Surrendering an Annuity: Beware of Taxes and Surrender Fees

There are many reasons why individuals decide to surrender their annuities. Unfortunately, one of the most common reasons that we see is that individuals realize they were sold the annuity by a broker that was either not in their best interest, or they discover that there are other investment solutions that will better meet their investment objectives. This situation can often lead to individuals making the tough decision to cut their losses and surrender the annuity.  But before surrendering their annuity, it’s important for investors to understand the questions to ask the annuity company about the surrender fees and potential tax liability before making the final decision to end their annuity contract.

Surrender Fee Schedule

Most annuities have what are called “surrender fees,” which are fees that are charged against the account balance in the annuity if the contract is terminated within a specific number of years. The surrender fee schedule varies greatly from annuity to annuity.  Some have a 5-year surrender schedule, others have a 7-year surrender schedule, and some have 8+ year surrender fees.  Typically, the amount of the surrender fees decreases over time, but the fees can be very high within the first few years of obtaining the annuity contract.

For example, an annuity may have a 7-year surrender fee schedule that is as follows:

Year 1:  8%

Year 2:  7%

Year 3:  6%

Year 4:  5%

Year 5:  4%

Year 6:  3%

Year 7:  3%

Year 8+: 0%

If you purchased an annuity with this surrender fee schedule and two years after purchasing the annuity you realize it was not the optimal investment solution for you, you would incur a 7% surrender fee. If your annuity had a $100,000 value, the annuity company would assess a $7,000 surrender fee when you cancel your contract and move your account.

When It Makes Sense To Pay The Surrender Fee

In some cases, it may make financial sense to pay the surrender fee to get rid of the annuity and just move your money into a more optimal investment solution.  If a client has had an annuity for 6 years and they would only incur a 3% surrender fee to cancel the annuity, it may make sense to pay the 3% surrender fee as opposed to waiting 2 more years to surrender the annuity contract without a surrender fee.  For example, if the annuity contract is only expected to produce a 4% rate of return over the next year, but they have another investment solution that is expected to produce an 8%+ rate of return over that same one-year period, it may make sense to just surrender the annuity and pay the 3% surrender fee, so they can start earning those higher rates of return sooner, which essentially more than covers the surrender fee that they paid to the annuity company.

Potential Tax Liability Associated with Annuity Surrender

An investor may or may not incur a tax liability when they surrender their annuity contract.  Assuming the annuity is a non-qualified annuity, if the cash surrender value is not more than an investor's original investment, then there would not be a tax liability associated with the surrender process because the annuity contract did not create any “gain” in value for the investor.  However, if the cash surrender value is greater than the initial investment in the contract, then the investors would trigger a realized gain when they surrender the contract, which is taxed at an ordinary income tax rate.  Annuity investments do not receive long-term capital gain preferential tax treatment for contacts held for more than 12 months like stocks and other investments held in brokerage accounts. The gains are always taxed as ordinary income rates because it’s technically an insurance contract.

Not all annuity companies list your total “cost basis” on your statement.  Often, we advise clients to call the annuity company to obtain their cost basis in the policy and have the annuity company tell them whether or not there would be a tax liability if they surrendered the annuity contract.  You can call the annuity company directly; you do not need to call the broker that sold you the annuity.

If there is no tax liability associated with surrendering the contract, surrendering the contract can be an easy decision for an investor. However, if there is a large tax liability associated with surrendering an annuity, some tax planning may be required.  There are tax strategies associated with surrendering annuities that have unrealized gains, such as if you are close to retirement, you could wait to surrender the annuity until the year that you are fully retired, making the taxable gain potentially subject to a lower tax rate.  We have had clients that have surrendered an annuity, incurred a $15,000 taxable gain, and then turned around and contributed up to $23,500 (or $31,000 if age 50+), pre-tax, to their 401(k) account at work, which offset the additional taxable income from the annuity surrender in that tax year.

Is Paying The Surrender Fee and Taxes Worth It?

For investors who face either a surrender fee, taxes, or both when surrendering an annuity contract, the decision of whether or not to surrender the annuity contract comes down to whether or not paying those taxes and/or penalties is worth it, just to get out of that annuity that was not the right fit in the first place. Or maybe it was the right investment when you first purchased it, but now your investment needs have changed, or there is a better investment opportunity elsewhere.  If there are no surrender fees and minimal tax liability, the decision can be very easy, but when large surrender fees and/or tax liability exists, additional analysis is often required to determine if delaying the surrender of the annuity contract makes sense.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs):

Why do investors surrender their annuities?
Many investors choose to surrender an annuity when they realize it no longer fits their financial goals or when they discover better investment alternatives. In some cases, annuities are sold by brokers under less-than-ideal circumstances, prompting investors to cut their losses and move to more flexible investment options.

What are annuity surrender fees?
Surrender fees are charges imposed by the insurance company if you cancel (surrender) your annuity within a certain period—typically 5 to 8 years after purchase. These fees decline over time. For example, a 7-year surrender schedule might charge 8% in the first year, 7% in the second, and gradually drop to 0% after year seven.

When might it make sense to pay the surrender fee?
It can make sense to pay a surrender fee if switching to a new investment is expected to produce significantly higher returns. For example, if your annuity is projected to earn 4% annually but another investment could earn 8%, paying a small surrender fee (like 3%) could be worthwhile because the higher returns may quickly offset the cost of surrendering the contract.

What taxes apply when you surrender an annuity?
If your annuity’s cash value exceeds your original investment (cost basis), the gain is taxable as ordinary income in the year you surrender it. Unlike stocks or mutual funds, annuities do not qualify for long-term capital gains tax treatment. However, if your cash surrender value is less than or equal to your original investment, no tax will be due.

