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February 27, 2025

Trump's DOL Pick

President Trump has announced his new choice to lead the Department of Labor (DOL) as Lori Chavez-DeRemer, a congresswoman from Oregon. The DOL pick has important implications for both the standards governing independent contractor status and investment advice fiduciary status. Both sets of rules have been revamped under the Biden administration's DOL, yet are facing significant legal challenges in federal court. We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about Trump's pick to head the DOL. Below is a summary of the debate that ensued between the two professors. Their Votes<img class="alignnone size-medium wp-image-62920" src="https://cms-taxfacts.thinkadvisor.com/wp-content/uploads/2024/07/ByrnesThumbsUp-300x105.png" alt="" width="300" height="105"><img class="alignnone size-medium wp-image-62922" src="https://cms-taxfacts.thinkadvisor.com/wp-content/uploads/2024/07/BloinkThumbsDown-300x105.png" alt="" width="300" height="105">Their Reasons:Byrnes: Lori Chavez-DeRemer is a strong pick to lead the DOL. She has stated priorities that would significantly improve life for independent contractors and more fully reflect the reality of today's workforce—a key component of the DOL's role in the federal government. Gig and freelance positions are becoming more and more mainstream. This new DOL will have priorities that reflect that reality. Bloink: We all know that Trump's pick to head the DOL is likely going to strip away the significant protections offered by the robust fiduciary standard developed under the Obama and Biden administrations. How does that offer progress for anyone? We're currently relying on a standard for fiduciary status that was developed in 1975 and completely ignores the realities of the modern retirement investment arena. ___________________________________________ Byrnes: Trump's DOL has committed to focusing on improving access to retirement savings options and health benefits for independent contractors--and making those benefits much more affordable for ordinary Americans. A lack of meaningful retirement and health benefits is one reason many would-be independent contractors shy away from going off on their own and succeeding--and instead decide to rely on an employer's antiquated system. That lack of progress is downright wasteful and ends up costing everyone more in the long run. Bloink: The retirement investment market has changed in significant ways since the 1975 standard was developed, and the DOL should not be run by someone who is willing to ignore that fact. Stripping retirement investors of valuable fiduciary protections may accomplish Trump's goals of minimizing regulation, but it does absolutely nothing for the ordinary investor who deserves to rely on the strong protections offered under the Biden and Obama-era rules. ___________________________________________ Byrnes: This labor pick is committed to ensuring that independent contractors are able to keep the flexibility they need to contribute to the economy in meaningful ways. Biden-era tests for determining independent contractor status were much too rigid, attempting to impose a one-size-fits all standard that did nothing to help American workers. This new DOL is committed to offering the flexibility that Americans need and, in fact, have come to expect in the modern workforce. Bloink: Sure, the Trump pick may do much to support gig workers in important ways, but at what cost? It's also highly likely that we'll return to the Trump-era standard for determining independent contractor status under his new DOL pick. That means it will become significantly easier for businesses to misclassify employees as independent contractors and strip them of important benefits and legal protections afforded to common law employees.

