SECURE ACT OF 2020: IRA's, RMD's and Other Changes for Retirement Plans

 News on Retirement Accounts:  In December of 2019, Congress passed the painfully named Setting Every Community Up for Retirement Enhancement Act of 2019, so that they could shorten it to the SECURE Act.  The Act is concerned with the fact that Americans don’t have a lot of significant retirement assets, and are too reliant on Social Security – which was always intended as a supplement for retirement and not the sole retirement income.  So the Act encourages employers to open up simpler plans, extend participation to part-timer workers, and make certain changes regarding IRA’s.  The whole bill would take an upper level tax seminar to fully understand.  I wanted to go through several changes significant to my age group – the folks heading into retirement.  I find it helpful to write about complicated matters to make them easier to understand – for me and for you.

If you keep working, you can keep putting money into your IRA:  Before the Act, once you turned 70 ½, you could no longer make contributions to an IRA.  In fact, you were then required to start withdrawing money each year.  The Act recognizes that people are working longer and living longer – so as long as you are earning income (not passive investment income), then you can continue to contribute to your IRA past the age of 70 ½.  If you work until you are 100, you can keep socking away your annual IRA contribution.  But you still must take the Minimum Required distribution by age 72. 

Required Minimum Distributions Deferred to 72:  Before the Act you were required to begin taking a Minimum Required Distribution (RMD) of your tax-deferred retirement funds at age 70 ½.  The annual amount was calculated based on your life expectancy.  You could always take more – you can take all of the money out of your IRA at any time after age 59 1/5, but after 70 ½, you had to take at least the minimum.  That starting age has now been extended:  you have to begin taking the required minimum by age 72.  And when you take that money out (unless it is a Roth IRA on which you have already paid income tax), then you recognize taxable income that year.  That is why they force you to take the money – because this is untaxed income – you took a deduction for it in the year that you earned it - and they want their tax share in your lifetime. 

Inherited IRA’s & RMD’s.  If you die, what becomes of your IRA and how is it taxed?  Recall that this is untaxed income, and so the Government wants its share, even after you are gone.  Before the Secure Act, the IRA would go to your designated beneficiaries, who could then take all the money and pay the tax that year, or could instead roll the money into an inherited IRA account, and take the Minimum Required Distribution each year based on their life expectancy.  This was called the “Stretch” – because the same money would have been paid over the life of the account owner, but since they died, the payments could now be  s—t—r—e--t—c—h—e--d  over the life expectancy of the new owner – in most cases in the next generation.  And so the government had to wait a much longer time for their cut.  If they shorten that period, then they get their share sooner, and so can in effect pay for some of the other benefits they are giving out.  And so that is exactly what they did in the SECURE Act. 

So now, if you inherit an IRA in 2020 and afterwards, and you are a surviving spouse or minor child or certain other favored categories, the old rules apply, and you have to take your RMD calculated with reference to your life expectancy.  However, for virtually everyone else who inherits an IRA in 2020 and later, you must take the Minimum Required Distribution over the next ten years.  You can take it (and pay taxes) all at once, or in one year but not another, or all in the last year, or whatever else is convenient to you.  If you have a low income year that drops you into a lower tax bracket, you may want to take your withdrawal then.  So there are still opportunities for tax planning, but not the same benefit as before when the well to do could take only the minimum during their lifetime, and then pass along the remaining balance which could then be spread over the lifetimes of their presumably much younger beneficiaries. 

Summary:  There are a host of other changes in the Secure Act.  I sat in a seminar with other tax and estate planning attorneys and as always, the complexity and ambiguity in every extensive new tax law was mind-boggling.  So, if you think you are going to be passing along, or inheriting, an IRA or other retirement plan, the alarm bells should go off and you should make an appointment with your financial advisor to talk about what your options may be.  The downside to not taking a timely RMD?  You will owe the tax on what you should have taken that year, plus you will pay the government 50% of what you were required to take that year, as a penalty. 

CORONAVIRUS LEGISLATION UPDATE (March 27, 2020):  As part of the Government’s massive legislative response to the Coronavirus pandemic in Spring of 2020, the proposed Act waives the requirement for anyone taking an RMD in 2020.  You don’t have to withdraw the minimum in year 2020 – though if your income is severely impacted, you may want to take the minimum or more this year, to pay your bills, or take the payment in a year when you are paying a lower tax rate. 

French lesson of the day: Force Majeure

force ma*jeure\ n [F, superior force] (1883) 1 : superior or irresistible force 2 : an event or effect that cannot be reasonably anticipated or controlled; compare act of god.

