Michael Gray, CPA's Blog

Tax and financial advice from the Silicon Valley expert.

Stock Market’s Down! Convert to Roth Now?

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  • mike   

The weak stock market might be an opportunity for taxpayers who want to convert their taxable traditional retirement accounts to tax-free Roth accounts.

On Monday, April 21, 2025, the S&P 500 sank 2.4%. The index at the center of many 401(k) accounts has retreated 16% below its record set two months ago.

The other stock market indexes, bond prices (including U.S. Treasury bonds) and the dollar have also fallen.

Reasons for the market weakness might be uncertainty as a result of President Trump’s imposition of tariffs of 145% to 245% on imports from China, broad-based 10% tariffs on other imports, and more tariffs on imports from other countries after a 90-day pause, together with his threat to fire Federal Reserve Chair Jerome Powell. Firing Chairman Powell threatens the independence of the Federal Reserve, which helps stabilize world financial markets.

With securities prices down, this could be a great time to make a Roth conversion.

What if securities prices fall even more? Timing financial decisions is problematic. Securities prices could fall even more if Trump actually fires Chairman Powell and goes ahead with many of Trump’s proposed tariffs that have been “paused.” Securities prices could improve if Trump reconsiders these threats and proposals and decides to not go ahead with them. Or, something else could happen. We just don’t know what will happen in the future.

We do know prices have already fallen, creating a potential opportunity to save taxes with a Roth conversion.

Why make a Roth conversion?

  1. After a short waiting period, most earnings and appreciation inside a Roth account are tax-free. . The earnings and appreciation inside a traditional retirement account are tax-deferred until distributions are made. (There is an exception for “unrelated business taxable income” that doesn’t apply to most taxpayers.)

2. Distributions from a Roth account after age 59 1/2 are tax-free, and so are many distributions before age 59 1/2. Distributions from a traditional retirement account in excess of any non-deductible contributions are generally taxable.

3. There are no required minimum distributions for a Roth account during the lifetime of the account owner (unless the retirement plan specifies otherwise.) Required minimum distributions generally must be made from a traditional retirement account when the account owner reaches the “applicable age”, currently age 73.

4. When the account owner dies after the required beginning date (April 1 of the year after reaching the “applicable age”), required minimum distributions must be made to the beneficiaries of a traditional retirement account. Since there is no required beginning date for Roth accounts (except Designated Roth Accounts of some employer plans), required minimum distributions don’t apply for most inherited Roth accounts. (Inherited Designated Roth Accounts can be rolled over to beneficiary Roth IRA accounts to avoid having to make required minimum distributions.) (Both traditional and Roth retirement accounts are subject to the requirement to be distributed by the end of the tenth year after the death of the account owner, with some exceptions.)

5. Distributions to beneficiaries from inherited Roth accounts are generally tax-free. Distributions to beneficiaries from inherited traditional retirement accounts are generally taxable, except for the recovery of any nondeductible contributions.

Since required minimum distributions don’t qualify for Roth conversions, taxpayers who have reached their required beginning date MUST TAKE THEIR REQUIRED MINIMUM DISTRIBUTION FOR THE YEAR BEFORE MAKING A ROTH CONVERSION.

A Roth conversion is currently taxable. Planning to have the cash available to pay the income taxes relating to the conversion is critical. You might want to consult with a tax consultant or financial planner to estimate in advance what the tax will be and decide how much to convert.

There can be other “side effects” of a conversion. For example, the additional income can reduce itemized deductions for medical expenses and can result in higher Medicare premiums. Get advice to “look before you leap.”

Now that tax return filing season is over, it’s tax planning season. Whether to make a Roth conversion during 2025 should be a topic on the agenda for a tax planning meeting for everyone who has a traditional retirement account.

Will U.S. income tax laws become suggestions?

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  • mike   

There are a lot of reasons to question the viability of the federal income tax system during the Trump administration.

President Trump HATES the federal income tax system and suggested he might repeal it during his 2024 Presidential campaign. He would prefer to replace it with “simple” tariffs. But tariffs simply can’t generate as much revenue as the income tax system for funding the federal government. The federal government collects about $2.2 trillion in income taxes. Imports to the U.S. for 2023 were about $3 trillion. When tariffs are imposed, that import number will fall. There isn’t enough scope to raise the same revenue with tariffs. (And, incidentally, tariffs shift the tax burden from high income individuals, who spend less of their income, to the poor and middle class, who spend most of their income.)