February 13, 2025

Trump 10-for-1 Deregulation

President Trump, on January 31, 2025, signed an executive order that requires federal agencies to identify at least 10 rules, regulations or pieces of guidance to repeal anytime they issue a new rule or regulation. The order also directs the director of OMB to measure and estimate regulatory costs. For 2025, the cost of new regulations must be less than zero (and account for decreased costs associated with eliminating existing regulations). This new deregulation order is similar to the executive order that President Trump signed during his first term in office, which only required that two sets of rules or regulations be eliminated for each newly proposed rule or regulation (Biden rescinded this policy on his first day in office). We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about Trumps 10-for-1 deregulation executive order. Below is a summary of the debate that ensued between the two professors. Their Votes:<img class="alignnone size-medium wp-image-62920" src="https://cms-taxfacts.thinkadvisor.com/wp-content/uploads/2024/07/ByrnesThumbsUp-300x105.png" alt="" width="300" height="105"><img class="alignnone size-medium wp-image-62922" src="https://cms-taxfacts.thinkadvisor.com/wp-content/uploads/2024/07/BloinkThumbsDown-300x105.png" alt="" width="300" height="105">Their Reasons:Byrnes: We're living in a time where we have tens of thousands of pages of regulations on the books. It's nearly impossible to navigate the maze of regulations interpreting the legitimate laws passed by Congress and the President. These regulations are creating an extreme amount of government waste and have passed on an estimated $1.7 trillion in wasteful expenses to hard working Americans. Trump's deregulation order will go a long way toward eliminating the waste. Bloink: This order is wholly unreasonable. By some accounts, the DOL alone released three sets of regulations in 2024. Assuming roughly the same number of regulations for 2025, the executive order means the DOL would then have to eliminate 30 existing regulations or proposed regulations in order to provide much-needed guidance to businesses, advisors and others who are actually putting the laws into practice. This is entirely unworkable given the importance of agency regulations. ________________________________ Byrnes: These regulations place an incredible burden on American businesses. The aim of this deregulation order is to ease that burden so that even the smallest businesses can thrive and grow unhindered. The order makes exceptions for regulations and rules that impose minimal burdens on the private sector. The point isn't to eliminate needed guidance, but to weed out rules and regulations that are not essential and yet create difficult burdens for the American people. Bloink: While the Trump administration slams government agencies for their ineffectiveness, they fail to recognize the critical role that agencies like the IRS and DOL play. When we read a piece of legislation like the SECURE Act or even the TCJA, we may be looking at hundreds (or even thousands) of pages of legislative text. It's impossible to provide all needed guidance within the text of the legislation itself—and we have to remember that federal agencies aren't creating these rules and regulations for no reason. ________________________________ Byrnes: Overregulation at the agency level makes it nearly impossible for small businesses to get started, operate and succeed. Eliminating these levels of government inefficiency is critical to protecting the American people from this type of unnecessary waste and bureaucracy. We elected President Trump to weed out the waste and that's exactly what we're getting with this type of deregulation order. Bloink: Whenever a new law is passed, inevitably, real-world practitioners require clarifications that cannot all be addressed within the text of a law itself. Agency regulation is essential so that businesses and owners have the clarity they need to put the laws to work without running afoul of them. Without these critical regulations, taxpayers do not have the information they need to effectively follow and make use of the law. Trump's extreme deregulation order is going to be highly detrimental when it comes to getting the guidance we deserve.

February 06, 2025

Trump Tariffs

President Trump has doubled down on one of his key campaign promises to impose tariffs on Canada, Mexico and China. If the tariffs on Canada and Mexico become effective, a 25% tariff will be imposed on virtually any type of product that is imported from these countries. A 10% tariff will now be imposed upon Chinese imports. Canada is the largest export market for products coming from many U.S. states and Mexico is often cited as the U.S.' largest trading partner. Currently, the 25% tariff on Canadian and Mexican imports has been delayed for one month based on Mexico's willingness to send 10,000 troops to the U.S.-Mexico border and Canada's agreement to take additional steps to secure the northern border (including appointment of a new Canadian fentanyl tsar). We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about President Trump's decision to impose tariffs on Canada, Mexico and China. Below is a summary of the debate that ensued between the two professors. Their Votes:<img class="alignnone size-medium wp-image-62920" src="https://cms-taxfacts.thinkadvisor.com/wp-content/uploads/2024/07/ByrnesThumbsUp-300x105.png" alt="" width="300" height="105"><img class="alignnone size-medium wp-image-62922" src="https://cms-taxfacts.thinkadvisor.com/wp-content/uploads/2024/07/BloinkThumbsDown-300x105.png" alt="" width="300" height="105">Their Reasons:Byrnes: In the long run, tariffs are going to pay off both for the American economy and the safety of Americans as a whole. Even the mere threat of tariffs has already resulted in significant steps from Mexico and Canada. Yes, there may be some short-term fallout in terms of increased prices and even retaliatory tariffs. However, note that Trump limited the tariff on Canadian energy products--meaning that the price of oil won't be so painful for Americans at the gas pumps. These tariffs are a reasonable way to motivate our neighboring countries to help stop the flow of illegal immigrants and drugs into this country. Bloink: We all know what tariffs accomplish. Dozens of experts have told us that these tariffs are going to make necessary purchases much more expensive for hardworking Americans. We're already struggling under the weight of inflation. Taking steps that will undoubtedly increase the cost of goods for Americans is completely counterproductive. Make no mistake, ordinary Americans will take the hit when it comes to these tariffs, and that hit will be even stronger if the tariffs on Canada and Mexico do ultimately become effective. ________________________________________________________ Byrnes: We must take dramatic steps to show the world that we're serious about stopping illegal immigration and the flow of deadly drugs into this country. American cannot resolve these problems without strong partnerships with our neighboring countries. This type of economic strike shows the world that we are serious about keeping Americans safe. Bloink: Some studies show that the average household could pay more than $800 a year in extra costs tied to these tariffs. That amounts to a substantial tax hike for lower-income Americans who need help the most. These tariffs will mean that American households will have less money to spend on less necessary consumer products due to the increased prices on things like groceries, gas, vehicles and vehicle components. ________________________________________________________ Byrnes: The tariffs are by no means permanent. If Canada and Mexico continue to show that they're willing to develop meaningful partnerships with the United States in order to accomplish key safety goals, there's every likelihood that even the threat of these tariffs eliminated entirely (note that the tariff on Mexican and Canadian imports have already been put on hold based on our neighbors' good faith efforts to partner with the U.S.). The tariffs also serve to encourage increased production of goods here in the U.S.--meaning they'll result in more jobs and a stronger economy in the long run—and we have to be paying attention to the big picture and our nation's long-term goals. Bloink: In the long run, when we're looking at the big picture, these tariffs will be counterproductive and harm the economy as a whole. When Americans experience reduced purchasing power, that essentially reduces the incentive to work. Tariffs create a protected domestic economy and reduce competitive pressures that otherwise serve to keep prices lower for Americans. That results in higher prices across the board for all Americans. These tariffs simply do not make sense if we're concerned about the financial stability of the American people.