The Situation:  As we all huddle at home with our families, not going to work or social events on pain of arrest, and listening to the news reports of more victims and area deaths, are we currently experiencing some kind of superior force that could not be reasonably anticipated or controlled?  

Welcome to the world of “Force Majeure”. 

What is Force Majeure?  Force Majeure is a legal buzzword, used to describe one of a variety of boilerplate clauses that a thorough lawyer puts in every contract that he drafts.  They are the clauses that no one every reads, until there is an act of terrorism or earthquake or war or perhaps a pandemic, and one or both of the parties are having difficulty honoring a particular obligation under their contract.  For example, a landlord is obligated to get the leased space ready for a tenant – but can’t get the carpet delivered, can’t get a contractor to perform the work, isn’t even allowed to work in the work place.  Is the landlord in default under the lease?   It may depend on whether there is a force majeure clause in the lease.  If the clause is there, it will likely say that either party is excused from performing when they cannot do so by reasons of force majeure.  The operation of that clause does not necessarily cancel the whole contract, unless of course the event makes the whole contract unenforceable – such as all of the leases and service contracts in the World Trade Tower buildings.  Or the hotel room contracts in New Orleans during Hurricane Katrina.  In the cases where the event is expected to be more temporary, than the clause can excuse the timeliness of performance until the event that caused the lack of performance has resolved.  In the case of the landlord, once the carpet can be delivered, and the labor force is free to travel and work, then “game on” under the contract.

What if we disagree?  Like all contract clauses, this one is just words on paper – and so if the cause and effect are unclear, in the minds of one party or both, then the situation only resolves itself when the parties agree on how to move forward, or when they take the issue to a judge who then tells them what he thinks.  The second way costs a lot more money than the first way.  In cases like we are experiencing, it is better to work with your other contracting parties, and be the epitome of the law’s “reasonable man”.  Because if a judge must some day decide who was reasonable in the situation, you don’t want to be seen as the party who was hitting the other party over the head with the legal boilerplate in your contract, while your other party was home with their children or aged parents, dealing as best they could with everything else that must be handled in an emergency. 

That clause is not in my contract!  And if you have no “force majeure” clause in your contract?  There are a variety of other legal doctrines that will excuse performance in the hard cases, including  impossibility of performance, commercial impracticability, and frustration of purpose.  I can’t lease you space in a building that does not exist.  I can’t install carpet in space that no longer exists.  I can’t come to your workplace and perform contract obligations when the governor has declared a state of emergency and requires me to quarantine at home.  I can’t host your birthday celebration in my restaurant because I have been ordered to close that night.  The law does not require a party to do the impossible. 

On the other hand, if you can still perform your end of the bargain while at home – such as a lawyer, accountant, engineer, web designer, or anyone that can still perform in front of a screen at home rather than at a fixed location such as an office or retail store or warehouse or in an airplane or on a train, then you cannot simply use the existence of a public emergency to take the time off and ignore your contractual obligations.  The game is still “on” for you.

Conclusions?  If you have legal disputes arising from the current pandemic, you are at some point going to be judged on your behavior, whether in the court of public opinion or by a judge.  If you are seen as trying to take advantage of the situation, using power to benefit yourself at the expense of someone with less power, putting money ahead of people, asking others to take risks in a risky environment, you are unlikely to find a sympathetic ear.  So in your dealings with your contracting parties, do the “right thing”, whether because you live your life that way anyway, or you simply want to avoid the adverse consequences.  They will both get you to the right place.

Bastards, Illegitimate Children and Non-Marital Children

For most of our English common law history, children born out of wedlock were disfavored. In feudal days, the first born male was entitled to the manor, and so succession to wealth and entitlement all depended on the children being “legitimate” children of a legitimate marriage. It has taken years for that system to be eroded by changes in the law. And the recent headlines in the newspaper now highlight how that can matter.

Michael Morgan Taylor was a bond broker who was in the World Trade Center when it collapsed, killing him along with so many others. Some of his remains were recovered and buried. At the time, he had a paternity suit pending against him by a woman who claimed that he had fathered her son. I am not sure what took so long, but I just read today that the court has ordered the remains to be DNA tested to determine the paternity issue. DNA testing has taken a lot of the guesswork out of that issue; and in fact is dispositive of the issue in most cases. And so the law has had to catch up.

Every state has its own laws on this issue, so I am going to look only at New York for this note. Like the others, New York had once disfavored illegitimate children - because it was difficult to prove a paternity case unless you had some type of admission from the father. Absent that proof, a child who claimed but could not prove paternity was left where he started, with no rights to the father’s estate.

