RTS #047 IRS Update and a Clarification

The IRS Is at it again, making changes to things they already changed. But more on that in a minute. First, a quick point of clarification because at RTS, we are committed to ending in the right place; we don’t claim perfection – at least not all the time 😉

In a recent weekly newsletter talking about SEP IRA contributions, I made the statement that all contributions, both for employees and for the owner, are free from self-employment tax (FICA tax), but an important clarification is that this is only true for S-corp owners. The owner’s SEP contribution is an adjustment to income on Schedule 1 of the 1040, which means that for sole proprietors and partnerships, taxable income is reduced but not self-employment income. For an S-corp owner, those contributions would be free from FICA taxes along with all the income of the company above the reasonable salary taken by the owner.

And now back to the IRS.

The IRS has once again punted the requirement to begin taking RMDs on inherited IRAs for 2024. I have seen some people celebrate this delay but I do not agree with that sentiment. You should be helping your clients to be proactive regardless of the IRS’s inability to administratively start enforcing new tax laws. For some clients the ability to delay taking an RMD could be a good strategy but that needs to be part of a bigger plan, and not simply because the IRS isn’t forcing the issue (yet).

Inherited IRAs for non-spousal beneficiaries still have a 10-year time requirement for the full balance of the account to be distributed. Which means that if you do nothing, that all comes due in year 10 (after TCJA has expired), and the taxpayer gets killed in taxes all at once. While no one has a crystal ball, the minimum for a client who inherits an IRA should be mapping out the next 10 years (you can easily do this in Excel or the back of a napkin) and identify major life events or changes that will drive income up or down and use that as a road map for when it makes the most sense to intentionally take distributions along the way.

Waiting until year 10 and taking everything all at once will rarely be the optimal outcome compared to proactively spreading out the distributions over time.

Don’t let taxes happen to you, or your clients, by default. Just because the IRS is going to wait another year to figure out what they want to do with inherited IRAs doesn’t mean you should.

Happy Tax Planning!

About The Newsletter

The tax code is 80,000+ pages and Google has 875,000,000 results when you search “Tax Planning”, so each week we are going to help you wade through all of that noise and get to the Relevant Tax Stuff.