Category: Tax and Financial News

For many high-income earners and those approaching retirement, a Roth IRA conversion represents a strategic financial move that can significantly impact long-term wealth preservation. This approach allows you to restructure your retirement savings in a way that could potentially reduce your overall tax burden while creating more flexibility in your golden years.

Understanding Roth IRA Conversions

A Roth IRA conversion is when you transfer funds from traditional tax-deferred retirement accounts – such as a 401(k) or Traditional IRA – into a Roth IRA. While this transaction triggers an immediate tax obligation on the converted amount, it eliminates future taxation on both the principal and all investment growth, provided you follow IRS guidelines. The IRS website offers comprehensive information on the specifics of this process.

The primary advantage lies in strategic tax planning: paying taxes now at a potentially lower rate than you might face in the future.

Traditional vs. Roth: Understanding the Tax Timing Difference

When saving for retirement, the choice between traditional and Roth accounts fundamentally comes down to tax timing:

Traditional 401(k): Contributions reduce your current taxable income, increasing your take-home pay today. However, all withdrawals in retirement will be subject to ordinary income taxes, potentially at higher future rates.

Roth 401(k): Contributions are made with after-tax dollars, reducing your current take-home pay. The significant benefit comes later: tax-free withdrawals throughout retirement.

To illustrate, consider a $10,000 contribution while in the 24 percent federal tax bracket:

With a traditional 401(k), your take-home pay only decreases by $7,600 because you save $2,400 in immediate taxes.

With a Roth 401(k), your take-home pay decreases by the full $10,000 as you’re paying taxes upfront.

While traditional accounts offer immediate tax relief, Roth accounts provide tax-free income during retirement and important flexibility that extends beyond just avoiding income taxes.

The IRMAA Factor: A Hidden Retirement Expense

One often overlooked aspect of retirement planning is IRMAA – Income-Related Monthly Adjustment Amount. This Medicare surcharge applies to higher-income retirees, increasing their Medicare Part B and Part D premiums substantially.

For 2025, married couples filing jointly with income exceeding $206,000 could face premium increases of hundreds of dollars monthly. By strategically converting traditional retirement funds to Roth accounts before retirement, you can potentially keep your future taxable income below IRMAA thresholds, avoiding these additional healthcare costs entirely.

The Long-Term Impact: Required Minimum Distributions

Without implementing Roth conversions, retirement accounts can accumulate substantially larger taxable balances. By age 75, Required Minimum Distributions (RMDs) from traditional accounts can be three times higher than for those who gradually converted assets to Roth accounts.

These larger RMDs can create cascading financial challenges:

• Pushing income above Medicare IRMAA thresholds
• Significantly increasing Medicare premiums by thousands annually
• Creating higher tax burdens for surviving spouses who must file as single taxpayers

Early Roth conversions – performed strategically during years with stable tax rates – can dramatically reduce future taxable income while creating greater financial flexibility throughout retirement.

Legacy Planning Benefits

Roth IRAs offer substantial advantages for estate planning. The accounts pass tax-free to heirs (provided the five-year holding requirement is met). For surviving spouses, Roth IRAs provide financial security without RMD concerns. When both spouses have passed, beneficiaries inherit completely tax-free income.

Is a Roth Conversion Right for You?

While powerful, Roth conversions aren’t universally beneficial. Consider this strategy if:

• You anticipate higher tax rates in your future
• You have several years before RMDs begin (typically at age 73)
• You have sufficient savings to cover the conversion taxes without depleting the retirement accounts themselves.
• You want to minimize potential IRMAA surcharges or tax implications for a surviving spouse.

Conversions tend to be most advantageous when you can maintain a reasonable tax bracket (24 percent or lower) during the conversion process.

Conclusion

By approaching Roth conversions thoughtfully and as part of a comprehensive retirement strategy, you can potentially create more tax-efficient income streams, avoid Medicare premium surcharges, and leave a more valuable legacy for your loved ones.

The Basics of Tax Reporting in Legal Settlements

When you collect a settlement for a lawsuit, you’ll likely also receive a Form 1099 from the IRS. This form serves as a reminder to pay taxes on your settlement; copies are sent to both you and the IRS. These forms match reported income for income tax purposes, making them critical for accurate tax filing.