January 30, 2025

Trump Funding Freeze

The Trump administration last week ordered federal agencies to stop disbursing funds under the Biden-era Inflation Reduction Act and Infrastructure laws. The order requires agencies to halt distributions so that the Trump administration can "review their processes, policies, and programs for issuing grants, loans, contracts, or any other financial disbursements of such appropriated funds for consistency with the law." Federal agencies have 90 days to report to the Office of Management and Budget and the National Economic Council and provide information on how the spending freeze comports with the new administration's energy policies. We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about Trump's decision to halt Inflation Reduction Act and Infrastructure Act funding. Below is a summary of the debate that ensued between the two professors. Their Votes:<img class="alignnone size-medium wp-image-62920" src="https://cms-taxfacts.thinkadvisor.com/wp-content/uploads/2024/07/ByrnesThumbsUp-300x105.png" alt="" width="300" height="105"><img class="alignnone size-medium wp-image-62922" src="https://cms-taxfacts.thinkadvisor.com/wp-content/uploads/2024/07/BloinkThumbsDown-300x105.png" alt="" width="300" height="105">Their Reasons:Byrnes: This pause is a legitimate way for the new administration to examine current funding and determine whether initiatives are in line with the new administration's priorities and policies. This type of spending freeze is not at all uncommon when we have a new administration take office. The freeze gives the administration time to assess and review to determine whether continued funding remains in line with the goals of the administration that the American people overwhelmingly voted into office. Bloink: Many of the green energy-related initiatives that were encouraged by the Biden-era law are now in full swing. Halting funding for these initiatives is extremely confusing to the companies that have been awarded contracts in these areas. While the funding freeze isn't permanent, it makes it incredibly difficult for companies and individuals to plan to maximize the value of these beneficial tax credits and incentives going forward under an act that was lawfully enacted by Congress. ________________________________ Byrnes: We knew to expect significant policy changes from this new administration that vastly disagrees with our previous administration. The Inflation Reduction Act includes hundreds of billions of dollars in tax credits and other incentives for green energy initiatives. This level of government spending on green energy initiatives cannot be a priority when ordinary Americans are struggling to pay for gas and groceries. Bloink: Trump's decision to freeze funding puts tens of billions of dollars' worth of funding into limbo—and remember that we're talking about lawfully allocated funds. Putting these types of climate-related initiatives on the back burner is incredibly irresponsible and ignores the needs of future generations. It also ignores the current realities and is an incredible setback with respect to this country's energy and climate policies. ________________________________ Byrnes: The new administration's priority must be focusing on extending the 2017 tax cuts and creating initiatives that really help the American people today. The prior administration's actions did significant damage to this country's economy. We first have to fix the most pressing problems that ordinary Americans are struggling with today before we look toward funding Biden's green energy initiatives. That's what the American people voted for and that's what the Trump administration is working to deliver. Bloink: We can't pretend that this wide-reaching spending freeze is business as usual for a new administration. While an administration will often impose a spending freeze and review with respect to agency decisions ordered by a prior administration, this is a freeze on funding pursuant to a law enacted by Congress—not a unilateral order from the executive branch. We're talking about a wide-reaching freeze on disbursements that have already been approved. While many on Trump's team claim this freeze is going to allow the administration to reprioritize and ensure that their policies are reflected, in reality this spending freeze is going to have a chilling effect on the new and lucrative jobs created by these clean-energy laws—hurting hardworking Americans in the process.