New York decided in 2010 that it was unfair to penalize a child for the circumstances of his birth, and so changed its laws. First, it recognized that the term “illegitimate” was a bad starting point - it cast the child in a poor light by using this term. So these children in New York are now “Non-Marital Children”. Second, it recognized that DNA testing has made huge advances, and so permits a child to claim paternity in one of two ways: either by “clear and convincing evidence” of kinship (which DNA testing can furnish) or evidence that the father held them out as his own child through “open and notorious” means.

So, the putative son of Michael Morgan Taylor has been given the right to exhume the remains of Taylor to do DNA testing. As gruesome as that sounds, it is the right result. No matter how horrific his death, if he is survived by a son, then the son should be entitled to the rights granted to a son.

If Taylor died with a will in place that named specific people but not others, then his will would likely be honored; and so the non-marital child would likely not inherit under the will. But if Taylor, 42 years old and not expecting death, died without a will, then the laws of intestacy generally provide for either all or a large share of the estate to go to the surviving children of the deceased (depending upon whether a spouse survives or not). In that case, proving paternity leads to the right result.

The son’s mother has been criticized for being a gold-digger, but in addition to her specific memories of her relationship with Taylor, which in the past would probably not be enough to prove the case, she may have science on her side. If the DNA test proves paternity, then the son is likely entitled to his share of his father’s estate. He is no longer a bastard, or illegitimate; he is the much improved 21st century version, the non-marital child. While I don’t care much for wholesale revisions of language done in the name of political correctness, this change corrects an historical injustice done to children whose only sin was being born to the wrong people at the wrong time. It will be interesting to see how the rest of the case plays out.

Reminder: Check your credit report

Here is an easy new year's resolution to keep:  check your credit report to help keep your credit in good repair.  Like checking your car's oil or tire pressure, or the batteries in your home smoke alarms, or your heart rate and blood pressure, there are some simple life hacks that you should do to be pro-active in life rather than letting it rise up and bite you when you don't expect it.  Checking your credit reports is easy, and free, and if you play your cards right, you can do this three times a year and be better off for it. 

What is a credit report?  It is a record, compiled through both publicly available records and voluntary reporting by lenders and credit card companies of how you are handling your credit card and loan payments.  Why is that important?  It provides a history of your credit use to enable other lenders to decide whether they are going to give you a new car loan, a new credit card, a new home improvement or mortgage loan.  If you show a history of late payments, they are going to be less interested in loaning money to you.  And with reason.  When you have bad credit history, you are likely a bad credit risk.  You would not continue to lend money to a friend or family member who you know is slow to pay you back, who always has to be reminded of it, who always has an excuse for late payments.  The community of lenders feel the same way.  When they are evaluating your loan application, they look at your credit history as part of the process. 

There are three companies that monitor your credit:  Transunion, Experian and Equifax.  You can find them at the following websites:

• Experian:  https://www.experian.com/
• Equifax:  https://www.equifax.com/personal/
• Transunion:  https://www.transunion.com/

Each of them is required by federal law to give you one free credit report a year.  Rather than get them all at once, I spread them out so that every four months I get a new one.  I have the reminder on my calendar, and I follow through.  It takes all of 5-10 minutes.  The credit reports list personal information - your past residences, your past places of employment, your social security number; and all of the open credit accounts you may have, and past histories for each.  It shows each late payment - a good reminder of the importance of paying on time - and your current and average balances.  It is also a reminder of accounts that you may have that you thought you closed.  I am currently dealing with a client who thought a joint account with her ex-husband was closed, and is finding out the hard way that it was not - and that she may still be obligated for debts he ran up on it.  

How do they compare you to others in their data base?  There is a whole scoring system that they use to rank us according to our creditworthiness.  There is no one standardized system, but rather each credit company uses its own system - though they all look the same to those of us on the outside of the scoring system.  The most widely known score is called the FICO score - because it was developed by the Fair Isaac Corporation.  You don't necessarily need to know what goes into the score, but you want to know what your score is, and if you are interested in obtaining a loan at some point in the future, then you might want to understand where you rank, and take steps to improve on it when you can. 

Credit scores are typically not given out for free - you must pay a small fee to obtain it.  But I have noticed that several credit card companies are now offering it for free, and my Quicken program is doing that for me as well.  So be on the lookout for something that you can get for free rather than paying for it.  And then educate yourself on what you need to do to be proactive about protecting and improving on it. 

So which credit company should you start with?  Normally it does not matter, but in 2017, Equifax experienced a "Cybersecurity Incident".  Hackers got into their data base and stole personal information on up to 170 million of us.  As a result, if your personal information was potentially in the data that was stolen, then they are offering free services that they would usually charge for:  identity theft protection and credit file monitoring.  

