Tax News & Notes

Each year the IRS adjusts retirement plan contributions for inflation.  Here are the 2025 limits:

• IRA (Traditional or ROTH, but not both) - $7,000
• IRA catchup if over 50 by year-end - $1,000
• 401(k), 457(b) and 403(b) plans - $23,500
• 401(k), 457(b) and 403(b) plans catchup if 50 by year-end - $7,500 ($31,000 total)
• 401(k), 457(b) and 403(b) plans have a new "super" catchup if you are 60-63 at year-end - $3,750 (in addition to the $7,500 above for a total of $34,750)

For all of you concerned about Venmo, PayPal, StubHub, Ticketmaster and other third party collection services reporting sales of tickets to concerts and sporting events as well as other revenue (including potentially transfers to/from family and friends), the IRS has started the phase-in for 2024 transactions.  The IRS is now requiring 1099-Ks to be issued for the 2024 tax year if you receive over $5,000 in payments. 

In the last few years, I have received more and more questions on gifts, gift limits, and taxes on gifts, so it's time for a crash course. 

Fact #1 - Non-Charity gifts are NOT deductible to the donor.  You get no tax help from gifting money to your kids.  Charitable donations may help, but your kids aren't charity (despite the way it may seem sometimes).

Fact #2 - Gifts are tax-free to the recipient (regardless of the amount).  You can give your kids $1,000,000 and they DO NOT PAY TAX.  And you still don't get a deduction.

Myth #1 - Gifts are limited to $19,000 in 2025 - FALSE.  Gifts are NOT limited at all, but $19,000 is a key number (keep reading).

Myth #2 - Gifts must be to "related parties."  FALSE.  You can all give me any amount of money that you want and it's legal, tax free to me and not deductible to you.  

So what is taxable about gifts?  There are two parts to this question really:
   1.  When does tax get paid on a gift?
   2.  What and when do we have to report a gift to the IRS?

The taxability issue is a lifetime limit of $13,990,000 (in 2025 and goes up with inflation) per person under current law.  If you make cumulative gifts of this amount during your life , there is tax to be paid once you go over.  But it's NOT paid by the recipient, instead the tax is paid by the donor.  The tax rate is 40% on any excess gifts over this amount.  So with a limit this high, the vast majority of us will never pay tax on any gifts made to family and friends.

So what's all this about the gift "limit" being $19,000 per year?  That's the reporting issue when the need for paperwork is triggered.

This limit of $19,000 is per donor (giver) per donee (recipient and not necessarily a related party) per year is a paperwork filing threshold. If the cumulative gifts during the year (per recipient) exceed $19,000 (per year, not per gift) then there is a gift tax return Form 709 required.

For example, if Mommy and Daddy are quite well off and want to give some money to their three adult kids and avoid paperwork, here's what they can do.  Mommy gives $19,000 each to three kids totaling $57,000 and Daddy also give $19,000 x 3 kids for another $57,000.  And they have transferred $114,000 of wealth from Mommy and Daddy to the next generation tax free and paperwork free.  If there are grandkids, then they can keep on going and transfer even more.  

But if they go over the $19,000 limit to any one person, then you will start chipping away at your $13,990,000 and then track that for the rest of your life. 

So with gifts that you and I make during the year, there is likely not going to be any tax consequence, but there might be some paperwork. 

As the IRS has "modernized" its computer system (believe it or not they still use floppy disks for some data - for you younger people, you may need to Google "floppy disk"), there are now more records available online that you may find interesting or helpful.  

To get the most complete and current information you'll need to set up an ID.me account, which can be established at www.irs.gov - Sign in to your Account. This is easier to do from your cell phone rather than a computer.  (This same account can also be used to access Social Security and VA records.)

This will give you access to:

• Account Balances (for up to five years).
• Make a Payment.
• View Payments (including estimated taxes for the current year).
• Get Transcripts of returns, accounts, W2s and 1099s reported about you by third parties.
• Get Notifications of correspondence or changes to your account.

What you can do WITHOUT an online account:

• Make a Payment.
• Check on the status of a refund for up to three years.
• Check on the status of an amended tax return.

For detailed step-by-step instructions on how to set up your ID.me account click here Your IRS Account

There’s an awful lot of hype in the media about “settling your tax debt for pennies on the dollar.” And the key word is “hype.” In the good old days, there was a bit of Let’s Make a Deal mentality. "I’ll offer $5,000 on the $50,000 tax bill I owe and pay in 30 days, take it or leave it." And sometimes they’d take it, just to close the case file. But not anymore. Here’s how the Offer in Compromise system works today.

The IRS wants fairly thorough financial information about your income, assets, family size and location and apply it all to a formulated worksheet. Without going into gory detail, the result is a figure called RCP - Reasonable Collection Potential. Barring exceptional circumstances (disability, illness, loss of job), this is pretty much the bottom line the IRS will accept. 