January 24, 2025

Texas ESG Court Decision

In a recently released decision from the District Court for the Northern District of Texas, the judge decided that a retirement plan sponsored by American Airlines breached their fiduciary duty of loyalty by investing retirement plan dollars with investment managers and funds that pursued investments based on environmental, social and governance (ESG) factors. The court found that the plan allowed corporate interests and the interests of their investment managers to influence the plan's management. The court, however, found that these actions did not amount to a breach of the plan sponsor's duty of prudence/ We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about the Texas court's finding that a retirement plan's sponsors violated their duty of loyalty by allowing firms with ESG objectives to manage the plan's funds. Below is a summary of the debate that ensued between the two professors. Their Votes:<img class="alignnone size-medium wp-image-62920" src="https://cms-taxfacts.thinkadvisor.com/wp-content/uploads/2024/07/ByrnesThumbsUp-300x105.png" alt="" width="300" height="105"><img class="alignnone size-medium wp-image-62922" src="https://cms-taxfacts.thinkadvisor.com/wp-content/uploads/2024/07/BloinkThumbsDown-300x105.png" alt="" width="300" height="105">Their Reasons:Byrnes: Allowing retirement plan fiduciaries to focus on things like ESG investing with plan assets is a dangerous proposition--and one that I think will be more clearly prohibited under the Trump administration's DOL. Unfortunately, ESG investing often coerces retirement plan participants to support progressive ideas that they might not have any real desire to support. It makes complete sense that the courts should seek to limit that ability. Bloink: The court found that the plan in this case violated their duty of loyalty merely because Blackrock does consider ESG factors in making its investment decisions. I can't agree with that conclusion. ESG investing is socially responsible, of course, but that's not really what all the controversy is about. Investing in companies with strong environmental, social and governance positions is also often a smart move financially--especially when investing with an eye toward a changing future. ___________________________________________ Byrnes: Plan fiduciaries should be focused solely on maximizing the value of financial returns--it's their obligation to do everything they can to secure plan participants' retirement assets. Non-pecuniary factors should only be considered when choosing investment options in situations where all other financial factors are equal--and we need a system where investors are able to control the "causes" they support. Here, the sponsors put their own interests first and the court correctly recognized the impropriety of that fact. Bloink: Plan fiduciaries should be permitted to consider every investment option as a whole--limiting consideration of ESG factors makes very little sense given their importance over time. The court in this decision acknowledged that the defendants acted in accordance with prevailing industry standards, so could not be found to violate their duty of prudent investment management. The court acknowledged that the defendants acted with the required attention to evaluating, reviewing and monitoring the plan's investment. There is no reason to believe that ESG factors should not be considered in maximizing the plan's financial returns. ___________________________________________ Byrnes: The problem is that the sole focus should be on maximizing the plan's financial returns. The leftist political agenda should play absolutely no role in the investment management of individual retirement funds. In this case, the plan sponsors let their own political agendas impact their financial decisions—something that is always going to violate the plan sponsor's critical duty to act in the sole financial interests of plan participants. Bloink: ESG factors can actually increase the odds that an investment will perform well over time--especially in this changing world. We can't ignore that fact, which has been confirmed time and again with the passage of time. The government and courts should seek to encourage this type of responsible investing. Court decisions like this Texas court's merely serve to scare fiduciaries into avoiding potentially successful ESG investments altogether for fear of this type of blanket fiduciary liability.