So I recommend starting 2018 by going to their site - address given above - and doing the search to see if you were potentially victimized, and if so, then sign up for their free services.  And then get your credit report and begin to become familiar with what it says about you.  All three companies maintain a site, https://www.annualcreditreport.com/index.action, that you can use to launch into any one of your reports.  They will offer to do them all at once - don't do it - spread it out!

If you have late payments, they can stay on your report for up to 7 years.  One late payment on occasion does not disqualify you from ever receiving credit in the future.  They are looking for patterns here - and so if they see your late payments perhaps occurred in the past, when you first opened your account and did not realize the importance of paying on time, they will take that into consideration.  And checking your reports allows you to correct any errors that may have been made in reporting on your payments.  

There are sites online that give hints on what else you can do.  Here are several of those hints:

1.  Dispute the late payment if it is inaccurate.  If you can prove that you were not late, or give some other excuse - an automatic payment gone awry, a situation where they credited it to the wrong account - then your creditor should be willing to remove it.  

2. You can request a "Goodwill Adjustment" from the creditor to remove late payments - if they see that perhaps the late payments were out of character, or you can tell them a sad tale about your hospitalization, or give them some other good reason to do so.   

2. Offer your creditor to sign up for automatic payments, which they love, in return for removing late payments from your credit history.  

You would never know any of this unless you checked your credit report on a regular basis.  So this year, 2018, put 3 reminders on your calendar, for January 1, May 1, and September 1, to check your credit report.  Keep a written record of which one you checked each time, and then spend a little time looking it over to understand what they have on you - and correct anything that is wrong.  This year I had them remove an address for me that they had in Richmond, a lovely city but one that I have never lived in.  If it appears on the report, and an identity thief has items delivered to a Richmond address, the theft may go undetected for a while.  By being proactive, I guard against this as best I can.  I also had them delete an alternative social security number that they listed for me - again - not sure why it was there but after submitting the correction, the risk has been lowered.  (And for those of you who don't want to give them your social security number, be assured - they already have it.  So better to make sure that they have the correct one, and no others.  Particularly if your name is John Smith or Mary Jones.  You want to stand out from the crowd rather than be mixed up with it.)

If you truly want a happy new year, then be proactive about it.  Do the simple things that we all should regularly do in this complicated world we live in.  Check your credit report!

Gift Tax - the annual exclusion and lifetime exemption

A client - a married couple - wants to help their daughter and her husband to buy a house. They can give a gift this year of $56,000 without tax consequences - if they write four checks. If they write one check, there could be gift tax consequences. Why? 

Under Federal tax law, each person is allowed to give away up to $14,000 per year to as many people as they want – the “annual gift tax exclusion”. This can be done without tax consequences or tax returns. 

Actually, each person is allowed to give more than that – in fact over your lifetime you are allowed to give away over $5.49 million without tax consequences. But when you are doing so, you have to keep a running tally with the IRS – by filing a gift tax return each year showing that you gave more than the annual exclusion amounts that year. At your death, your estate is entitled to the first $5.49 million – free of federal tax. You only pay the federal estate tax on the excess. (Ignoring state death taxes for another day.) 

But that lifetime exemption amount of $5.49 million is reduced by reportable gifts made during your life. Whether you are giving it away now, or giving it away then, a running tally is kept, so that each person has the same $5.49 million exemption at death. 

But the $14,000 per year gifts are not reportable – and so they do not eat into your lifetime exclusion amount. That’s the beauty of those gifts – there are no tax consequences or reporting requirements.

So, to avoid having to file a return for the proposed gift to the children to help with their house, the father and the mother each give the daughter and the son in law a check for $14,000. Four checks, each for the annual exclusion amount. In doing so, they qualify for the annual exclusion on all 4 gifts, and they don’t have to file a gift tax return. And they don’t eat into their lifetime exemption amounts.

Could you do with one check what you do with four - and argue with the IRS about whether in fact it is essentially the same transaction and result? If you like to argue with the IRS, and want to pay an attorney to do so, then you can choose the convenience of one check and then pay a lot of money to battle on principle. I think writing 4 checks is the easier option.

W-2? 1099? And now, introducing the 1095-C!