In lawsuit contexts, two common forms 1099 are issued:

• Form 1099-MISC: This version can include various types of settlement payments, often termed other income
• Form 1099-NEC: Used specifically for non-employee compensation

Understanding the Difference Between Forms

The distinction between these forms is significant. A Form 1099-NEC informs the IRS that taxes for self-employment should be collected in addition to income taxes. This form is appropriate if you were a non-employee contractor suing for unpaid compensation.

However, in cases like wrongful termination or emotional distress claims, you’ll want the non-wage portion reported on Form 1099-MISC instead of Form 1099-NEC to avoid unnecessary self-employment taxes. Pay close attention because filing an incorrect form can be difficult to correct later.

Double Reporting: When 100% Becomes 200%

A surprising aspect of legal settlement tax reporting is that defendants often issue forms 1099 totaling 200% of the actual settlement amount.

• The plaintiff receives a 1099 for 100% of the settlement
• The plaintiff’s attorney receives a 1099 for 100% of the settlement

This duplicate reporting occurs because the IRS requires defendants to report the full settlement amount to both parties when payments are made jointly or through the attorney’s trust account. This is done because the defendant may not be aware of how the money is ultimately divided between client and attorney.

Legal Fees and Tax Treatment

The U.S. Supreme Court decided in the case Commissioner v. Banks that gross income for a plaintiff typically includes the part of the settlement paid to their attorney as legal fees. This means you might be taxed on money you never actually received.

To address this issue, plaintiffs should understand when they can deduct legal fees:

• Plaintiffs in employment cases, civil rights cases, and most whistleblower cases qualify for deductions
• Legal fees must typically be paid in the same year as the settlement (as in contingent fee arrangements)
• Outside these case types, deducting legal fees becomes much more difficult
• Even in personal physical injury cases, complications arise if punitive damages or interest are awarded

Tax Planning Before Settlement

It’s best to deal with tax reporting before finalizing your settlement agreement. Consider these strategies:

1. Include specific provisions about which forms 1099 are to be issued
2. Specify the recipients, amounts, and even which boxes should be completed on the forms
3. For physical injury cases that should be tax-free, get written commitments about tax reporting
4. Consider separate checks to lawyer and client when appropriate (though this may not fully prevent attribution of legal fees to plaintiffs)

Without express provisions in your settlement agreement regarding tax forms, correcting any errors later becomes extremely difficult.

Tax-Free Settlements

Some settlements can be totally free of taxation, such as cases where compensation is granted as damages for physical injury. In typical injury cases like auto accidents, damages should be tax-free, but only if there are no punitive damages and no interest as part of the settlement.

Even when you believe your settlement qualifies as tax-free, securing written confirmation about tax reporting in your settlement agreement provides important protection.

Conclusion

Understanding the tax implications of your lawsuit settlement before signing an agreement can save significant headaches and potentially reduce your tax burden. Consulting with a tax professional who specializes in legal settlements is advisable for complex cases.

As tax filing season begins, scammers are ramping up efforts to steal taxpayers’ personal information through increasingly sophisticated schemes. Below, we discuss the latest scam, what to look out for in general, and what to do if you suspect something malicious.

New Scam of the Season

The U.S. Treasury Inspector General for Tax Administration (TIGTA) recently issued an alert about a prevalent scam involving Economic Impact Payments.

In this scheme, taxpayers receive texts claiming they’re eligible for a $1,400 Economic Impact Payment, requesting personal information and bank details for deposit. While the IRS is indeed processing some legitimate Recovery Rebate Credit payments from 2021 tax returns, they will never request personal information via text or social media. These legitimate payments will be automatically distributed by late January 2025, either through direct deposit or paper check, with official notification letters sent separately.

Detecting Scam in General

The cybersecurity firm Guardio reports a 77 percent increase in IRS-related spam messages, highlighting how scammers exploit taxpayers’ fears of making mistakes on their returns. Common manipulation tactics include urgent messages claiming:

• Tax return errors requiring immediate action to avoid penalties
• Unexpected tax refund eligibility requiring verification
• Account flags demanding immediate information verification to prevent legal action

These fraudulent messages typically contain malicious links designed to steal sensitive information like Social Security numbers, banking details, and payment credentials. They often masquerade as official IRS forms or legitimate tax advisory companies.