January 16, 2025

Reducing Pre-Tax Contribution Limit

President-elect Trump has proposed many ambitious plans to reduce taxes and extend the TCJA's 2017 tax reforms. With only a small majority in Congress, most expect that the GOP will attempt to push their agenda through using the reconciliation process, which would not require Democrats to vote in favor of the legislation. That process has strict revenue constraints, which has led to various ideas on how to offset the cost of extending the 2017 tax cuts. One of those proposals would reduce the amount that an individual can contribute to a retirement plan on a pre-tax basis. We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about proposals to reduce the pre-tax retirement contribution limits to increase revenue. Below is a summary of the debate that ensued between the two professors. Their Votes:<img class="alignnone size-medium wp-image-62920" src="https://cms-taxfacts.thinkadvisor.com/wp-content/uploads/2024/07/ByrnesThumbsUp-300x105.png" alt="" width="300" height="105"><img class="alignnone size-medium wp-image-62922" src="https://cms-taxfacts.thinkadvisor.com/wp-content/uploads/2024/07/BloinkThumbsDown-300x105.png" alt="" width="300" height="105">Their Reasons:Byrnes: In this current economic environment, it's much more important to prioritize extending the 2017 tax cuts. Most American families are still struggling under the weight of high prices and the impact of inflation. By reducing the pre-tax retirement contribution limits even slightly, Congress can generate the revenue necessary to get the Trump administration's tax package signed into law via the reconciliation process without significantly increasing the national debt. Bloink: We should continue to do everything possible to encourage taxpayers to save the most amount possible for their retirements—this proposal would steer ordinary Americans in the exact opposite direction. Suggesting that the pre-tax retirement contribution limits could be reduced without consequences for the retirement income security of millions of American retirement investors is absurd. The immediate tax benefit is a key factor in ordinary Americans' decision to fund private retirement plans. Eliminating that incentive could mean we see millions of Americans relying much more heavily on Social Security for retirement income. ________________________________________________ Byrnes: Americans will continue to have robust savings options even if the pre-tax retirement contribution limits are reduced. In fact, they may even have a stronger incentive to diversify their portfolios and explore additional valuable options when it comes to retirement savings. Roth accounts are incredibly valuable, and a reduction in pre-tax limits could spur a renewed focus on the value of Roth accounts. Bloink: The pre-tax appeal of a current tax reduction is perhaps the strongest motivation to fund a private retirement account. Reducing that benefit to pay for yet another tax break for the wealthiest Americans is only going to serve to exacerbate the impending retirement savings crisis in this country. Social Security is already under extreme stress—and we've yet to take steps to fix that looming problem. This proposal would only add fuel to the fire and take this country in the wrong direction. ________________________________________________ Byrnes: American taxpayers are not going to forego retirement savings simply because the pre-tax contribution limits are reduced. There are too many strong motivations to save—receiving employer matching contributions, for one. We have to weigh the possible costs against the strong benefit of extending the 2017 tax cuts so that ordinary Americans aren't faced with hugely increased tax bills when 2026 rolls around. Bloink: The government's focus should be on increasing the current value of a retirement savings contribution—and thus giving taxpayers stronger motivation to responsibly save to ensure a comfortable future. Americans are naturally going to be more inclined to save if there is an immediate benefit, and while Roth accounts do provide a valuable future tax savings, the promise of a tax break decades down the road is rarely sufficient.

January 09, 2025

Proposal to Repeal Tax on Social Security Benefits

President-elect Trump has repeatedly promised to repeal the tax on Social Security benefits. Under current law, depending on a taxpayer's income, up to 85% of Social Security benefit can be subject to federal income taxes. Taxpayers with less than $32,000 (joint returns) or $24,000 (single filers) in annual income are not taxed on Social Security benefits. When a taxpayer's whose modified adjusted gross income plus one-half of their Social Security benefits exceeds these base amounts, they're required to include in gross income the lesser of (a) 50% of the excess of such combined income over the base amount, or (b) 50% of the Social Security benefits received during the taxable year. The percentage is increased to 85% for taxpayers whose income exceeds the "adjusted base amount" of $44,000 (joint returns) or $34,000 (single filers). We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about Trump's renewed calls to eliminate federal income taxes on Social Security benefits. Below is a summary of the debate that ensued between the two professors. Their Votes:<img class="alignnone size-medium wp-image-62920" src="https://cms-taxfacts.thinkadvisor.com/wp-content/uploads/2024/07/ByrnesThumbsUp-300x105.png" alt="" width="300" height="105"><img class="alignnone size-medium wp-image-62922" src="https://cms-taxfacts.thinkadvisor.com/wp-content/uploads/2024/07/BloinkThumbsDown-300x105.png" alt="" width="300" height="105">Their Reasons:Byrnes: The tax on Social Security tax is essentially a form of double taxation. Social Security benefits are earned--they're based on the amount of Social Security taxes that the beneficiary actually paid into the system. Taxing those amounts once again when the beneficiary reaches full retirement age is patently unfair. Bloink: This proposal is never going to become law. Sure, we all know that something is going to have to change to keep the Social Security system solvent--and no one wants to cut benefits being received by current Social Security beneficiaries. However, repealing the tax on Social Security benefits that are being paid out is not going to do anything to help the system and it's certainly not going to provide a tax cut for lower-income beneficiaries. Some studies show that Trump's proposal would actually speed up the Social Security fund's insolvency by one year—giving Congress even less time to take action and shore up the system. ________________________________ Byrnes: The taxes imposed on Social Security benefits are in no way earmarked toward bolstering the system's solvency, so repealing that tax will not further jeopardize the system itself. Americans on fixed incomes are struggling under the weight of inflation and deserve this tax cut to help them get back on their feet. Bloink: Eliminating the tax on Social Security benefits would cost about $1.6 trillion over a ten-year period. Where is that extra revenue going to come from? Some new proposals have indicated that tax preferences for private retirement contributions could be slashed in order to increase revenue. That reduces the private incentive to save for retirement at a time when we need to become more focused on finding ways to encourage taxpayers to save for their own retirements instead of relying on the Social Security system entirely. ________________________________ Byrnes: Eliminating the tax on Social Security benefits would put more money in Americans' pockets at a time when they sorely need the extra cash. Inflation has taken a massive toll on lower and middle Americans. Every little bit counts when retired Americans are struggling to pay for basic needs. Trump has also proposed imposing the Social Security tax on income above $250,000, which would create additional payroll tax revenue to offset the cost of eliminating the tax on Social Security benefits. Bloink: We have to remember that many taxpayers with low incomes are already not required to pay taxes on their Social Security benefits—since those taxes are based on a family's income levels. Who is this proposed repeal really going to benefit? It's going to benefit the highest-income Americans who pay the highest tax rates when it comes to their Social Security benefits. Those are the Americans who need the extra income the least—because they aren't so reliant on Social Security to replace income during retirement. This is yet another misleading ploy to benefit the super wealthy while Trump claims to cut taxes for low and middle-income Americans.

