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Tax Guy

Bill Bischoff

One little-noticed tax grab is already on the table, and another waits in the wings

Wealthy families like the one on the show “Succession” may want to rethink some strategies.

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One of the perils of being well-off is the constant risk that the federal government and/or your friendly state and local tax collectors will figure out new and different ways to snatch more of your wealth. Especially wealth that you earned the old-fashioned way: by inheriting it. To raise your paranoia to the appropriate level, here are two new things to worry about.

SECURE Act would eliminate big tax advantage for IRA beneficiaries

Few noticed when the House of Representatives in May overwhelming passed the imaginatively named “Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2020.” The vote was 417-3. Senate passage was thought to be a mere formality — until Senator Ted Cruz (R-Texas) announced opposition, because the bill no longer includes a provision that would allow tax-free Section 529 college savings account withdrawals to cover homeschooling costs.

But with such near-unanimous support, you would think the SECURE Act is basically nothing but good news for anybody and everybody. Right? Wrong. Here’s the story.

The noncontroversial good stuff

The SECURE Act is allegedly intended mainly to encourage more businesses to offer retirement plans and expand opportunities for workers to invest their retirement account funds. Good. And it would allow you to continue to make contributions to traditional IRAs after reaching age 70½, which is not permitted under current law. Fine. It would also raise the age that you must begin taking mandatory IRA and retirement account required minimum distributions (RMDs) from the current 70½ to 72. Also good, but only a minor improvement. The SECURE Act would make other IRA and retirement plan changes that are, arguably, noncontroversial.

The unpublicized dark side

Now for the bad news. If it becomes law, the SECURE Act would require most non-spouse IRA and retirement plan beneficiaries to drain inherited accounts within 10 years after the account owner’s death. This is an anti-taxpayer change for beneficiaries who would like to keep inherited accounts open for as long as possible to reap the tax advantages.

Under current law, the RMD rules for a non-spouse beneficiary allow you to gradually drain the substantial IRA that you inherited from Uncle Henry over your life expectancy from an IRS table. See this previous Tax Guy column for more info.

For example, say you inherit Uncle Henry’s $500,000 Roth IRA when you are 40 years old. The IRS table says you have 43.6 years to live. You must start taking annual RMDs from the inherited account by dividing the account balance as of the end of the previous year by your life expectancy. So your first RMD would equal the account balance as of the previous yearend divided by 43.6, which would amount to only 2.3% of the balance. Your second RMD would equal the account balance as of the end of the following year divided by 42.6, which translates to only 2.35% of the balance. And so on until you drain the inherited Roth account.

As you can see, the current RMD regime allows you to keep the inherited account open for many years and reap the tax advantages for those many years. This is particularly advantageous for inherited Roth IRAs, because the income those accounts produce can grow and be withdrawn federal-income-tax-free. So an inherited Roth IRA gives you some protection from future federal income tax rate increases. Nice.

Who would be affected?

The SECURE Act’s anti-taxpayer RMD change would not affect account owners who drain their accounts during their retirement years. And the change would not affect account beneficiaries who want to quickly drain inherited accounts. The change would only affect heirs who want to keep inherited accounts open for as long as possible to reap the available tax advantages. So we are talking about “rich” tax-hating beneficiaries who have the wherewithal and self-control to defer gratification from inherited accounts.

To be fair, the SECURE Act’s anti-taxpayer RMD change would also not affect accounts inherited by: (1) the spouse of the deceased account owner, (2) a beneficiary who is no more than 10 years younger than the deceased account owner, (3) a minor child of the deceased account owner, or (4) a disabled or chronically-ill individual. But everybody else would get slammed by the new 10-year account liquidation requirement. So you could only keep the big Roth IRA that you inherited from good old Uncle Henry open for 10 years after his departure.

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If it finally passes the Senate, will President Trump sign the SECURE Act into law? Who knows? Trump is, after all, Trump. Meanwhile, consider blasting your beloved Senators with emails if you are opposed to the bill.

Another thing: estate tax clawback could fleece your heirs

The Tax Cuts and Jobs Act (TCJA) drastically increased the unified federal gift and estate tax exemption from $5.49 million in 2020 to $11.4 million for this year, with inflation adjustments for 2020-2025. But the exemption is scheduled to revert back to the much-lower pre-TCJA level in 2026. Depending on political developments, that could happen much sooner. If it happens in 2026 or sooner, how would it affect the tax treatment of large gifts that you made while the ultra-generous TCJA exemption was in place? Good question.