Every year in late winter and early spring, you receive formal looking statements from various sources that are either paying money to you or receiving money from you in payment of certain types of expenses, such as mortgage interest and taxes.  Now with the next stage of the Obamacare regulations, if you are an employee you will be receiving a new IRS form - the 1095-C.  Everyone is required to obtain health insurance.  If you do not do so, you may have to pay a "individual shared responsibility payment", which is the bureaucratic doublespeak for a penalty. Here is the IRS Tax Tip that explains what this form does and what you need to do when you receive it:

Here’s What You Need to Do with Your Form 1095-C

This year, you may receive one or more forms that provide information about your 2015 health coverage.  These forms are 1095-A, 1095-B and 1095-C. This tip is part of a series that answers your questions about these forms.

Form 1095-C, Employer-Provided Health Insurance Offer and Coverage Insurance, provides you with information about the health coverage offered by your employer.  In some cases, it may also provide information about whether you enrolled in this coverage.

Here are the answers to questions you’re asking about Form 1095-C:

Will I get a Form 1095-C?

• You will receive a Form 1095-C – which is a new form this year – if you were a full time employee working for an applicable large employer last year. An applicable larger employer is generally an employer with 50 or more full-time employees, including full-time equivalent employees.
• Even if you were not a full time employee, you will receive form 1095-C if your employer offered self-insured coverage and you or a family member enrolled in that coverage.
• You might get more than one Form 1095-C if you worked for more than one applicable large employer last year.

How do I use the information on my Form 1095-C?

• This form provides you with information about the health coverage offered by your employer and, in some cases, about whether you enrolled in this coverage.
• If you enrolled in a health plan through the Marketplace, the information in Part II of Form 1095-C could help determine if you’re eligible for the premium tax credit. If you did not enroll in a health plan through the Marketplace, this information is not relevant to you.
• If there is information in Part III of Form 1095-C, review this information to determine if there are months when you or your family members did not have coverage. If there are months you did not have coverage, you should determine if you qualify for an exemption from the requirement to have coverage. If not, you must make an individual shared responsibility payment.
• You are not required to file a tax return solely because you received a Form 1095-C if you are otherwise not required to file a tax return.
• Do not attach Form 1095-C to your tax return - keep it with your tax records.

What if I don’t get my Form 1095-C?

• You might not receive a Form 1095-C by the time you are ready to file your 2015 tax return, and it is not necessary to wait for it to file.
• The information on these forms may assist in preparing a return.  However, you can prepare and file your return using other information about your health insurance.
• The IRS does not issue and cannot provide you with your Form 1095-C. For questions about your Form 1095-C, contact your employer. See line 10 of Form 1095-C for a contact number. 

Depending upon your circumstances, you might also receive Forms 1095-A and 1095-B. For information on these forms, see our Questions and Answers about Health Care Information Forms for Individuals.

Your Social Security Benefits May be Taxable

Passing along another Tax Tip from the IRS:

When are your Social Security Benefits taxable?

If you receive Social Security benefits, you may have to pay federal income tax on part of your benefits. These IRS tips will help you determine if you need to pay taxes on your benefits.

• Form SSA-1099.  If you received Social Security benefits in 2015, you should receive a Form SSA-1099, Social Security Benefit Statement, showing the amount of your benefits.
• Only Social Security.  If Social Security was your only income in 2015, your benefits may not be taxable. You also may not need to file a federal income tax return. If you get income from other sources you may have to pay taxes on some of your benefits.
• Free File.  Use IRS Free File to prepare and e-file your tax return for free. If you earned $62,000 or less, you can use brand-name software. The software does the math for you and helps avoid mistakes. If you earned more, you can use Free File Fillable Forms. This option uses electronic versions of IRS paper forms. It’s best for people who are used to doing their own taxes. Free File is available only by going to IRS.gov/freefile.
• Interactive Tax Assistant.  You can get answers to your tax questions with this helpful tool and see if any of your benefits are taxable.  Visit IRS.gov and use the Interactive Tax Assistant tool.
• Tax Formula.  Here’s a quick way to find out if you must pay taxes on your Social Security benefits: Add one-half of your Social Security to all your other income, including tax-exempt interest. Then compare the total to the base amount for your filing status. If your total is more than the base amount, some of your benefits may be taxable.
• Base Amounts.  The three base amounts are:
• $25,000 – if you are single, head of household, qualifying widow or widower with a dependent child or married filing separately and lived apart from your spouse for all of 2015
• $32,000 – if you are married filing jointly
• $0 – if you are married filing separately and lived with your spouse at any time during the year

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your TaxpayerBill of Rights. Explore your rights and our obligations to protect them on IRS.gov.
Additional IRS Resources:

• Social Security Income - Frequently Asked Questions
• Publication 915, Social Security and Equivalent Railroad Retirement Benefits

IRS YouTube Videos:

• Is Social Security Taxable? - English | Spanish | ASL