January 09, 2025

Early Retirement Withdrawals? Is it Worth it?

It's common for clients save for retirement throughout their entire working career. Individuals who are fortunate enough may spend decades contributing to their IRAs and 401(k)s. The need to access retirement savings for one reason or another is also extremely common even well before the client has reached retirement age. Life is unpredictable and expenses can pile up—especially in the wake of a busy holiday season. However, early access to retirement funds is limited and can also quickly become expensive. It's critical that clients who are considering tapping their retirement savings before reaching age 59 ½ understand the IRS rules on early withdrawals—and the significant penalties that can apply for both early IRA and 401(k) withdrawals. Early Withdrawal Penalties: Basic Rules Most clients know the basic rules governing retirement plan withdrawals. Taxpayers are entitled to contribute a limited amount of pre-tax dollars to their 401(k)s and IRAs each year, thereby reducing tax liability. To encourage those individuals to save the funds until retirement, a 10% early withdrawal penalty applies if the client starts withdrawing funds before reaching age 59 ½. IRA owners can take distributions from their IRAs at any point, and for any reason. However, if an exception doesn't apply and the taxpayer isn't 59 ½, the 10% early withdrawal penalty is tacked on to the ordinary income tax liability that any retirement withdrawal generates (of course, Roth accounts are subject to different rules). Clients can only take distributions from 401(k) accounts when certain events occur. For clients who have yet to reach age 59 ½, it's critical to determine whether an exception applies. Traditional exceptions to the early withdrawal penalty include (1) disability, (2) reaching age 59 ½, (3) to cover certain unreimbursed medical expenses, (4) separation from service after reaching age 55 (for employer-sponsored plans), (5) distributions that satisfy the "series of substantially equal periodic payments (SEPP)" rules or (6) death. Hardship distributions provide another way for 401(k) participants to access their retirement funds. The terms of the specific plan will govern the types of distributions that are permitted. In the most general terms, participants can take a hardship distribution to cover "an immediate and heavy financial need". The amount of the distribution can only cover the amount of the need. While the need can be created because of financial liabilities that were incurred voluntarily, consumer purchases generally don't quality. While hardship distribution may be permitted, they also may be subject to the 10% early withdrawal tax unless a specific exception applies. Note that hardship distributions cannot be repaid. Qualified plans can also permit a participant to take a non-taxable loan. If the participant repays the loan according to the terms of their agreement, the loan will not generate taxes and penalties. New and Less Common Exceptions to the Early Withdrawal Penalty For tax years beginning in 2024 or later, the SECURE Act 2.0 allows 401(k) and IRA participants to take emergency distributions from their retirement savings accounts without penalty. These emergency distributions are limited to $1,000 each year. Also, taxpayers who take emergency distributions can repay the distribution within a three-year period (otherwise, they will be prohibited from taking another $1,000 distribution during the following three-year period). The IRS also often allows repayable distributions for taxpayers who are dealing with the aftermath of federally declared national disasters. The SECURE Act 2.0 created new provisions to allow penalty-free distributions to cover up to $2,500 in long-term care insurance premiums this year. Taxpayers who are dealing with the cost of a qualified birth or adoption can also access up to $5,000 in penalty-free withdrawals (which can be repaid within a three-year period). Some exceptions only apply to IRAs. Taxpayers who have yet to reach age 59 ½ may be able to tap their IRA savings without penalty to cover the costs of higher education. This penalty-free withdrawal option is only available to IRA owners (not participants in company-sponsored plans, such as 401(k)s). Qualifying education expenses include things like tuition, fees, books, etc. IRA owners can make penalty-free withdrawals for purchasing a first home (this penalty exception is limited to IRA withdrawals of $10,000 or less). Conclusion Clients should be advised that even when an exception to the withdrawal penalty applies, the distribution will still constitute taxable income. The retirement plan will send the client a Form 1099-R upon distribution. Clients who are taking an early distribution should use Form 5329 to report the distribution and either report the amount of the 10% penalty or claim an exception. Your questions and comments are always welcome. Please post them at our blog, <a href="http://www.advisorfyi.com/">AdvisorFYI</a>, or call the <a href="http://www.advisorfx.com/panelofexperts.aspx">Panel of Experts</a>.