Meanwhile, Trump’s speeches have confused many taxpayers about their obligations. While working at a CPA firm this year, I heard some of the clients thought the IRS was being disbanded and they no longer had to file an income tax return.

That simply isn’t true. If you study the budget proposals in Congress, income taxes are still scheduled to provide most of the revenue for federal programs, notably the Department of Defense.

The IRS is one agency that hasn’t been eliminated by the Trump’s Department of Government Efficiency (DOGE), although it has been seriously wounded.

With additional funding enacted by Congress, the IRS grew from about 79,431 employees to 102,309 during the Biden administration. With increased staffing, taxpayers who called the IRS saw a decrease from 28-minute wait times a few years ago to about 3 minutes during the 2025 tax season.

That additional $80 billion funding has since been cut to $40 billion, most of it already spent.

DOGE layoffs plus about 20,000 IRS employees who accepted the administration’s deferred resignation offer will reduce the IRS’s staffing to about 60,000 to 70,000 employees.

Three IRS Commissioners have resigned since the beginning of the year, most recently because of disagreement with the Trump administration’s plan to use IRS records to track undocumented aliens living in the United States for deportation.

When they learned that IRS records were no longer confidential, some undocumented aliens decided not to file a 2024 federal income tax return.

The leadership for modernizing the IRS has also resigned, since funding for their efforts has been eliminated.

Decreased staffing means decreased enforcement. Decreased enforcement leads to decreased compliance and decreased tax collections.

Taxpayers see less risk of not complying with the tax laws.

This year, federal income tax return filings fell by nearly 1 million (about 1.1%) and about 200,000 more taxpayers have filed extension forms, compared to last year. (Natural disasters, including the Los Angeles wildfire, also contributed to the decrease in 2024 income tax returns filed by April 15.)

Decreased staffing also leads to more frustrated taxpayers, who won’t be able to get their IRS questions answered and problems resolved.

On February 19, 2025, President Trump issued Executive Order 14219, Ensuring Lawful Governance and Implementing the President’s “Department of Government Efficiency” Deregulatory Initiative, which suspended issuing new regulations by government agencies, including the IRS.

The IRS recently issued Notice 2025-23, withdrawing final regulations issued during January, 2025, making basis-shifting via partnerships “transactions of interest” and requiring special disclosure of these transactions. These transactions are a way to shift the tax basis (cost for sold assets or tax deductions) from non-deductible items, such as corporate stock, to tax deductible items, such as equipment.

The American Institute of Certified Public Accountants complained the regulations were too complicated. Of course, these artful tax-dodging structures are also complicated, generating substantial fees for tax advisors.

Instead of cleaning up the regulations, the IRS is withdrawing them, so these transactions no longer have to be disclosed, and these abusive taxpayers can go on their merry way, avoiding paying income taxes. The Treasury estimated last year that the transactions could potentially cost taxpayers more than $50 billion over a 10-year period.

The withdrawal of these regulations is an indication of a reduced IRS commitment to enforcing our tax laws. In other words, our tax laws might become merely “suggestions”, inviting “aggressive” tax positions and “substantial compliance” for matters such as properly documenting charitable contributions and business expenses.

After all, no one is looking!

How IRS employees helped eliminate a $250,000 tax bill

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  • mike   

Here is the story of one of my biggest “taxpayer wins”. The names and amounts have been changed for confidentiality.

My client, Bob, was experiencing financial difficulties. His antiques store was experiencing losses.

He was embarrassed to come to me to have his income tax returns prepared, because it would be hard to pay me.

In 2010, he sold the building that housed his store for $1,000,000 and moved the business to rented space.

Based on an information report for the sale of the building that it received, the IRS prepared its own tax return for Bob. There were no deductions for the cost of the property or the selling expenses. It made “worst case” assumptions, prepared the return for a married person filing a separate return, and taxed the gain as ordinary income with no itemized deductions or personal exemption deductions. A ballpark of the bill was $250,000. California would also eventually assess tax based on the IRS report.

IRS Collections started garnishing funds from Bob’s bank accounts.

Finally, he came to me to help with his problem.

When I prepared his income tax returns, there was no tax due!

I applied to the IRS for audit reconsideration. Remember, they had already assessed the tax plus penalties and interest.

The IRS agreed to reopen the case and audit Bob’s tax return. They accepted the tax return I prepared as filed and reduced his tax to zero.

For some reason, they didn’t eliminate the penalties for failure to file and underpayment of tax.