How can you find out your annuity’s cost basis?
Your annuity company can tell you your exact cost basis and whether surrendering the annuity would trigger taxable gains. You can contact the insurance company directly—there’s no need to go through the broker who sold you the annuity.

Are there tax strategies for surrendering an annuity with gains?
Yes. Timing matters. For instance, if you’re close to retirement, surrendering the annuity after you stop working could mean the taxable gain falls into a lower tax bracket. Another strategy is to offset taxable gains by making a pre-tax 401(k) or IRA contribution in the same year.

How do you decide if paying surrender fees or taxes is worth it?
The decision depends on your time horizon, expected investment returns, and tax impact. If surrender fees are low and tax exposure is minimal, surrendering may be the best move. If both are high, it might make sense to wait or consult a financial planner to explore tax-efficient options.

Why Do Wealthy Families Set Up Foundations and How Do They Work?

When a business owner sells their business or a corporate executive receives a windfall in W2 compensation, some of these individuals will set up and fund a private foundation to capture a significant tax deduction, and potentially pre-fund their charitable giving for the rest of their lives and beyond.  In this video, David Wojeski of the Wojeski Company CPA firm and Michael Ruger of Greenbush Financial Group will be covering the following topics regarding setting up a private foundation:

1. What is a private foundation

2. Why do wealthy individuals set up private foundations

3. What are the tax benefits associated with contributing to a private foundation

4. Minimum funding amount to start a private foundation

5. Private foundation vs. Donor Advised Fund vs. Direct Charitable Contributions

6. Putting family members on the payroll of the foundation

7. What is the process of setting up a foundation, tax filings, and daily operations

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs):

What is a private foundation?
A private foundation is a nonprofit organization typically funded by a single individual, family, or business. It’s designed to support charitable activities, either by making grants to other nonprofits or by conducting its own charitable programs. The foundation is controlled by its founders or appointed board members rather than by the public.

Why do wealthy individuals set up private foundations?
High-net-worth individuals often establish private foundations to create a lasting legacy of charitable giving, maintain control over how funds are distributed, and involve family members in philanthropy. It also allows donors to give strategically over time rather than making one-time gifts to multiple organizations.

What are the tax benefits of contributing to a private foundation?
Contributions to a private foundation are tax-deductible. Assets contributed to the foundation grow tax-free, and donors can make grants to charities in future years while capturing the tax deduction in the year of the initial contribution.

What is the minimum funding amount to start a private foundation?
While there is no legal minimum, some experts recommend starting with at least $1 million to $2 million in assets. This level of funding helps offset administrative, tax filing, and compliance costs associated with running the foundation.

How does a private foundation compare to a Donor Advised Fund or direct charitable giving?
A Donor Advised Fund (DAF) is easier and less expensive to set up and maintain than a private foundation. However, a private foundation offers more control over investment management, grant-making, and governance. Direct charitable contributions are simpler still but provide no long-term control or legacy-building opportunities.

Can family members receive compensation from a private foundation?
Yes. Family members can serve on the foundation’s board or be paid for legitimate services such as administration, accounting, or grant oversight. However, compensation must be reasonable and documented to comply with IRS rules for private foundations.

What is involved in setting up and maintaining a private foundation?
Setting up a foundation involves establishing a nonprofit corporation or trust, applying for IRS tax-exempt status under Section 501(c)(3), and creating bylaws or a governing document. Ongoing operations include annual IRS Form 990-PF filings, distributing at least 5% of assets annually to charitable causes, maintaining proper records, and adhering to self-dealing and investment regulations.

Tax-Loss Harvesting Rules: Short-Term vs Long-Term, 30-Day Wash Rule, $3,000 Tax Deduction, and More…….

As an investment firm, November and December is considered “tax-loss harvesting season”, where we work with our clients to identify investment losses that can be used to offset capital gains that have been realized throughout the year to reduce their tax liability for the year.  But there are a lot of IRS rules surrounding what “type” of realized losses can be used to offset realized gains, and retail investors are often unaware of these rules which can lead to errors in their lost harvesting strategies.  In this article, we will cover loss harvesting rules for:

1. Realized Short-term Gains

2. Realized Long-term Gains

3. Mutual Fund Capital Gains Distributions

4. The $3,000 Annual Realized Loss Income Deduction

5. Loss Carryforward Rules

6. Wash Sale Rules

7. Real Estate Investments

8. Business Gains or Losses

Short-Term vs Long-Term Gain and Losses

Investment gains and losses fall into two categories: Long-Term and Short-Term.  Any investment, whether it’s a stock, mutual fund, or real estate, if you buy it and then sell it within 12 months, that gain or loss is classified as a “short-term” capital gain or loss and is taxed to you as ordinary income. 

If you make an investment and hold it for more than 1 year before selling it, your gain or loss is classified as a “long-term” capital gain or loss. If it’s a gain, it’s taxed at the preferential long-term capital gains rates.  The long-term capital gains tax rate that you pay varies based on the amount of your income for the year (including the amount of the long-term capital gain). For 2024, here is the table:  

Note: For individuals in the top tax bracket, there is a 3.8% Medicare surcharge added on top of the federal 20% long-term capital gains tax rate, so the top long-term capital gains rate ends up being 23.8%.  For individuals that live in states with income tax, many do not have special tax rates for long-term capital gains and they are simply taxed as additional ordinary income at the state level.

What Is Year End Loss Harvesting?