Proposed IRS regulations issued late last year would provide some protection by stipulating that folks who make large gifts while the ultra-generous TCJA exemption is in place would not be penalized if the exemption reverts back to the much-lower pre-TCJA amount in 2026. If that quite-likely scenario materializes, the exemption for the estate of a decedent (the deceased individual) would be the greater of: (1) the TCJA exemption amount that was utilized to shelter earlier gifts while the decedent was alive or (2) the exemption amount that is allowed in the decedent’s post-TCJA year of death.

Example 1: This year, when the unified federal estate and gift tax exemption is a whopping $11.4 million, Able makes gifts of $9 million.

Able passes away in 2026, when the unified exemption has reverted back to only $6 million. He leaves a $4 million estate. To calculate the estate’s federal estate tax liability, the $9 million of gifts made this year are added back to the $4 million date-of-death estate value, resulting in a gross estate of $13 million for federal estate tax purposes. According to the proposed regulations, the estate tax liability would then be calculated using a $9 million exemption. So the estate would owe federal estate tax on $4 million ($13 million gross estate – $9 million exemption), and the $9 million of gifts made while the much-larger TCJA exemption was in place would not increase the estate’s federal estate tax liability. Good.

Example 2: If Able instead gives away $11.4 million this year, his remaining estate in 2026 would be only $1.6 million ($13 million – $11.4 million). To calculate the estate’s federal estate tax liability, the $11.4 million of gifts made this year are added back to the $1.6 million date-of-death estate value, resulting in a gross estate of $13 million. According to the proposed regulations, the estate tax liability would then be calculated using an $11.4 million exemption. So the estate would owe federal estate tax on $1.6 million ($13 million gross estate – $11.4 million exemption), and the $11.4 million of gifts made while the much-larger TCJA exemption was in place would not increase the estate’s federal estate tax liability. Good!

Example 3: Able suffers from paralysis by analysis and fails to make any gifts while the TCJA’s ultra-generous exemption is in place. He passes away in 2026 when the exemption is only $6 million. So $7 million of his estate will be exposed to the federal estate tax. What will the tax rate be? Nobody knows, but it probably won’t be any lower than the current 40%. Able’s heirs will pay the price, whatever it turns out to be.

Key point

Example 2 illustrates why making big gifts while the TCJA’s ultra-generous exemption is still in place might be a tax-smart strategy. Example 3 illustrates why doing nothing could be a bad strategy. That said, the taxpayer-friendly proposed regulations that encourage that idea of making big gifts right now are only proposed rules. They have not yet taken effect, and future events could ensure that they never take effect. So place your bet and act accordingly.

The bottom line

Sorry to bring you bad tidings, but you now know what you need to know. And remember: you’re not paranoid if everybody really is working against you.

5 Reasons Why Money Is The #1 Cause of Divorce

Have you ever wondered what happens between “I do” and “we’re done”?

No one wants to get divorced. Not even those celebrity unions that seem doomed from the start. They don’t want it. No one wants the pain and wreckage of divorce.

A bride and groom gaze down that aisle and envision a future of dedicated teamwork fulfilling hopes and dreams.

Photo Courtesy: Thinkstock

A little thing called money.

No one hopes to fight. No one dreams about arguing. But what couples may not see as they gaze into their future is how a little something that they’ve known since their childhood could easily come between them. A little thing called money.

Research shows money is the #1 reason couples cite when filling for divorce in America. And money is often blamed by people divorcing who have plenty of savings and cash.

What are the reasons behind this often ignored, but destructive force and what can you do about it? Start by considering these 5 reasons why money is the #1 cause of divorce and the solutions:

Photo Courtesy: Pina Messina/Unsplash

1. You make money decisions every single day.

When you deal with something in your marriage over and over, it stands to reason that you would have an increased chance of experiencing conflict over it. Probably not a lot of people fight with their spouse about who gets to drive the yacht, but fighting over daily use of money stands to get a lot of air time.

Bring two people together and you’re guaranteed a difference of opinion at some point. She thinks their budget would look better if he took his lunch every day instead of eating out at work. He thinks she could grab a cup of coffee at home each morning versus spending $5 a day at the drive-thru. And so it begins.

Solution: Address issues as they arise. Don’t let them fester or build. If your spouse doesn’t seem to think it’s an issue, but it bothers you – it’s worth discussing.

Photo Courtesy: Unsplash/Christin Hume

2. You may not realize it, but money fights feel very personal.

You may think money is just a “rate of exchange” or dollars and cents – something very tangible and unemotional, but that is not necessarily the case.

When someone criticizes your use of money it feels very personal. The accusation or attack feels like it’s about you, the core of you, not just about lattes, credit card swipes, and receipts.

Photo Courtesy: Pexels

The way you approach money is central to your character.