The IRS has a pre-qualifier tool at https://irs.treasury.gov/oic_pre_qualifier/if you want to play around with it.

I have my own pre-qualifier that consists of just a few questions without even going into your earnings:

1. How much do you owe the IRS?
2. How much equity do you have in your home?
3. How much do you have in retirement accounts?
4. How much do you have in the bank?

If you have more equity, cash or retirement vesting than you owe, it’s not going to happen.   About 99% of my clients are disqualified based on these four questions.

Many of us have IRAs that we've inherited from relatives who have passed away.  These inherited IRAs have different rules than your own IRA.  And those rules changed dramatically for one inherited in 2020 or later.

Is there a penalty on an inherited IRA when withdrawn if I'm not 59 1/2 yet?  No.  Inherited IRAs may be withdrawn without the 10% early withdrawal penalty that a traditional IRA has.

Is there tax on an inherited IRA when withdrawn?  Yes.  Usually it will be fully taxable, but the decedent may have made non-deductible contributions during their life and so a portion may be tax-free.  The trick here is how to find out if they did.  Generally only their final tax return would give this information.

Can I just roll an inherited IRA into my own IRA?  Only if you're the spouse.  Non-spouses must keep this account separate.

Do I have to take distributions from the Inherited IRA if I don't need the money now?  That depends on variety of factors too detailed for this post.

Is there a maximum I can take from an Inherited IRA?  Nope.  You can clean it out at any time.  You will pay tax on it, but you can take it all.

How long can I keep it open?  That too depends on the age of the decedent and your relationship to the decedent.  For non-spouses, the time limit is generally 10 years to exhaust the account.  But some can stretch it out longer.  And spouses can stretch it over their lifetimes. 

Over the past several years, Congress and the IRS have several times changed the starting age for Required Minimum Distributions from IRAs, 401(k)s, 403(b)s, SEP-IRAs and SIMPLE-IRAs.  

There was another change very late in 2022. Each one has delayed the mandatory starting age. Here are the current starting ages based on the year the recipient was born: 

Born in 1950 or earlier - Your RMDs should have already begun.  If they haven't, contact the account holder and get them started (including catch-ups for the missed years) immediately.  There are hefty penalties for failure to take an RMD.

Born in 1951-1959 - Your RMDs must start at age 73.

Born in 1960 and later - Your RMDs must start at age 75.  (Check on this as we get closer to 2035 because there's a good chance it will be extended again by then.)

Your first year of RMDs can be taken as late as April 1 of the following year, but I don't recommend this since you will then have to take two in that year, the delayed first year and the normal second year.

RMDs are not required from a ROTH IRA.

RMD rules for inherited IRAs remain unchanged.

Q:  Is my Social Security Taxable after I reach a certain age?

A:  Maybe, usually, but not fully:  And age has nothing to do with it.
If your other (non-SS) income is very low, your SS is not likely taxable.
If your other income is above a certain threshold it starts to become taxable
But no more than 85% of your SS is taxable.  So at least 15% is tax-free - YIPPEEEE!.

Q.  What should I know if I take Social Security before my full retirement age (66-67 depending on your birth year)?
A:  There are two major issues of collecting SS early.
First, your benefit is reduced by as much as 30% for life.
Second, if you're still working for wages or self-employed, there's a limit on how much you can make.  If you make over this limit ( $23,400 in 2025), you have to pay back $1 for every $2 over the limit.  So if you're still planning to work, be aware of this figure (which changes each year with inflation).

Q:  How much can I make after full retirement age?
A:  As much as you want.  It'll be taxable but there's no obligation to pay any of it back.

Q:  If I continue to work after I start collecting will it impact my SS?
A:  It can.  Since you will still be paying into SS (even though you're also collecting it), it might increase future benefits.  Social Security only considers your "best" 35 years, so you may make enough to knock off a lower income year and it will increase the average income on which your benefit is based.

• Never use Bill Pay from your bank!! The bank doesn't provide the IRS enough information for the IRS to properly post this to your account.
• You can pay by mail with a check, but this is presenting a new problem.  The IRS destroys the check (so you CANNOT get a copy of the check, endorsement, or its posting).  Instead the IRS is assigning a tracking number (which shows up on the bank statement).  I've had multiple clients tell me the IRS took the money, assigned a tracking number, didn't give them credit, and claims they can't find that tracking number.  But If you do choose to pay by mail (as opposed to online), use a check since it is still easier to track than a money order.
• As a result of the check problem described above, it may be preferable to schedule a payment online directly using the IRS website.  Use ONLY the IRS website to initiate the payment from www.irs.gov/Payments. DO NOT use a third party site.
• If you are married, use the SSN of the first person to appear on the last tax return. If you make a payment using the spousal SSN, the IRS may NOT post it correctly and we'll have a nightmare fixing it later.
• AND NEVER USE BILL PAY FROM YOUR BANK!!