Loss harvesting is a tax strategy where investors intentionally sell investments that have lost value to generate a realized loss to offset a realized gain that they may have experienced in another investment.  Example, if a client sold Nvidia stock in May 2024 and realized a long-term capital gain of $100,000 in November and they look at their investment portfolio an notice that their Plug Power stock has an unrealized loss of $100,000, if they sell the Plug Power stock and generate a $100,000 realized loss, it would completely wipes out the tax liability on the $100,000 gain that they realized on the sale of their Nvidia stock earlier in the year.

Loss harvesting is not an all or nothing strategy. In that same example above, even if that client only had $30,000 in unrealized losses in Plug Power, realizing the loss would at least offset some of the $100,000 realized gain in their Nvidia stock sale.

Long-Term Losses Only Offset Long-Term Gains

It's common for investors to have both short-term realized capital gains and long-term realized capital gains in a given tax year.  It’s important for investors to understand that there are specific IRS rules as to what TYPE of investment losses offset investment gains. For example, realized long-term losses can only be used to offset realized long-term capital gains. You cannot use realized long-term losses to offset a short-term capital gain.

Short-Term Losses Can Offset Both Short-Term & Long-Term Gain

However, realized short-term losses can be used to offset EITHER short-term or long-term capital gains.  If an investor has both short-term and long-term gains, the short-term realized losses are first used to offset any short-term gains, and then the remainder is used to offset the long-term gains.

Loss Carryforward

What happens when your realized loss is greater than your realized gain?  You have what’s called a “loss carryforward”. If you have unused realized investment losses, those unused losses can be used to offset investment gains in future tax years.  Example, Joe sells company XYZ and has a $30,000 realized long-term loss.  The only other investment income that Joe has is a short-term gain of $5,000.  Since you cannot use a long-term loss to offset a short-term gain, Joe’s $30,000 in realized long-term losses cannot be used in this tax year.  However, that $30,000 loss will carryforward to the next tax year, and if Joe has a long-term realized gain of $40,000 that next year, he can use the $30,000 carryforward loss to offset a larger portion of that $40,000 realized gain.

When do carryforward losses expire?  Answer: never (except for when you pass away). The carryforward loss will continue until you have a gain to offset it.

$3,000 Capital Loss Annual Tax Deduction

Even if you have no realized capital gains for the year, it may still make sense from a tax standpoint to generate a $3,000 realized loss from your investment accounts because the IRS allows you deduct up to $3,000 per year in capital losses against your ordinary income.  Both short-term and long-term losses qualify toward that $3,000 annual tax deduction. 

Example: Sarah has no realized capital gains for the year, but on December 15th she intentionally sells shares of a mutual fund to generate a $3,000 long-term realized loss. Sarah can now use that $3,000 loss to take a deduction against her ordinary income.

Tax Note: You do not need to itemize to take advantage of the $3,000 tax deduction for capital losses. You can elect to take the standard deduction when filing your taxes and still capture the $3,000 tax deduction for capital losses.

The $3,000 annual loss tax deduction can also be used to eat up carryforward losses. If we go back to our example with Joe who had the $30,000 realized long-term loss, if he does not have any future capital gains to offset them with the carryforward loss, he could continue to deduct $3,000 per year against his ordinary income over the next 10 years, until the loss has been fully deducted.

Mutual Fund Capital Gain Distribution

For investors that use mutual funds as an investment vehicle within a taxable investment account, certain mutual funds will issue a “capital gains distribution”, typically in November or December of each year, which then generates taxable income to the shareholder of that mutual fund, whether they sold any shares during the year.

When mutual funds issue capital gains distributions, it’s common that a majority of the capital gains distributions will be long-term capital gains. Similar to normal realized long-term capital gains, investors can loss harvest and generate realized losses to offset the long-term capital gains distribution from their mutual fund holdings in an effort to reduce their tax liability.

The Wash Sale Rule

When loss harvesting, investors have to be aware of the IRS “Wash Sale Rule”.  The wash sale rule states that if you sell a security at a loss and the rebuy a substantially identical security within 30 days following the date of the sale, a realized loss cannot be captured by the taxpayer.

Example:  Scott sells the Nike stock on December 1, 2024 which generates a $10,000 realize loss, but then Scott repurchases Nike stock on December 25, 2024.  Since Scott repurchased Nike stock within 30 days of the sell day, he can no longer use the $10,000 realized loss generated by his sell transaction on December 1st due to the IRS 30 Day Wash Rule. 

Also make note of the term “substantially identical” security. If you sell the Vanguard S&P 500 Index ETF to realize a loss but then purchase the Fidelity S&P 500 Index ETF 15 days later, while they are two different investments with different ticker symbols, the IRS would most likely consider them substantially identical triggering the Wash Sale rule.

Real Estate & Business Loss Harvesting

While most of the examples today have been centered around stock investments, the lost harvesting strategy can be used across various asset classes. We have had clients that have sold their business, generating a large long-term capital gain, and then we have them going into their taxable brokerage account looking for investment holdings that have unrealized losses that we can realize to offset the taxable long-term gain from the sale of their business.

The same is true for real estate investments. If a client sells a property at a gain, they may be able to use either carryforward losses from previous tax years or intentionally realize losses in their investment accounts in the same tax year to offset the taxable gain from the sale of their investment property.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs):

What is tax-loss harvesting?
Tax-loss harvesting is a year-end tax strategy where investors sell investments that have declined in value to realize a loss that can be used to offset realized capital gains for the year. For example, if you realized a $100,000 gain from one stock, selling another stock with a $100,000 loss could eliminate the tax liability from that gain.

