Jonathan Clements's Blog, page 45
April 23, 2025
Forfeiture laws vs. Tax laws
Hubbard v. Comm’r of Internal Revenue
https://www.opn.ca6.uscourts.gov/opin...
I was not previously aware that there are two types of criminal forfeitures and the impact, at least so far, determined the taxability of a IRA distribution after forfeiture when the forfeiture order identifies the “specific property” (the IRA among other things) that the defendant must relinquish. Apparently, the government becomes the owner of this property at the time of a conviction per this Court of Appeals and Hubbard did not have taxable income event when the IRS withdrew the $400K+ from his former IRA.
In the non criminal arena this case comments that if you have been swindled out of an IRA by theft and then to add insult to injury you get a 1099-R saying you have taxable income from the IRA distribution you did not receive that there is case law you may reference when preparing your return and excluding that income and when/if you get correspondence from the IRS. See that case reference on page 9 of the link titled Balint v. Comm’r.
However, I do not believe it was economic thinking to bring this tax case after the district court had already ordered
Hubbard to serve decades in prison for illegally operating an illegal “pill mill”, but rather to send a message that doing so will mean you will lose everything.
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RDQ Sorry folks, I still see annuities, including deferred annuities, as a viable option for creating steady retirement income.
Certainly do it yourself investing, even withdrawing when retired, offer no guarantees - and a lot of planning and projecting that are challenges for many people - especially those who don’t read HD.
I know annuities get a bad rap, but even considering the potential lower return than investing, the annual fees (According to Morningstar Annuity Research Center, variable annuity annual fees range widely, with an industry average of 1.05%), surrender charges and possible early withdrawal limits, why wouldn’t you want to create your own pension by making annual contributions to an annuity over your working life?
Clearly, you must start with the intent of not making an early withdrawal, not stopping contributions within any penalty period. It’s a very long term commitment, just like working many years for an employer to accumulate pension value.
Those of us with a pension - an annuity we may or may not have contributed toward - know the less stress feeling of a steady monthly income, a monthly payday so to speak. An annuity isn’t an investment- except in peace of mind. I can’t think of a better way to pay the bills in retirement.
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Top Five Expense Categories and Inflation Factor
Dan’s post ‘Insomnia and the Back of an Envelope’ motivated me to review our expenses. Our top five categories are property taxes, home/car insurance, utilities, groceries, and healthcare premiums/deductibles.
Our home property taxes increased 23% from 2023 to 2025 while our home value increase 17%. The value of our ten-acre plot went down 1.6% from 2023 to 2024, but then increased 23.5% from 2024 to 2025 and property taxes increased by 30%.Home insurance went up 46% from 2023 to 2025, while the insured value went up 8%. The car insurance remained unchanged (my car insurance went down $6 and my husband’s went up $59). Surprisingly, our umbrella insurance went up 30% from 2024 to 2025. (no claims, no accidents, no tickets)Electric was up 15% even though our usage dropped 1.3% from 2023 to 2024. The other utilities only went up 1%My healthcare premiums (Medicare Supplement) went up 9.5% from 2023 to 2024, but my husband’s (Medicare Advantage) remained unchanged. Our dental insurance went up 8.1%. I haven’t seen the increases yet for 2025. The Part B Medicare premium increased from $164.90 in 2023 to $174.70 (5.9%) in 2024, and to $185 (5.9%) in 2025. The Part B Medicare deductible increased from $226 in 2023 to $240 (6.2%) in 2024, and to $257 (7%) in 2025.These categories make up over half our spending. Adding in groceries gives me the top 5 line items of our spending. Home maintenance hasn’t been an issue since we recently built, but over time, that could be a contender. So going forward, I’ll continue to track these top 5 categories. (Kinda the 80/20 rule.)
In the past, I’ve used a 3% inflation factor to forecast expenses. What inflation factor do you build into your assumptions? Are you seeing higher percentage increases in your top 5 categories of spending?
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Times Like These
I really feel for people who are unexpectedly losing their jobs late career because of the Doge cuts.
I experienced something similar when I was pushed out of my 36 year banking job at age 59. I was a good performer, but when they want to get you they get you.
I struggled for a couple of years but the good news is that I finally figured things out and at age 70 I'm the happiest I've ever been.