Key Warning Signs of Tax Scams:

• Requests for sensitive personal or financial information
• Links to suspicious websites (legitimate government sites end in .gov)
• Misspellings, grammatical errors, or inconsistent formatting
• Fuzzy or distorted official logos
• Initial contact via email, phone, text, or social media instead of postal mail

What to Do if You Receive a Suspicious Message

If you receive a suspicious message, don’t engage with it. Never click links or provide personal information to unknown sources. Report potential fraud by forwarding the message to phishing@irs.gov or filing a report with TIGTA. If you’re uncertain about correspondence claiming to be from the IRS, verify it by calling 800-829-1040 or visiting IRS.gov. Your online IRS account will display any official notices mailed to you.

If you’ve accidentally engaged with a scam:

1. Immediately close any suspicious website tabs
2. Change passwords for potentially compromised accounts
3. Contact your bank or credit card provider to monitor for fraudulent activity
4. Report the incident to the IRS and file an identity theft report with the Federal Trade Commission
5. Consider notifying local law enforcement

When searching for tax-related information online, only use official sources like IRS.gov or the official IRS app. Be wary of sponsored ads and search results that might lead to fraudulent websites. Consider bookmarking official sites for quick, secure access.

Conclusion

Remember, the IRS will never initiate contact through email, text, or social media. When in doubt, assume it’s a scam and verify through official channels. Keeping your personal information secure requires constant vigilance, especially during tax season when scammers are most active.

 

As 2025 unfolds, U.S. tax policy is poised for significant shifts, particularly with a new Republican administration under President Donald Trump. The year ahead will likely see a range of tax reforms, largely driven by the GOP’s objectives and campaign promises. In this article, we’ll explore the major tax policy trends, legislative developments, and administration changes that may shape U.S. tax law in 2025.

The Impact of Supreme Court Decisions

2024 also saw two major Supreme Court decisions with significant tax implications. In the Moore case, the Court ruled narrowly on the issue of wealth taxation, leaving open the possibility of revisiting the question in the future. While wealth tax proposals had gained some traction among Democrats, the Court’s decision, combined with the political climate, suggests that such proposals are unlikely to gain much momentum under the new administration.

The Loper Bright decision, which questioned the deference given to government regulations, could have far-reaching effects on tax policy. The ruling makes it more difficult for agencies like the IRS to issue regulations without clear legislative guidance, potentially leading to more legal challenges to IRS regulations and shifting the balance of power between lawmakers and regulatory agencies.

2025: A New Republican Agenda

With a Republican administration taking office in 2025, tax policy is expected to shift dramatically. President Trump, along with a Republican-controlled Senate and House, will likely push for several key changes to tax law.

One of the primary objectives will be to extend provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that are set to expire. This includes individual tax cuts, corporate rate reductions and changes to the state and local tax (SALT) deduction cap. The extension of other expiring provisions involving lifetime gift and estate tax exemptions, AMT, child tax credits, and the mortgage interest deduction may also be on the table. Additionally, the GOP is expected to explore new tax cuts, with some lawmakers proposing measures like eliminating taxes on tips, which was promoted during Trump’s election campaign.

On the corporate side, there may be discussions about lowering the effective tax rate through credits and incentives rather than direct reductions to the statutory corporate tax rate. There also could be movement on tax expensing for research and development, as well as other measures to incentivize business investment.

Potential Revenue-Raising Measures

Despite the tax cuts expected to dominate the agenda, there may be some revenue-raising measures included in the GOP’s tax proposals. The focus on reducing deficits could lead to efforts to cut some of the green credits in the Inflation Reduction Act, although these cuts are unlikely to raise significant revenue. There also may be attempts to tighten international tax rules from the TCJA to generate more revenue.

President Trump has also proposed replacing individual income taxes with increases in tariffs, implementing a universal 20 percent tariff across the board, and implementing an additional 50 percent tariff on imports from China.

IRS Funding and Administration Changes

Under the new administration, the IRS is expected to face significant cuts, particularly in its enforcement budget. The $80 billion allocated to the agency in recent years, which was intended to improve taxpayer services and combat tax evasion, is likely to be rolled back. Republicans have expressed strong opposition to the IRS’ expanded powers and are expected to push for a reallocation of those funds toward customer service rather than enforcement.