What is the difference between short-term and long-term capital gains and losses?
Short-term gains or losses come from investments held for one year or less and are taxed as ordinary income. Long-term gains or losses come from investments held for more than one year and qualify for lower, preferential long-term capital gains tax rates.

Can long-term losses offset short-term gains?
No. Realized long-term losses can only be used to offset realized long-term gains. However, realized short-term losses can be used to offset both short-term and long-term capital gains.

What happens if my realized losses are greater than my gains?
If your realized losses exceed your gains, the remaining amount becomes a loss carryforward. You can carry forward unused losses indefinitely and use them to offset future realized gains.

What is the $3,000 capital loss deduction?
Even if you have no capital gains, you can deduct up to $3,000 in realized capital losses per year against ordinary income. For married couples filing separately, the limit is $1,500. Any remaining unused losses can continue to carry forward to future tax years.

What are mutual fund capital gain distributions?
Mutual funds often distribute capital gains to shareholders at the end of the year, usually in November or December. These distributions create taxable income for the investor—even if no shares were sold. Tax-loss harvesting can help offset the tax impact of these mutual fund capital gains distributions.

What is the wash sale rule?
The IRS wash sale rule disallows a realized loss if you sell a security at a loss and buy a “substantially identical” security within 30 days before or after the sale. For instance, selling a Vanguard S&P 500 Index ETF and repurchasing a similar Fidelity S&P 500 ETF within 30 days would likely violate the wash sale rule.

Do loss harvesting rules apply to real estate and business sales?
Yes. The same loss-harvesting concept can apply when selling real estate or a business at a gain. Investors can use realized losses from their taxable brokerage accounts or carryforward losses from prior years to offset taxable gains from these sales.

The Huge NYS Tax Credit Available For Donations To The SUNY Impact Foundation

There is a little-known, very lucrative New York State Tax Credit that came into existence within the past few years for individuals who wish to make charitable donations to their SUNY college of choice through the SUNY Impact Foundation.  The tax credit is so large, that individuals who make a $10,000 donation to the SUNY Impact Foundation can receive a dollar-for-dollar tax credit of $8,500 whether they take the standard deduction or itemize on their tax return. This results in a windfall of cash to pre-selected athletic programs and academic programs by the donor at their SUNY college of choice, with very little true out-of-pocket cost to the donors themselves once the tax credit is factored in.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs):

What is the SUNY Impact Foundation Tax Credit?
The SUNY Impact Foundation Tax Credit is a generous New York State tax incentive that allows individuals to receive a large state tax credit for making a charitable donation to the SUNY Impact Foundation. This program was introduced in recent years to encourage private giving to support SUNY campuses and their programs.

Do you have to itemize deductions to receive the SUNY Impact Foundation tax credit?
No. Donors can claim the full New York State tax credit whether they itemize deductions or take the standard deduction on their tax return. This makes it a valuable opportunity for both high-income and middle-income taxpayers.

Where does the donation go?
All contributions are made through the SUNY Impact Foundation, a statewide nonprofit that supports State University of New York campuses. Donors can designate their gift to specific SUNY colleges or to particular athletic or academic programs at those institutions.

How does the SUNY Impact Foundation benefit SUNY schools?
The foundation channels private donations directly to SUNY institutions, providing extra funding for scholarships, research, athletics, and academic innovation. The tax credit encourages more private giving to supplement public funding for SUNY programs.

Is there a limit on how much you can donate?
The program is capped annually by the state, and only a limited number of donors can participate each year. Interested individuals should contact the SUNY Impact Foundation or their financial advisor early to confirm availability and eligibility.

The Trump Tax Plan for 2025: Social Security, Tips, Overtime, SALT Cap, and more….

It looks as though the likely outcome of the 2024 presidential election will be a Trump win, and potentially full control of the Senate and House by the Republicans to complete the “full sweep”.  As I write this article at 6am the day after election day, it looks like Trump will be president, the Senate will be controlled by the Republicans, and the House is too close to call.  If the Republicans complete the full sweep, there is a higher probability that the tax law changes that Trump proposed on his campaign trail will be passed by Congress and signed into law as early as 2025.  Here are the main changes that Trump has proposed to the current tax laws:

• Making Social Security Completely Exempt from Taxation

• Exempting tips from income taxes

• Exempting overtime pay from taxation

• A new itemized deduction for auto loan interest

• Dropping the corporate tax rate from the current 21% down to 15%

• Eliminating the $10,000 SALT Cap

• Extension of the Tax Cut & Jobs Act beyond 2025

Even if the Democrats end up hanging on to the House by a narrow margin, there is still a chance that some of these tax law changes could be passed in 2025.

Social Security Exempt From Taxation

This one is big for retirees. Under current tax law, 85% of Social Security retirement benefits are typically taxed at the federal level. Trump has proposed that all Social Security Benefits would be exempt from taxation, which would put a lot more money into the pocket of many retirees.   For example, if a retiree receives $40,000 in social security benefits each year and they are in the 22% Fed bracket, 85% of their $40,000 is currently taxed at the Federal level ($34,000), not paying tax on their social security benefit would put $7,480 per year back in their pocket.

Note: Most states do not tax social security benefits. This would be a tax change at the federal level.

Exempting Tips from Taxation

For anyone who works in a career that receives tips, such as waiters, bartenders, hair stylists, and the list goes on, under current tax law, you are supposed to claim those tips and pay taxes on those tips.  Trump has proposed making tips exempt from taxation, which for industries that receive 50% or more of their income in tips could be a huge windfall.  The Trump proposed legislation would create an above-the-line deduction for all tip income, including both cash and credit card tips.