January 03, 2025

WEP-GPO Repeal

Social Security benefits are typically based on a taxpayer's earnings history. Exceptions exist for certain government workers who are covered by separately funded pension plans if their wages were exempt from Social Security withholding. For decades, the windfall elimination provision (WEP) and government pension offset (GPO) have reduced the Social Security benefits for some public sector workers. In recent weeks, Congress passed the Social Security Fairness Act to repeal the WEP and GPO entirely. The law will also provide retroactive Social Security benefits for public workers whose benefits were reduced during the 2024 tax year. We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about Congress' recent decision to repeal the WEP and GPO completely. Below is a summary of the debate that ensued between the two professors. Their Votes:<img class="alignnone size-medium wp-image-62919" src="https://cms-taxfacts.thinkadvisor.com/wp-content/uploads/2024/07/BloinkThumbsUp-300x105.png" alt="" width="300" height="105"><img class="alignnone size-medium wp-image-62921" src="https://cms-taxfacts.thinkadvisor.com/wp-content/uploads/2024/07/ByrnesThumbsDown-300x105.png" alt="" width="300" height="105">Their Reasons:Bloink: The WEP and GPO provisions have unfairly stripped many low income government and public workers of the benefits they deserve. We're talking about firefighters, police, teachers and others who have dedicated their careers to public service. By comparison to government benefits, Social Security provides relatively higher benefits to the lowest income Americans. It's fundamentally unfair that these public servants should see their benefits reduced simply because a portion of their careers were spent in public service jobs that offer pension benefits when they've earned their rightful Social Security benefits. Byrnes: The WEP and GPO are specifically designed to prevent certain government workers from receiving a greater level of government-provided benefits than they really deserve, including with respect to federal Social Security benefits. We need to be searching for ways to shore up the Social Security system as we ready ourselves for the new administration--not hand out additional benefits that would only serve to deplete the fund further. _____________________________ Bloink: The formulas used to figure benefits under the WEP and GPO systems are fundamentally flawed, and have led to many cases where workers are not receiving the full Social Security benefits they deserve simply because they worked in government positions at some point in their careers. Eliminating these provisions is the best way to keep the system fair for all Americans, regardless of income level. Byrnes: State and local government workers receive pensions in lieu of full federal Social Security benefits. These workers aren't unprotected. They may appear to have lower earnings--so have a relatively high replacement rate via Social Security during retirement. That's not fair when, in fact, these workers have a higher earnings history—meaning that Social Security should replace a lower percentage of their pre-retirement income. _____________________________ Bloink: WEP and GPO actually served to cut some public workers' Social Security benefits in half over the years. It's really quite simple. If the public worker was, at some point, also employed in a position where they paid Social Security taxes, they should receive the benefit that they earned. The WEP and GPO prevented this from happening. Implying that these workers received some type of windfall payment is entirely misleading—when they earned the benefits that they earned through private sector employment at some point in their careers. Byrnes: In reality, many public workers have worked in well-paid government jobs for much of their careers, yet have some lower wages in covered jobs where they paid into the Social Security system. WEP prevents them from collecting based on both situations. The solution is to fix the formula used to calculate reduced benefit rates, rather than eliminate the WEP and GPO entirely. That way, we'll avoid paying the windfall payments that the WEP and GPO have prevented for years.