Additionally, the new administration may replace current IRS Commissioner Daniel Werfel, who was appointed during the Biden administration. Trump could nominate a new commissioner, and if this happens, it could spark further debates over the direction of the IRS in the coming years.

Conclusion

2025 promises to be a dynamic year for U.S. tax policy, with significant changes expected under the new Republican administration. Key issues to watch include the fate of the TCJA’s expiring provisions, potential new tax cuts, and ongoing debates over IRS funding and regulations. As the administration works to implement its agenda, there will likely be contentious discussions and compromises on Capitol Hill, setting the stage for a new era of tax policy in the United States.

The word “innocent” in innocent spouse relief can be misleading. It doesn’t imply you’re perfect or blameless – it’s more about whether you knew or should have known about the tax issue. The IRS defines “innocence” in a specific way, and it hinges on the concept of reasonable ignorance. In short, the issue isn’t one of morality; it’s about whether you could have reasonably been unaware of a tax problem.

Innocent spouse relief allows you to avoid being held responsible for tax debts, penalties, and interest stemming from a joint tax filing. In the case that a spouse (or ex-spouse) made an error that led to a tax issue, regardless of intention, you may not have to shoulder the burden. Say your income wasn’t reported, excessive deductions were claimed, or tax fraud was committed. If you meet the IRS criteria, you can request relief by submitting Form 8857.

Qualifications for Innocent Spouse Relief

To qualify, you must meet several conditions.

• Joint Tax Return: The tax liability must arise from a joint return. When you file together, both spouses are equally responsible for any tax issues that arise.
• Tax Underreporting: The tax issue must stem from underreported income or an incorrect claim for deductions or credits. This could involve unreported income (like from offshore accounts) or fraudulent deductions made by your spouse.
• Lack of Knowledge: You must show that, at the time of filing, you were unaware of the problem and had no reason to suspect it.
• Unfair Responsibility: Lastly, it must be deemed unjust to hold you liable. The IRS looks at factors such as whether you benefited from the underreported taxes (e.g., through extravagant spending) or if you’ve divorced.

What Doesn’t Qualify for Innocent Spouse Relief?

Not all cases involving a spouse’s financial mismanagement qualify for relief. The IRS may reject your claim in the following situations:

• Awareness of the Mistake: If you knew about the issue or should have known, you won’t be eligible for relief. Simply stating that you didn’t read the return won’t suffice. The IRS expects you to recognize obvious errors if you had access to the relevant information.
• Divorce Doesn’t Automatically Provide Relief: Divorce alone doesn’t eliminate your liability for tax debt. Joint returns create shared responsibility, and being separated or divorced doesn’t mean the IRS will automatically release you from this obligation. You must prove your innocence through the relief process.
• Disagreements Over Personal Spending: If your spouse’s spending decisions are something you disagree with, the IRS will not consider it a tax issue unless it involves unreported income or fraudulent deductions. The IRS focuses on tax matters, not marital conflicts over financial choices.

Pros and Cons of Filing

Advantages include:

• Avoid Financial Hardship: Tax liabilities, along with interest and penalties, can be overwhelming. Innocent spouse relief can protect you from these financial burdens.
• Clear Your Name: If you’ve been unfairly tied to a tax issue you didn’t cause, the relief process can help remove you from the responsibility.
• Peace of Mind: Successfully claiming relief can bring emotional relief, especially if you’ve gone through a challenging marriage.

Potential drawbacks are:

• No Guarantee of Approval: The IRS does not grant relief easily. You’ll need to provide strong evidence, and the process can be lengthy and difficult.
• Time Limitations: You generally must apply for relief within two years of the IRS starting collection efforts. Missing this deadline could result in losing the opportunity for relief.
• Invasive Process: The IRS will closely examine your financial and personal life, including details about your marriage and finances, which could feel intrusive if you value your privacy.
• Possible Strain on Relationships: If you’re still married, filing for relief could cause tension, as it might be seen as blaming your spouse for the tax issue.

Conclusion

To request innocent spouse relief, you’ll need to file Form 8857. Be prepared to provide details about the tax years involved, an explanation of why you didn’t know about the issue, and any supporting documents (like bank statements, emails, or divorce decrees). After submitting the form, the IRS will notify your spouse or ex-spouse, who will have a chance to respond.