Overtime Pay Exempt From Taxation

For hourly employees who work over 40 hours per week and receive overtime pay, Trump has proposed making all overtime wages exempt from taxation, which could be a huge windfall for hourly workers. The Tax Foundation estimates that 34 million Americans receive some form of overtime pay during the year.

Auto Loan Interest Deduction

Trump has also proposed a new itemized deduction for auto loan interest. However, since it’s likely that high standard deductions will be extended beyond 2026, if there is a full Republican sweep, only about 10% of Americans would elect to itemize on their tax return as opposed to taking the standard deduction.  A taxpayer would need to itemize to take advantage of this new proposed tax deduction.

Reducing The Corporate Tax Rate from 21% to 15%

Trump proposed reducing the corporate tax rate from the current 21% to 15%, but only for companies that produce goods within the United States.  For these big corporations, a 6% reduction in their federal tax rates could bring a lot more money to their bottom line.

Eliminating the $10,000 SALT Cap

This would be a huge win for states like New York and California, which have both high property taxes and state income taxes. When the Tax Cut and Jobs Act was passed, it was perhaps one of the largest deductions for individuals who resided in states that had both state income tax and property taxes referred to as the SALT Cap (State and Local Taxes). Trump has proposed extending the Tax Cut and Jobs Act but eliminating the $10,000 SALT cap.   

For example, if you currently live in New York and have property taxes of $10,000 and you pay state income tax of $20,000, prior to the passing of the Tax Cut and Jobs Act, you were able to itemize your tax deductions and take a $30,000 tax deduction at the federal level. When TCJA passed, it capped those deductions at $10,000, so most individuals defaulted into just taking the standard deduction and lost some of that tax benefit.  Under these proposed tax law changes, taxpayers will once again be able to capture the full deduction for their state income taxes and property taxes making itemizing more appealing.

No Sunset For The Tax Cut and Jobs Act

The Tax Cut and Jobs Act was passed by Trump and the Republican Congress during his first term.  That major taxation legislation was scheduled to expire on December 31, 2025, which would have automatically reverted everything back to the old tax brackets, standard deductions, loss of the QBI deduction, etc., prior to the passing of TCJA.   If the Republicans gain control of the House, there is a very high probability that the tax laws associated with TCJA will be extended beyond 2025.

Summary of Proposed 2025 Tax Law Changes

There could be a tremendous number of tax law changes starting in 2025, depending on the ultimate outcome of the election results within the House of Representatives. If a full sweep takes place, a large number of the reforms that were covered in this article could be passed into the law in 2025.  However, if there is a divided Congress, only a few changes may make it through Congress. We should know the outcome within the next 24 to 48 hours.

It’s also important to acknowledge that these are all proposed tax law changes. Before passing them into law, Congress could place income limitations on any number of these new tax benefits, and/or new tax law changes could be introduced. It should be a very interesting 2025 from a tax standpoint.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs):

What tax changes has Donald Trump proposed for 2025?
If Donald Trump returns to the presidency with Republican control of Congress, several major tax changes could be enacted in 2025. His proposals include making Social Security benefits tax-free, exempting tips and overtime pay from taxation, allowing a new deduction for auto loan interest, reducing the corporate tax rate to 15%, eliminating the $10,000 SALT cap, and extending the Tax Cuts and Jobs Act (TCJA) beyond 2025.

Will Social Security benefits become tax-free under Trump’s plan?
Yes, Trump has proposed eliminating all federal taxes on Social Security benefits. Currently, up to 85% of Social Security income is taxable for many retirees. If enacted, retirees could see thousands of dollars in annual tax savings, depending on their total income and filing status.

What does it mean that tips and overtime pay would be tax-exempt?
Under Trump’s proposal, workers in industries that receive tips—such as restaurants, salons, and hospitality—would no longer have to pay federal income tax on their tip income. In addition, overtime wages earned by hourly workers would be fully exempt from taxation, providing meaningful take-home pay increases for millions of Americans.

What is the proposed auto loan interest deduction?
Trump’s plan includes creating a new itemized deduction for interest paid on auto loans. However, since most taxpayers claim the standard deduction, only those who itemize would benefit from this new deduction.

How would the corporate tax rate change?
The proposal would lower the corporate tax rate from 21% to 15%, but only for companies that manufacture goods within the United States. The goal is to incentivize domestic production and boost U.S.-based manufacturing jobs.

What would happen to the $10,000 SALT cap?
Trump has proposed eliminating the $10,000 cap on state and local tax (SALT) deductions, which would significantly benefit taxpayers in high-tax states like New York, California, and New Jersey. Removing the cap would allow taxpayers to once again deduct their full state income and property taxes.

Will the Tax Cuts and Jobs Act be extended beyond 2025?
Yes, Trump and Republican leaders have indicated they intend to make the TCJA permanent. This would preserve lower individual tax brackets, the higher standard deduction, and the 20% qualified business income (QBI) deduction for pass-through entities.

When could these proposed tax changes take effect?
If Republicans control the presidency and both chambers of Congress, some or all of these proposals could be passed and take effect as early as the 2025 tax year. However, Congress may adjust income thresholds, introduce phaseouts, or modify the scope of these benefits before enactment.

Can You Process A Qualified Charitable Distribution (QCD) From an Inherited IRA?