January 03, 2025

Whipsaw BOI Rulings Leave Business Owners Dizzy: Injunction is Once Again Effective

<a href="http://www.advisorfyi.com/about/">by Prof. Robert Bloink and Prof. William H. Byrnes</a> Rulings on the new FinCEN beneficial ownership information (BOI) reporting requirements have been nothing short of dizzying in recent weeks. The whipsaw rulings have many small business owners scratching their heads and wondering what will come next. Under the Corporate Transparency Act (CTA), most American business owners were to become subject to a January 1, 2025 deadline for submitting their initial BOI reports. The picture has now become significantly more uncertain for reporting companies. The current status is that a Fifth Circuit merits panel has reversed a motions panel's order that would have reinstated the BOI reporting obligations—so the injunction remains in place. Reporting companies should pay close attention to the developing situation, which continues to evolve at a rapid pace as we enter the new year. The Fifth Circuit Back-and-Forth On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide injunction to prevent enforcement of the BOI reporting rules. The case was Texas Top Cop Shop, Inc., et al. v. Garland, et al. The court enjoined enforcement of the CTA entirely, stating that the CTA itself is likely unconstitutional, so should not be enforced pending a full review and decision on the merits. Shortly after, FinCEN announced that it would not issue penalties for failure to comply with the BOI reporting obligation but encouraged reporting companies to voluntarily submit their reports. On December 23, a Fifth Circuit Court of Appeals motions panel lifted the injunction to reinstate the BOI reporting obligations while the government's appeal was considered. In response, FinCEN announced that businesses that would otherwise be required to comply by January 1, 2025, would have until January 13, 2025, to file their reports. Just days later, on December 26, a merits panel of Fifth Circuit Court of Appeals nullified the earlier motions panel's ruling and reinstated the original injunction. The Fifth Circuit's action was designed to prevent business owners from becoming subject to reporting obligations viewed as burdensome until the court had fully considered the merits of the parties' arguments. While the order gave very little information, the Fifth Circuit's order did, however, state that the DOJ's appeal remains on an expedited track. Currently, it's unclear if (and when) the BOI reporting obligations would be reinstated. Oral arguments are now scheduled for March 25, 2025. BOI Reporting Requirements: Background If the injunction is eventually lifted, BOI reporting obligations would apply to nearly all domestic reporting companies. Reporting companies include corporations, LLCs (including single-member LLCs), limited partnerships and any other entity formed by filing a document with a Secretary of State in the United States. Reporting companies must identify and provide information about beneficial owners to FinCEN. "Beneficial owners" include natural people who either 1) exercise substantial control over the company or 2) own or control 25% or more of the ownership interests in the company (whether directly or indirectly). When making the determination of whether an individual owns or controls 25% of the business, the individual's options, convertible instruments and other similar equity rights are treated as though they have been exercised. For each beneficial owner, the company must provide (1) full legal name, (2) date of birth, (3) address, (4) identifying number from the individual's ID (driver's license or passport) and (5) a copy of the ID used. The reporting company itself must report the entity's (1) legal name, (2) any trade names or dba names, (3) principal place of business, (4) state of formation and (5) unique taxpayer ID number. Absent the stay, entities created before January 1, 2024, were required to file their BOI reports before January 1, 2025. Entities created after January 1, 2024, had only 90 days from the date their registration became effective to report the required information. Starting in 2025, new entities were to have only 30 days from the date of creation to complete the BOI reporting form. The 30-day clock would begin to run on the date the entity gains actual knowledge that its registration is effective, or the date when registration is published publicly. Conclusion The bottom line is that reporting companies should closely monitor the status of the case. While FinCEN did signal that it would extend applicable deadlines should the BOI reporting obligations be reinstated, it's unlikely that any extension would be significant given that the initial extension was only 13 days. Reporting companies should continue to prepare to report if conditions change. Your questions and comments are always welcome. Please post them at our blog, <a href="http://www.advisorfyi.com/">AdvisorFYI</a>, or call the <a href="http://www.advisorfx.com/panelofexperts.aspx">Panel of Experts</a>.