As we’ve discussed in the past, we are very focused on the sunsetting of existing tax provisions after 2025. The main areas getting the attention of advisors and their clients are “estate taxes, the deduction for qualified business income and federal brackets.”[1] Some of the planning techniques suggested involve “strategic or lump-sum gifts and life insurance held in trusts.” One adviser mentioned in the Financial Planning article lists “spousal lifetime access trusts, gifts, leveraged gifts, loans, family limited partnerships or family LLCs” as available “tools.” The applicability of any of these depends mostly on the specifics of an individual taxpayer’s situation. An election happens in three months, so many taxpayers may have to pick something, if needed. Given enough time, ten to fifteen years, the annual exclusion gift is our preferred route. A recent planning session with one of our clients showed him an elegant and simple method of helping an adult child with a home purchase, which involved down payment help, plus help with annual interest and principal payments, which will apply, perhaps, over the next ten to fifteen years.
Watching the bureaucracy react to their idea of how the coming election may turn out is a good spectator sport. We take very little from the IRS announcement that it wants to expand its Direct File website, which processed 140,000 returns last tax season. The IRS competes in online tax preparation with Intuit and other for-profit services. For 2023, the Direct File pilot was “limited to twelve states and relatively simple returns.”[2] This effort just seems to be a misdirection of IRS resources.
Of more interest was the IRS announcement that it is making efforts to settle land-rights tax-break deals under audit.[3] Given candidate Donald Trump’s involvement in one such transaction, it looked like the IRS trying to “clear the decks” before a storm. Accepting the settlement offer would lower the tax rate and the penalty involved from admitting inflating the charitable deduction (this deduction, if reasonable, is allowed under the law). We witnessed some of this behavior when Mr. Trump last won election in 2016, as the bureaucracy prepared for his inauguration in January 2017.
Milton Friedman’s Fault?
The vast amounts of money that the US government collects in taxes every year comes in from relatively docile US taxpayers. Why? A recent Wall Street Journal op-ed article blamed the lack of squawking on the stealth aspect of the tax withholding system and blamed Milton Friedman for the idea.[4] To help finance US efforts in World War II, “the idea of withholding taxes at the employer level was devised.” The crisis past, “unfortunately, powers once granted in times of crisis are never relinquished voluntarily.” As we’ve commented, the government ought to be wary of turning taxpayers into “consumers” of tax avoidance ideas. To the government’s horror, ending employer withholding might be a result. One letter to the editor in response to blaming Mr. Friedman compared employer withholding to general anesthesia during surgery.[5] “It has three effects: it reduces awareness (anesthetic effect), it mitigates pain (analgesic effect) and it helps you forget (amnesic effect).” Seventy-five years after going under general anesthesia might be a good time to come out of it.
If you or any of 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
[1] Tobias Salinger, “With Congress Slow to Act, Advisors Can Plan Ahead,” Financial Planning, June 2024, p. 27
[2] Richard Rubin, “IRS Considers Expanding Free Tax Filing,” WSJ, 4/27-28/2024, p .A2
[3] Richard Rubin, “IRS Offers Generous Settlement Offers In Land Rights Deals,” WSJ, 7/18/2024, p. A3
[4] Jason De Sena Trennert, “Milton Friedman’s Worst Mistake,” WSJ, 4/15/24, p. A15
[5] Sal Greco, “The General Anesthesia of American Taxation,” WSJ, 4/25/24, p. A14