other retirement plans have been important tools helping people save enough for retirement, if they were not able to do so earlier. Changes to catch-up payment rules for 401(k)s take effect in January 2024 and limit payments into a 401(k) to those earning less than $145,000 in the prior year.[1] Those payments are allowed to go into a Roth 401(k), however. As we’ve noted before, the government likes contributions to Roth accounts because they generate current taxes. The financial advisory world touts Roth IRAs because these contributions “grow and can be withdrawn tax free”[2] under current rules. Given government’s history here, why would it be assumed that current rules for Roth IRAs will be the same when you want to withdraw “tax free”?
Mission Creep at the IRS?
Two recent incidents of taxpayer run-ins with the IRS, one a newspaper reporter[3] and one a businesswoman[4] illustrate that the IRS and its agents have great latitude about giving their correct name, entering property, accurately describing a tax situation or searching for unrelated personal information. As one commentator put it, “is it now standard for an agent to show up unannounced at your door – in absence of any proof of lawbreaking?”[5] As this was being written, the IRS announced that it is “ending a decades-old policy of making unannounced home and business visits.”[6]
As we’ve described before, “mission creep” is a problem at the IRS. Generally, the IRS “has two essential functions: responsible tax collection and enforcement.”[7] What they expect from taxpayers is compliance. When tax payers err, the route back to freedom means becoming a “compliant taxpayer.” What is one to think of the recent suggestion from the IRS that it “create an IRS-run electronic tax filing system” to compete with, say, H&R Block, which called the pilot program an unnecessary “solution in search of a problem”?[8] The conflicts of interest for the IRS in determining the “correct tax due” or in correcting its own errors would seem to be insurmountable. One letter to the editor suggested making this service “optional, especially for affluent people who say they don’t pay enough. I’m sure the IRS can fix that problem for them.”[9] As you’ll remember, the rules of the game are changing constantly, the IRS agent “is not your friend,” and the government is confused about what it should do.
If you or your other advisors have questions about the issues raised here, please contact your investment manager or one of us.
William H. Darling, CPA – Chairman & CEO
Jeanne M. FitzGerald, CPA – Tax Manager
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1 Anne Tergesen, “High Earners to Lose A 401(K) Tax Break,” WSJ, 7/17/23, p. A1
2 Ibid.
3 Kimberley A. Strassel, “IRS Needs a Cage, Not More Cash,” WSJ Opinion, 5/26/23
4 Betsy Sanz, “What IRS Employees Can Do Under the Law,” WSJ, 6/23/23
5 Kimberley A. Strassel, “IRS Needs a Cage, Not More Cash,” WSJ Opinion, 5/26/23
6 Fatima Hussein, “Unannounced IRS Visits End,” Associated Press, 7/24/23
7 Jason Altmire, “The IRS Wants to Prep Your Taxes,” WSJ, 6/1/23
8 Richard Rubin, “IRS Will Offer Free Online Tax Prep for Some,” WSJ, 5/17/23
9 John Trickett, “Bad Ideas from the IRS to Collect More Taxes,” WSJ, 6/8/23