The way you approach money is part of your DNA and central to your character so any blaming or attacking about your use of money feels like you are being criticized for who you are, not just how you spend or save.

Solution: Stop and consider your differences. Recall that your differences were part of the initial attraction to one another. Remember the old “toothpaste rule”. Saying a hurtful word is like squeezing a tube of toothpaste, it’s messy and once it’s out, you can’t put the mess back in the tube.

Photo Courtesy: Kyu Lee/Unsplash

3. Roles are undefined or ill-defined.

Another reason couples experience conflict when dealing with money is their lack of understandable roles or poorly assumed or “assigned” roles in handling finances.

You married a helpmate, a teammate, a friend, and a co-collaborator. Not your mom or your dad. The wisdom of the word tells us to “leave and cleave” so avoid establishing a parent/child relationship when you and your spouse handle your money.

No one should feel like they are receiving an allowance from their spouse. And no spouse should be left in the dark about the financial realities of your household. An imbalance steers the relationship into dangerous waters. The “parent” feels all the pressure and potentially wields too much power and the “child” feels belittled or unappreciated.

Photo Courtesy: Unsplash/Ryan Jacobson

Meet to make sure you’re both on the same page.

Solution: Evaluate your roles – spoken or unspoken. Consider your strengths and weaknesses and play to those when managing your money. Communicate openly. Communicate often. We suggest meetings: brief, weekly updates and monthly in-depth meetings to make sure you’re both on the same page. Take turns running point on your money. Trade off months or 60-day periods. You will understand your finances better and appreciate the time and effort required to manage them.

Photo Courtesy: Charles Deluvio/Unsplash

4. The cycle repeats itself.

We know that people think talking about money just leads to fighting about money. So couples avoid discussing it or they do bring up money in the same ineffective ways and the cycle continues.

If your spouse (or you) defaults to nagging, controlling, dishonesty, or using guilt to “deal” with your concerns about money, you aren’t really dealing with anything. You are inflicting pain and driving your relationship closer to destruction. No one operates optimally when he or she is injured.

Solution: Recognize your contribution to the cycle. Pray for wisdom and God’s power to end your behavior and break the cycle. Confess your sin to your spouse and ask their forgiveness. Their sin is … their sin. Pray for your spouse and your marriage. Avoid the temptation to point out their flaws.

Photo Courtesy: Thinkstock

5. God wired your spouse to approach money the way they do.

After decades of research and work with a statistical scientist we have found that an individual’s approach to money is hardwired from an early age. We call this approach to money your Money Personality. Like whether you are naturally quiet or talkative.

You have a Primary Money Personality and Secondary Money Personality that drive every decision you make about money.

Watch any group of kids with a stash of candy and you’ll see their Money Personalities play out in a variety of ways as they handle that “currency”. Their approach is hardwired from a young age.

Photo Courtesy: Unsplash/Annie Spratt

Approach to money is hardwired from a young age.

You may not realize this, but you assume everyone else thinks about money the exact same way you do. And if they don’t, they are wrong. That goes for your spouse too.

You wouldn’t ask your spouse to get taller or try harder to change the color of their eyes. Secretly hoping a person who loves to save money one day wakes up and has no anxiety over a risky investment is similar. This isn’t to say that we all can’t grow and mature in our ability to recognize our character traits and plan accordingly. BUT someone who loves to spend money is going to enjoy that feeling forever, and they aren’t wrong.

Solution: Invest in yourself and your marriage and identify your Primary and Secondary Money Personalities with a scientific, statistically sound assessment. Then talk about it.

Photo Courtesy: Pexels

Don’t let money get in your way.

Identifying your Money Personalities is so critical to a harmonious marriage that we created a free, online, confidential Money Personality Assessment to help every person and every couple in the world discover theirs for free. Knowing your Primary and Secondary Money Personalities arms you with powerful information. Sharing them with your spouse and respecting each other helps you both create a healthier, wealthier future together.

God ordained marriage to be a light to the world. To show others a tangible example of His love for us. God designed it and laid it out in Genesis and then Jesus underlined it during his earthly ministry just to make sure we didn’t miss the point. A united front is priceless.

Divorce-proofing your marriage is critical for you, your family, and a watching world. Don’t let money get in your way.

Photo Courtesy: Unsplash

About the Authors

Scott & Bethany Palmer, The Money Couple, are love & money experts, authors, speakers, each have 20 years of financial advising experience, and help couples solve money issues in their relationship. Grab a copy of“The 5 Money Personalities: Speaking the Same Love and Money Language,” and take theFREE online Money Personality Assessment.