Qualified Charitable Distributions are an advanced tax strategy used by individuals who are age 70½ or older who typically make annual contributions to their church, charity, or other not-for-profit organizations.  QCDs allow individuals who have pre-tax IRAs to send money directly from their IRA to their charity of choice, and they avoid having to pay tax on those distributions.   However, a client recently asked an excellent question:

“Can you process a qualified charitable distribution from an Inherited IRA?  If yes, does that QCD also count toward the annual RMD requirement?”

QCD from an Inherited IRA

The short answer to both of those questions is “Yes”.   As long as the owner of the Inherited IRA account is age 70½ or older, they would have the option to process a QCD from their inherited IRA, and that QCD amount would count towards the annual required minimum distribution (RMD) if one is required.

What is a QCD?

When you process distributions from a Traditional IRA account, in most cases, those distributions are taxed to the account owner as ordinary income. However, once an individual reaches the age of 70½, a new distribution option becomes available called a “QCD” or a qualified charitable distribution.    This allows the owner of the IRA to issue a distribution directly to their church or charity of choice, and they do not have to pay tax on the distribution.

Backdoor Way To Recapture Tax Deduction for Charitable Contribution

Due to the changes in the tax laws, about 90% of the taxpayers in the U.S. elect to take the standard deduction when they file their taxes, as opposed to itemizing.  Since charitable contributions are an itemized deduction, that means that 90% of taxpayers no longer receive a tax benefit for their charitable contributions throughout the year. 

A backdoor way to recapture that tax benefit is by making a QCD from a Traditional IRA or Inherited Traditional IRA, because the taxpayer can now avoid paying income tax on a pre-tax retirement account by directing those distributions to a church or charity.  So, in a way, they are recapturing the tax benefits associated with making a charitable contribution, and they do not have to itemize on their tax return to do it.

QCD Limitations

There are three main limitations associated with processing qualified charitable distributions:

The first rule that was already mentioned multiple times is that the individual processing the QCD must be 70½ or older. For individuals turning 70½ this year, a very important note, you cannot process the QCD until you have actually turned 70½ to the DAY.  I have seen individuals make the mistake of processing a QCD in the year that they turn 70½ but before the exact day that they reached age 70½. In those cases, the distribution no longer qualifies as a QCD. 

Example: Jen turned 70 in February 2024, and she wants to make a QCD from her Inherited IRA. Jen would have to wait until August 2024, when she officially reaches age 70½, to process the QCD.  If she attempts to process the QCD before she turns 70½, the full amount of the IRA distribution will be taxable to Jen.

QCD $100,000 Annual Limit

Each taxpayer is limited to a total of $100,000 in QCDs in any given tax year, so the dollar limit each year is relatively high.  That full $100,000 could be remitted to a single charity or it could be split up among any number of charities. 

QCD’s Can Only Be Processed From IRAs

If you inherit a pre-tax 401(k) account, you would not be able to process a QCD directly from the 401(K) plan.  401(k) accounts are not eligible for QCDs.  You would first have to rollover the balance in the 401(K) to an Inherited IRA, and then process the QCD from there.

QCDs Count Toward the RMD Requirement

If you have inherited a retirement account, you may or may not be subject to the new 10-year rule and/or required to take annual RMDs (required minimum distributions) for your inherited IRA each year.  For purposes of this article, if you subject to the annual RMD requirement, these QCD count toward the annual RMD amount.

Example: Tom has an inherited IRA and he is subject to the new 10-year rule and is also required to distribute annual RMD’s from the IRA during the 10 year period. If the RMD amount of 2025 is $5,000, assuming that Tom has reached age 70½, he would be eligible to process an QCD for the full amount of the RMD, he will be deemed as satisfying the annual RMD requirement, and does not have to pay tax on the $5,000 distribution that was directed to charity.

This is also true for 10-year rule distributions. If someone gets to the end of the 10-year period, there is $60,000 remaining in the inherited IRA, and the account owner is age 70½ or older, they could process a QCD for all or a portion of that remaining balance and avoid having to pay tax on any amount that was directed to a charity or not-for-profit.

QCD Distributions Must Be Sent Directly To Church or Charity

One of the important rules with processing these QCDs is the owner of the Inherited IRA can never come into contact with the money.  The distribution has to be sent directly from the IRA custodian to the church or charity.

For our clients, a common situation is sending money directly to their church as opposed to putting money in the offering plate each Sunday.  If they estimate that they donate about $4,000 to their church throughout the year, in January, they request that we process a QCD from their inherited IRA to their church in the amount of $4,000 and that amount is a non-taxable distribution from their IRA. 

When the distribution is requested, we have to ask the client how to make the check payable and the mailing address of the church, and then our custodian (Fidelity) processes the check directly from their IRA to the church.

No Special Tax Code on 1099-R for QCDs

Anytime you process a distribution from an inherited IRA, the custodian of the IRA will issue you a 1099-R tax form at the end of the year so you can report the distribution amount on your tax return. With QCD, there is not a special tax code indicating that it was a QCD. If you use an accountant to prepare your taxes, you must let them know about the QCD, so they do not report the distribution as taxable income to you.

Summary

For individuals who inherit Traditional IRAs and have charitable intent, processing Qualified Charitable Distributions each year can be an excellent way to recapture the tax deduction that is being lost for their charitable contributions while at the same time counting toward the annual RMD requirement for that tax year.  

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs):

Can you make a Qualified Charitable Distribution (QCD) from an inherited IRA?
Yes. If the owner of the inherited IRA is age 70½ or older, they can make Qualified Charitable Distributions (QCDs) directly from their inherited IRA. These distributions can also count toward satisfying their annual Required Minimum Distribution (RMD).