I want others to be as happy as me so I've been giving my retirement books away for free.
You can download my books "Retirement Heaven or Hell" and "Longevity Lifestyle By Design" by visiting the BoomingEncore.com website.
If you would like my other book "Victory Lap Retirement" which makes the case for working part-time in retirement DM me at michael.drak@yahoo.ca and I will send you an electronic copy.
All I ask in return is that you consider posting a honest Amazon review on the book you read. Notice the emphasis on the words "consider" and "honest".
I use the reviews as motivation to keep going when I feel like quitting on my new "Ikigai" book.
During times like these we need to help and watch out for each other.
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April 22, 2025
Let’s Be Adults by Jonathan Clements
But here’s the thing: Those strong emotions may be justified—but they’re hard to justify on financial grounds, just as they were hard to justify during the Biden presidency. Consider:
The unemployment rate was 4.1% when Biden left office, 12-month inflation was running at 2.9% and GDP grew at an inflation-adjusted 2.8% in 2024. If you think those are bad numbers, and that the economy was a disaster under Biden, you need to lay off the hard stuff.
Since the S&P 500 peaked at 6114.15 on Feb. 19, stocks have slipped 14%. Yes, the decline could get worse. But based on how stock-market investors are currently voting their dollars, the Trump economy isn’t going to be a disaster, and certainly nothing compared to that of 2007-09, when stocks plunged 57%, or early 2020, when share prices fell 34%. We haven’t even matched 2022’s decline, when the S&P 500 slid 25% peak-to-trough during Biden’s second year in office.
My contention: Readers’ views of the economy and the financial markets are getting colored by their political opinions. Got strong political beliefs? Fine with me. I just don’t want to read about them on HumbleDollar, which is a site devoted to personal finance. And based on the numbers, matters aren’t so bad for investors right now, just as they weren’t so bad during the prior four years.
To be sure, if the current administration moves to revamp Social Security benefits, or revise the tax code, or takes actions that cause share prices to plunge, it’s hard to comment on such things without saying who’s responsible. But let’s focus on the details of what’s happening, rather than hyperventilating about the players involved.
Last week, I closed commenting on a Forum thread because it had deteriorated into political mudslinging. I did it reluctantly—but I’ll do it again if necessary.
By the way, political venting isn’t the only thing that’s verboten at HumbleDollar. I’m also anxious for the site to avoid personal nastiness. In the past, there have been folks who simply couldn’t restrain themselves, despite repeated warnings. Their comments now go directly to trash.
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TCJA – what to keep, what to toss
In the early 1980's I entered the world of public accounting which to a large extent is broken into two segments.
The first segment is a focus on attestation of financial statements with the level of services from the highest level downward being audit, review and compilation. The CPA firm issues an opinion on financial statements attestation work which requires practicing in a licensed CPA firm by individuals with required education that have passed appropriate exams, had appropriate experience and who continue to obtain sufficient and targeted continuing education. The primary purpose of CPA's in the attestation function is to serve the public by allowing limited reliance on financial statements which are the responsibility of the management of the issuer of the financial statements upon which the CPA firm opines.
The second segment is a focus on tax. Tax work requires a CPA or non CPA to follow the law and rules created by federal and state governments but the work is focused on helping business and individuals meet their objectives of tax compliance, planning and minimizing both tax paid and the cost of the tax work. A CPA license is not necessary for most tax work with the main exception being representation of third parties before the governments and in some legal matters.
We are now at a point in time where the Tax Cuts and Jobs Act (TCJA) of 2017 are set to expire Dec. 31, 2025. I think that many of the complexities created in the TCJA should be addressed as the federal tax laws and rules will change but my hope is that more complexity is not added.
The Bloomberg government reporter has a good summary of what is changing in business, international and individual taxes at the end of 2025 if nothing is done.
https://about.bgov.com/insights/elect...
My major worry about taxes is that unneeded complexity of our tax system could cause system failure. We can and must do better.
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Building Connections by Marjorie Kondrack
I’m not so good in the genre of Rapper or hip hop singers, but I don’t let that deter me when my mind is in tune with a good word puzzle. Yes, I’m hooked on the NYT word game Connections.