After some correspondence back and forth, I applied for help from the Taxpayer’s Advocacy Office at the IRS. One of the purposes of that office is to help taxpayers resolve problems dealing with the IRS. The Taxpayer’s Advocacy Office eliminated the penalties for Bob’s tax return, and he was able to recover all of the money that was garnished by the IRS.

(Needless to say, my fee for doing this was more than ten times what the tax return preparation fee would have been if Bob just had me prepare his tax returns in the first place.)

Yes, what I did for Bob was impressive.

But I couldn’t have done it without having competent and cooperative people at the IRS to work with.

Have you ever had to call the IRS with a problem or a question? It can be a frustrating experience, having to wait a long time on hold or hoping to be available when you are called back. What if there were even fewer people available to answer taxpayer calls?

The latest blow to the IRS is in the Continuing Resolution budget legislation passed by Congress and signed by President Trump on March 15, 2025 to keep the U.S. government open. The Continuing Resolution eliminates $20 billion of IRS funding previously approved by Congress in the Inflation Reduction Act of 2022.

The original appropriation was $80 billion. $20 billion was previously eliminated by Congress in other budget legislation, so only $40 billion is left. The appropriation was to be allocated over a 10-year period and was to be used by the IRS to modernize its operations, rebuild its declining workforce, and improve taxpayer compliance. As of September 30, 2024, the IRS spent about $9 billion of the funding, including about $3.7 billion for employee compensation.

Now all modernization activities have stopped and DOGE is initiating at least a 20% reduction in the IRS’s workforce after April 15 and by May 15, 2025.

430 of about 1,900 employees at the Taxpayer Advocate Service are slated to be cut, in addition to 90 employees who have already accepted the voluntary buyout offer.

With a dramatic decrease in the number of people working at the IRS, we can expect a big decline in tax audits and compliance with the tax laws and a big decline in the guidance and taxpayer support services provided by the IRS. According to Biden administration officials, the agency will conduct about 400 fewer audits of U.S. businesses and 1,200 fewer audits of high income individuals each year, which could add $140 billion to the national debt over the next decade.

After the Trump Administration guts the IRS, there will be fewer people available to help taxpayers resolve their problems. In many cases, they will remain unresolved and they might have to pay additional income taxes, interest, and penalties, or pay attorneys to litigate unnecessary disputes.

Having lost its funding for modernization, the IRS will have to continue operating with antique computer systems.

That doesn’t seem like “Government Efficiency” to me.

How do you feel about this? Let your representatives in Congress know. Remind them that, when you can’t get help from the IRS, you’ll be reaching out to them for help with IRS problems.

House bill takes from the poor; gives to the rich

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  • mike   

On February 25, 2025, the U.S. House of Representatives passed its Budget Reconciliation proposal, 217-215.

The Senate previously passed its reconciliation proposal 52-48 on February 18, 2025. The Senate proposal is limited to increased spending over the next decade of $175 million for immigration enforcement and $150 billion for defense, while cutting other federal programs. They planned on passing additional guidelines for revenue and other cuts later.

The House proposal fulfills President Trump’s requirement for a “big, beautiful bill” by providing the expected guidelines for federal revenue and spending for the next 10 years. It seems likely the Senate will also approve the House proposal and send it to President Trump for signature.

The House proposal includes extending about $4.5 trillion in tax cuts adopted in the Tax Cuts and Jobs Act of 2017 that are expiring.

It also lists increased spending of up to $110 billion for the Judiciary Committee, $100 billion for the Armed Services Committee and $90 billion for the Homeland Security Committee (immigration enforcement.)

To reduce the resulting increase in the national debt, the proposal includes cuts of at least $880 billion by the Energy and Commerce Committee, $330 billion by the Education and Workforce Committee, $230 billion by the Agriculture Committee and other smaller cuts, leaving a net deficit of about $3.5 trillion, or $4 billion, including interest.

The proposal consists of broad guidelines and not specific details, but it appears the largest cuts would come from Medicaid and food assistance programs, like food stamps and school lunches.

Although President Trump has said “there will be no Medicaid cuts”, the House blueprint instructs the Energy and Commerce Committee, which oversees Medicaid, to come up with at least $880 billion in cuts, accounting for more than half of the reduction in the budget outline. There is no other item big enough for $880 billion in cuts.

Medicaid pays medical bills for more than 70 million low-income Americans. Medicaid covers nearly half of all births in the U.S., and about two-thirds of nursing home stays.

Adding a work requirement to the program would only save about $100 billion.

Note interest expense is one of the largest items in the deficit, about $ 1/2 trillion. Interest continues to grow with higher interest rates and the ballooning federal debt.