What is a Qualified Charitable Distribution (QCD)?
A QCD allows individuals age 70½ or older to transfer funds directly from their Traditional IRA to a qualified charity without paying federal income tax on the distribution. It’s a tax-efficient way to give to charity while reducing taxable income.

Do QCDs count toward required minimum distributions (RMDs)?
Yes. If you are required to take RMDs from your IRA or inherited IRA, the amount of any QCDs you make during the year will count toward satisfying your RMD obligation for that year.

Can you process a QCD from a 401(k)?
No. QCDs can only be made from IRA accounts, including inherited IRAs. If you inherit a 401(k), you must first roll it over into an inherited IRA before making a Qualified Charitable Distribution.

What is the annual limit for QCDs?
Each taxpayer can make up to $100,000 in Qualified Charitable Distributions per year. Married couples filing jointly can each contribute up to $100,000 from their respective IRAs.

What age must you be to make a QCD?
You must be at least 70½ years old to the day before making a Qualified Charitable Distribution. If the QCD is processed before you reach 70½, the entire amount will be treated as a taxable distribution.

Do you get a tax deduction for a QCD?
No separate deduction is taken, but the QCD amount is excluded from taxable income. This provides a “backdoor” tax benefit for charitable giving, especially for those who take the standard deduction and do not itemize.

How must QCD funds be sent to the charity?
The funds must go directly from the IRA custodian to the charity. The account owner cannot receive the money first. For example, if donating to a church, the custodian issues the check directly payable to the church, not the IRA owner.

How are QCDs reported on tax forms?
The IRA custodian will issue a Form 1099-R showing the distribution, but it will not be coded as a QCD. It’s important to inform your tax preparer that the distribution was a QCD so it isn’t mistakenly reported as taxable income.

Why use QCDs from inherited IRAs?
QCDs from inherited IRAs allow charitably minded individuals to reduce taxable income while meeting RMD requirements. It’s especially useful for retirees and beneficiaries who no longer itemize deductions but still make annual charitable donations.

Should You Surrender Your Life Insurance Policies When You Retire?

As individuals approach retirement, they often begin reviewing their annual expenses, looking for ways to trim unnecessary expenses so their retirement savings last as long as possible now that their paychecks are about to stop for their working years.  A common question that comes up during these client meetings is “Should I get rid of my life insurance policy now that I will be retiring?”

Very often, the answer is “Yes, you should surrender your life insurance policy”, because by the time individuals reach retirement, their mortgage is paid off, kids are through college and out of the house, they have no debt outside of maybe a car loan, and they have accumulated large sums in their retirement accounts. So, what is the need for life insurance?

However, for some individuals, the answer is “No, you should keep your life insurance policies in force,” and we will review several of those scenarios in this article as well.   

Retirees That Should Surrender Their Life Insurance Policies

Since this is the more common scenario, we will start with the situations where it may make sense to surrender your life insurance policies when you retire.

Remember Why You Have Life Insurance In The First Place

Let’s start off with the most basic reason why individuals have life insurance to begin with.  Life insurance is a financial safety net that protects you and your family against the risk if you unexpectedly pass away before you're able to accumulate enough assets to support you and your family for the rest of their lives, there is a big insurance policy that pays out to provide your family with the financial support that they need to sustain their standard of living.

Once you have paid off mortgages, the kids are out of the house, and you have accumulated enough wealth in investment accounts to support you, your spouse, and any dependents for the rest of their lives, there is very little need for life insurance.

For example, if we have a married couple, both age 67, who want to retire this year and they have accumulated $800,000 in their 401(K) accounts, we can show them via retirement projections that, based on their estimated expenses in retirement, the $800,000 in their 401(K) accounts in addition to their social security benefits is more than enough to sustain their expenses until age 95. So, why would they need to keep paying into their life insurance policies when they are essentially self-insured.  If something happens to one of the spouses, there may be enough assets to provide support for the surviving spouse for the rest of their life.  So again, instead of paying $3,000 per year for a life insurance policy that they no longer need, why not surrender the policy, and spend the money on more travel, gifts for the kids, or just maintain a larger retirement nest egg to better hedge against inflation over time?   

It's simple.  If there is no longer a financial need for life insurance protection, why are you continuing to pay for financial protection that you don’t need?  There are a lot of retirees that fall into this category.

Individuals That Should KEEP Their Life Insurance Policies in Retirement

So, who are the individuals who should keep their life insurance policies after they retire?  They fall into a few categories.

#1:  Still Have A Mortgage or Debt

If a married couple is about to retire and they still have a mortgage or debt, it may make sense to continue to sustain their life insurance policies until the mortgage and/or debt have been satisfied, because if something happens to one of the spouses and they lose one of the social security benefits or part-time retirement income, it could put the surviving spouse in a difficult financial situation without a life insurance policy to pay off the mortgage.

#2:  Single Life Pension Election

If an individual has a pension, when they retire, they have to elect a survivor benefit for their pension. If they elect a single life with no survivor benefit and that pension is a large portion of the household income and that spouse passes away, that pension would just stop, so a life insurance policy may be needed to protect against that pension spouse passing away unexpectedly.

#3:  Estate Tax Liability

Uber wealthy individuals who pass away with over $13,990,000 in assets may have to pay estate tax at the federal level.  Knowing they are going to have an estate tax liability, oftentimes these individuals will purchase a whole life insurance policy and place it in an ILIT (Irrevocable Life Insurance Trust) to remove it from their estate, but the policy will pay the estate tax liability on behalf of the beneficiaries of the estate.