Chances are you played or, at least heard of the New York Times “cult”puzzles. Over the past few years, Wordle became a staple as part of millions of peoples daily routine, and I highly recommend the addictive Connections as a new challenge for word puzzle aficionados and word mavens.
Brain training games and puzzles has emerged as a way to optimize your brain’s efficiency and capacity at any age—the more you challenge your brain, the less likely you are to lose cognitive abilities over time, such as memory and learning skills
This doesn’t mean you’re necessarily smarter overall, but it does suggest you may be better at processing certain types of information, and have fun doing it, while building your vocabulary—and learning to think “outside the box.”
I appreciate the magic of words—how they sound, their nuanced meanings, their emotional associations, and the way a word evokes a personal response. Words are important. They impact us, change our moods and emotions—and inspire action. They allow us to connect and to comment.
Connections is also different from Wordles or Crossword because it’s a word grouping game about finding common threads between words. And there are so many choices it’s Impossible to just guess. But you can access hints.
Think you can find the right word groupings? Learn how to think “outside the box”—and explore the possibilities.of sequencing.
The next time you go for a run, remember your mind needs a good run too.
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April 21, 2025
Insomnia and the Back of an Envelope
I cannot think of a better cure for my occasional insomnia than to stare at my electronic 2024 checkbook and analyze our spending for the prior year.
I’m looking for how much money came in, and how much came out to pay bills and buy stuff, and how much went back into savings and investments.
Social Security and two dinky pensions are what I refer to as our spending benchmark. In an ideal world our spending will never exceed the benchmark. The last couple years have been benchmark busters, with 2023 being so bad that I didn’t bother doing the math. I described 2023 in a prior article, Our Spending Spree. That year we built a house and bought lots of new doodads to go into it.
2024 was better but we still missed the mark due to things like landscaping and some really cool additions to my man cave/garage.
Here’s our income stats, expressed as percentages.
Our guaranteed Benchmark income is 67% of total incomeOur 3% IRA distributions are 27% of total income.Other income represented 6% of total income.Our total spending for the year equaled 107% of benchmark income, requiring us to use about half of our IRA distribution to make the ends meet. The unused portion of the IRA distribution went back into a non-qualified money market and brokerage account.
If I were a teacher assigning a grade to last year’s spending, I think I’d give it an A-. We may have missed our benchmark, but the extra spending only equaled 1.5% of our IRAs. I anticipate this year’s spending will come in at less than 100% of the benchmark. At age 73 I am very comfortable with that.
This is as close as I will come to using what Webster’s Dictionary and HumbleDollar’s own grumpy old man would call a budget. As long as our spending requires such a modest IRA withdrawal I don’t see any reason to rock the spreadsheet by preparing a real budget.
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Taxing Situations
The Tax Aide program is free and not limited to seniors or AARP members. Even though most clients are retired seniors, we can serve all ages and incomes. Only more complex returns are out of scope.
It is not unusual to be helping someone whose spouse has recently passed away. I had a couple of situations where the death was in 2023 which had allowed them to continue to file “married filing jointly” last year. As I prepared the 2024 return, they were hit with the implications of now filing “single.” Their standard deduction is essentially cut in half. If their income and withholding stayed the same, this meant a big tax bill. This led to difficult conversations where I explained that: 1) they had to come up with the money to pay this year’s taxes; 2) they were potentially on the hook for penalties associated with under withholding because they owed more than $1000; and 3) they had to consider increasing withholding for the current year to avoid a penalty next year. As many of our clients have low incomes, these prospects were daunting. If I saw someone where the spouse died in 2024, I was able to counsel them to increase their withholding now so they did not get caught short next year.
I saw a smattering of W-2G forms. These represent gambling winnings, usually from one of our local casinos. Not surprisingly, the state and city have taken their cut and this is disclosed on the W-2G. A friendly single man nearing retirement brought in a W-2G showing about $1,600 in slot machine winnings. I congratulated him on his luck.
I did the return and then the reviewer and I got to talking to him about whether he had any offsetting losses. In the end, he made a quick trip to the casino and obtained a report for the year based on his membership card. His losses for the year from playing the slots were $15,000. He had no idea.
I was thinking about his situation as I was driving home that day. I would never do what he is doing… I have actually never been inside a casino. On the other hand, he was single. He had a well-paid government job for which he had a significant portion of his pay directed to his pension plan. Gambling presumably represented his preferred entertainment. If he went to the casino to play the slots a couple of times a week, who am I to say that was wrong?