Since low-income taxpayers pay very little income taxes, the overwhelming beneficiaries of $4.5 trillion in tax cuts are high-income taxpayers, so Congress is financing their tax cuts by taking benefits from the poor and adding the rest to the national debt, which sucks up more funds to pay interest expense and leaves payment to future generations.

These medical and food assistance cuts will hit voters hard in many “red” states. Moderate Republicans have expressed concerns about how their constituents will be affected.

“The devil is in the details.” Congress will still have to work through the details of the tax cuts and the expenses outlined in the proposal.

President Trump has also requested additional tax cuts, including exempting tips, Social Security benefits and overtime pay from income taxes, creating an itemized deduction for auto loan interest, and reducing the maximum corporate income tax rate from 21% to 15%. Adopting these changes would further increase the deficit.

I expect Congress will be arguing about these matters for the rest of the year.

Tax relief for Los Angeles fire victims

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  • mike   

The IRS has announce tax relief for individuals and businesses in Los Angeles county affected by wildfires and heavy winds that began January 7, 2025.

Their filing deadline for 2024 income tax returns has been extended to October 15, 2025.

Various tax filings and payment deadlines for returns and payments due from January 7, 2025 through October 15, 2025 have also been postponed to October 15, 2025.

Here’s a link to the news release, IR-2025-10. https://www.irs.gov/newsroom/irs-california-wildfire-victims-qualify-for-tax-relief-various-deadlines-postponed-to-oct-15

Here’s a link to the IRS tax relief in disaster situations page, including other U.S. disasters. https://www.irs.gov/newsroom/tax-relief-in-disaster-situations

Governor Newsom has announced the Franchise Tax Board will also postpone filing and payment dates for 2024 income tax returns to October 15, 2025 for taxpayers located in Los Angeles County. Here’s a link to that announcement. https://www.gov.ca.gov/2025/01/11/california-provides-tax-relief-for-those-affected-by-los-angeles-wildfires/ Here is a link to the Franchise Tax Board’s announcement. https://www.ftb.ca.gov/about-ftb/newsroom/news-releases/2025-01-emergency-tax-relief-for-los-angeles-county-fires.html

The Employment Development Department has announced a 60-day extension of time to file California state payroll tax reports and make payroll tax deposits for employers in Los Angeles and Ventura counties. The extension is not automatic; it must be requested. Here’s a link to the announcement. https://edd.ca.gov/en/about_edd/news_releases_and_announcements/california-supports-southern-california-communities-impacted-by-the-state-of-emergency-and-provides-relief-for-workers-and-businesses/

The California Department of Tax and Fee Administration (CDTFA) (sales and use tax) has also announced a 60-day extension of time to file California sales and use tax reports and make tax deposits for businesses in Los Angeles and Ventura Counties. The extension is not automatic; it must be requested. Here’s a link to the CDTFA’s tax relief page. https://www.cdtfa.ca.gov/services/state-of-emergency-tax-relief.htm

Should a surviving spouse roll over an inherited retirement account?

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  • mike   

When someone passes away is one time it's essential to consult with an estate planning lawyer, a tax advisor like a CPA or enrolled agent, and possibly a financial planner.

Read More

Final regulations issued for Required Minimum Distributions

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  • mike   

The IRS has issued final regulations (TD 1001) and proposed regulations (REG-103529-23) relating to Required Minimum Distributions from traditional and Roth qualified retirement plans, including Section 401(k) plans, and IRAs.

The regulations explain the rules for required minimum distributions under the SECURE Act of 2019 and SECURE 2.0 Act of 2022.

The final regulations are mostly the same as previously-issued proposed regulations with some minor changes in response to comments received by the IRS.

Notably, the final regulations didn’t change a controversial rule in previously-issued proposed regulations requiring that distributions be made annually when the plan participant dies after the required beginning date and annual required minimum distributions already applied during their lifetime. (This rule doesn’t apply to Roth account participants, because there is no required beginning date during their lifetimes.)

In most cases, that means when a plan participant dies after the required beginning date and annual required minimum distributions already applied during their lifetime, life expectancy distributions continue for the next nine years and the balance of the account is distributed during the tenth year after death. See your tax advisor for exceptions for “eligible designated beneficiaries” (including the surviving spouse) and non-designated beneficiaries.

See your tax advisor about how the new regulations apply for you and your family.

Michael Gray, CPA's Blog

Tax and financial advice from the Silicon Valley expert.