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Three Reasons Thinking like a Woman Will Improve Your Trading

Men and women are different and no I’m not just talking about the fun body parts. Men’s brains are 10% larger and men’s and women’s brains are wired differently . We react differently to the same stimuli. Sometimes it feels like we’re a completely different species.

Few things before we go with the article. Not all women (or men) are the same. We are just talking about averages here, the average woman compared to the average men. There can be huge differences between individuals of both sexes. Today, there are women that are high powered CEO and men that are stay at home dads. With that out of the way, let’s start! Since most of us traders are men, I will focus on the guys in this article. Here are the 3 main reasons why thinking like a woman will help your trading!

1. Women Are More Risk Averse

Study after study has shown that women are more risk averse then men. Women shun investment vehicles that are perceived as risky (like stocks or forex) and go for government bonds or bank deposits. Risk aversion has its plusses and minuses. On the plus side, increased risk aversion can help guard against unexpected losses. On the minus side, the unwillingness of women to take risks probably explains why there are so few female Warren Buffets. According to a 2020 Catalyst Census of Fortune 500 Women Executive Officers and Top Earners, women comprise only 17.6% of executive officers in the finance and insurance industries. The numbers are similar for CFOs or female board directors. Risk aversion is not the only reason for the discrepancy between the sexes at the top, but more on this later in the article.

How does this relate to forex?

Trading is a male dominated environment, with estimates ranging around 90% of traders being male (although things may be slowing starting to change). Forex trading in particular can be very risky, especially for the inexperienced. While data is hard to come by, anecdotal reports suggest that after 6 months, around 50% of newcomers to the Forex market will stop trading. After another six months, the number will halve again. So after year one, only 25% of forex newbies will stick around. Most of these traders will blow up in a spectacular fashion, losing few good sized trading accounts before giving up.

Guys tone down the risk. The average man takes way too much risk. While this may lead to more Warren Buffets or George Soroses, it also leads to twice as many men ending up homeless compared to women. Girls, take a chance once in a while, it won’t kill you. Well that’s not true, it might kill you or you may end up homeless. But as they say, no pain no gain!

2. Emotional Stability

They call women creatures of emotion but did you know that men are three times more likely to commit suicide? This lethal gender gap is consistent across countries and cultures. The World Health Organization statistics from 2005 say that in the USA, out of every 1000 people, 17 men will die from suicide compared to only 4 women. In Japan, the numbers are 28 to 10. In Russia, the ratio is almost 6 to 1. Out of a population of 1000 people, 41 Russian men will end their lives compared to only 7 women.

Women are emotional? What do rogue traders Jerome Kerviel (lost $6.9 Billion), Yasuo Hamanaka ($2.6 Billion) and Nick Leeson ($1.3 Billion) have in common, besides losing billions of dollars? If you answered trouser snake, you would be correct!

The weakness of men is the facade of strength

Part of reason for the high male suicide rate is that men don’t know how to deal with their emotions. In addition, men are less likely then women to ask for help out of fear that they will be ostracized. We are expected to ‘’tough it out’’ on our own. In the States, 72-89% of females who committed suicide had contact with a mental health professional at some point in their life, while only 41-58% of males who committed suicide had made use of this resource. Men’s inability to deal with emotions leads to suicide, premature death due to coronary heart disease, violence, accidents, drug or alcohol abuse. And yes, to blown trading accounts.

The first step to controlling your emotions is to learn how they affect your daily life. I used to make fun of my sister for keeping a journal. At age 27, almost 15 years after my sister started hers, I started my own journal. I recorded trades taken during the day, the reasons for taking them and my emotional state. Did I trade sick? Was I angry? Did I follow my trading strategy or was I just revenge trading?

Keeping a trading journal is just one of the things that can help you get a handle on your emotions. Having friends you can openly talk to without being made fun of is another. A good therapist can also help.

3. Women Lead More Balanced Lives

In his book ‘’Why Men Earn More’’ Dr. Warren Farrell outlines 25 different workplace choices men make that ultimately lead to them earning more money. These include taking up hazardous jobs, working longer hours or willingness to travel (only 16% of frequent flyers are women, for example). Dr. Farrell goes on to say that:

‘’Women’s choices appear more likely to involve a balance between work and the rest of life. Women are more likely to balance income with a desire for safety, fulfillment, potential for personal growth, flexibility and proximity-to-home.’’

It’s not all about the money. I don’t know about you but the main reason I got into trading wasn’t for the money. It was the potential for personal freedom. When you trade for a living you don’t have to answer to anybody but yourself. You can stay at home with the kids or take off to Rome for a working holiday (going on August 20 th woo-hoo!). It seems women figured out long time ago that the secret to a happy life is a healthy balance. This is something most of us men are just beginning to find out.

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