In the end, we could not deduct the losses… and he had to pay taxes on the $1,600. After seeing the whole picture, I was less inclined to think he was lucky.
One lady came to me who had not used our service before. She had been widowed a few years ago and was anxious about sharing her information with a stranger because she and her late husband had used the same small local accounting firm to do their taxes for the last 40 years. She knew them and trusted them.
She handed me last year’s return in a nicely bound booklet and pointed out the reason she came to us: the invoice tucked in the back was $360. A friend at church sent her to us. It was one of the simplest returns I did all year since all she had was social security, a pension and a few dollars in bank interest. She went away happy because she would keep this year’s refund instead of paying most of it to the accountant.
We have a fair number of clients who owe zero tax on either their federal or state return. Some tell me that a friend told them that they don’t need to file anymore. While technically correct, we are taught to counsel them that filing prevents someone appropriating their social security number and filing to scam the system.
More so this year than last, I am seeing clients come in with IP PIN numbers. These are six-digit numbers provided annually by the IRS to tax payers who request this identity protection. Think of it as similar to the multi-factor authentication numbers online accounts text to you. The only difference is that for victims of tax identity fraud, these are mailed to the taxpayer near the end of the calendar year. Note that these numbers are different from the PIN you are asked to put in if you e-file.
One morning two out of the first three clients had IP PINs because their social security number had been compromised with a fraudulent tax filing. One man in his mid-eighties told me that his daughter had to spend hours on the phone with the IRS straightening out the fraud. He said he would never have been able to work through it without her. You don’t have to wait until your identity is stolen to get an IP PIN. The only catch is that if you proactively apply, they don’t mail you the IP PIN… you have to sign on to your IRS account each year to get it. I’ve decided to apply for one for myself…preemptively protecting my identity.
I readily repeat my observation from last year: this is challenging and sometimes frustrating work. It is also interesting and rewarding. Assuming each of my clients would have paid $360 to have a paid preparer do their taxes, I put $36,000 in the pockets of people who need it for their daily expenses. Multiply that by 28,000 tax aide volunteers across the country. Not bad.
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April 20, 2025
Winning the Debt Game by David Powell
Mine are mostly happy, as I lived and worked through the first part of my lifetime happiness smile curve. There were a few rare exceptions. Buying my first car was one of them.
Back then, car dealers were probably even worse on customer service than today, but the experience I’ll never forget was applying for my first car loan. “You don’t exist”, said my salesman after looking up my credit history. This was true. While I worked from the earliest age I could, I had done nothing yet with credit. I was a babe in the woods. I don’t recall the details of that car loan, but I’m sure he took me for a buggy ride. I remember the feelings of joy and relief when I made the last payment.
Like so many others influenced by American debt culture of the 1980s and 1990s, I had my own period of swimming in excess debt. That was when I discovered Jonathan’s Getting Going column in the Wall Street Journal, reading a free copy at work. Yesterday, I began reliving some of his finest advice when I discovered the new release of The BEST of Jonathan Clements, edited by Christine Benz, William Bernstein, Allan Roth, and Jason Zweig. This book gets my vote for best personal finance book of 2025.
Jonathan has had two huge influences on my life. His focus on the role of money, and other factors, in creating lifelong happiness probably prepared me better than I knew for a sudden retirement. But the biggest financial benefit to me was perhaps his advice around spending and debt. I can’t tell you when I last paid credit card interest, the most corrosive type of debt we had in those first days of our marriage.
By our early 40s my wife and I could save and pay cash for cars, a thrilling experience for me. We helped our kids graduate from college without debt and paid off our mortgage in our early 50s. Jonathan taught me the only way to win the debt game was by mostly not playing.
This morning, I was reminded how much my debt game has changed when I glanced at our free FICO score at our bank. We haven’t had an installment loan in a decade, and FICO scores are all about keeping you hooked, playing the debt game. Our score is still darned good, but it will never be perfect. And I’m fine with that.
I thank you, Jonathan, for 30+ years of great writing and terrific financial wisdom. I will be forever grateful to you. If Elaine ever needs tech support, she has lifetime credit for my services.
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