#4: Tax-Free Inheritance

Some individuals will buy a whole life insurance policy so they have an inheritance asset earmarked for their children or heirs.  The plan is to maintain that policy forever, and after the second spouse passes, the kids receive their inheritance in the form of a tax-free life insurance payout.   This one can be a wishy-washy reason to maintain an insurance policy in retirement, because you have to pay into the insurance policy for a long time, and if you run an apple-to-apple comparison of accumulating the inheritance in a life insurance policy versus accumulating all of the life insurance premium dollars in another type of account, like a brokerage account, sometimes the latter is the more advantageous way to go. 

#5: Illiquid Asset Within the Estate

An individual may have ownership in a privately held business or investment real estate which, if they were to pass away, the estate may have expenses that need to be paid. Or, if a business owner has two kids, and one child inherits the business, they may want a life insurance policy to be the inheritance asset for the child not receiving ownership in the family business.  In these illiquid estate situations, the individual may maintain a life insurance policy to provide liquidity to the estate for any number of reasons.

#6: Poor Health Status

The final reason to potentially keep your life insurance in retirement is for individuals who are in poor health.  Sometimes an individual is forced into retirement due to a health issue.  Until that health issue is resolved, it probably makes sense to keep the life insurance policy in force. Even though they may no longer “need” that insurance policy to support a spouse or dependents, it may be a prudent investment decision to keep that policy in force if the individual has a shortened life expectancy and the policy may pay out within the next 10 years. 

While “keeping” the life insurance policy in retirement is less commonly the optimal solution, there are situations like the ones listed above, where keeping the policy makes sense.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs):

Should you keep or surrender your life insurance policy when you retire?
The answer depends on your financial situation. Most retirees who have paid off their mortgage, have no debt, and have sufficient assets to support themselves and their spouse no longer need life insurance for protection. In those cases, surrendering the policy can free up cash for travel, family, or other retirement goals.

When does it make sense to surrender life insurance in retirement?
If your financial plan shows that your retirement savings, pensions, and Social Security benefits are enough to meet your lifetime expenses, you’re effectively “self-insured.” Continuing to pay premiums on a policy you no longer need may not make financial sense. The savings from surrendering the policy can help stretch your retirement dollars.

Who should keep life insurance after retirement?
Some retirees should maintain coverage, including those who still have a mortgage or debt, those who elected a single-life pension with no survivor benefit, and individuals with high net worth who expect to owe estate taxes.

How can life insurance help if you have a pension?
If your pension ends when you pass away and your spouse depends on that income, life insurance can replace the lost income. This is especially important if you chose a “single life” pension option without survivor benefits.

Can life insurance be used for estate planning?
Yes. Wealthy individuals may use life insurance inside an irrevocable life insurance trust (ILIT) to pay future estate tax liabilities, ensuring heirs receive their inheritance without having to sell estate assets.

Is life insurance useful for leaving an inheritance?
Some retirees keep a whole life policy as a tax-free inheritance for their children. However, it’s wise to compare the long-term return of keeping the policy versus investing those premiums in a brokerage account, as alternative strategies may provide greater value.

What if your estate includes a business or real estate?
If your estate includes illiquid assets—like a business or property—life insurance can provide cash to cover estate expenses, taxes, or to equalize inheritance among heirs (for instance, when one child inherits a business and another does not).

Should retirees in poor health keep their life insurance?
Yes, possibly. If a retiree is in poor health and expects a shorter life expectancy, maintaining an existing policy can make sense. The death benefit could pay out soon, offering a strong return on the premiums.

Should You Lease or Buy A Car: Interview with a CFP® and Owner of a Car Dealership

When clients are looking to purchase a new car one of the most common questions that we receive is “Should I Buy or Lease?”  To get the answer, we interviewed a Certified Financial Planner and the owner of Rensselaer Honda to educate our audience on the pros and cons of buying vs leasing.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs):

Should I buy or lease my next car?
Whether you should buy or lease depends on your financial goals, driving habits, and how long you plan to keep the vehicle. Buying is generally better for long-term ownership, while leasing can make sense if you prefer lower monthly payments and like driving a new car every few years.

What are the advantages of buying a car?
Buying a car allows you to build equity and eventually drive payment-free once the loan is paid off. You have no mileage restrictions, can customize the vehicle, and can sell or trade it whenever you choose. Over time, purchasing is typically more cost-effective than leasing.

What are the downsides of buying?
The main drawback is higher upfront costs and larger monthly payments compared to leasing. You’re also responsible for the car’s depreciation, which can reduce resale value if you trade it in after only a few years.

What are the benefits of leasing a car?
Leasing generally provides lower monthly payments, minimal upfront costs, and the ability to drive a new car every two to three years. Lease agreements often include warranty coverage, which reduces maintenance costs during the lease term.

What are the disadvantages of leasing?
Leasing comes with mileage limits—usually 10,000 to 15,000 miles per year—and penalties for excess wear and tear. You don’t build equity in the vehicle, and at the end of the lease, you must either return it or start a new lease. Over many years, leasing repeatedly can cost more than buying.

Who should consider leasing?
Leasing may be ideal for individuals who prefer driving newer cars with the latest features, don’t drive long distances, and want predictable monthly costs without worrying about long-term maintenance.

Who should consider buying?
Buying is best for people who plan to keep their vehicles for many years, drive more than the average mileage, or want to eventually own a car outright without ongoing payments.

What financial factors should I consider before deciding?
Compare the total cost of ownership over the time you expect to use the car, including monthly payments, insurance, maintenance, taxes, and resale or lease-end fees. A financial planner or dealership finance manager can help run the numbers based on your budget and driving habits.