Welcome to The Retirement Tax Podcast, where hosts Steven Jarvis, CPA, and Benjamin Brandt, CFP, work together to bridge the gap between tax professionals, financial advisors, and their mutual clients to help reduce most people’s largest expense in retirement: taxes. Each week, they will dive into conversations around taxes, focusing on what you can truly control (instead of what you cannot) and how to set yourself up financially for your future.
The Inflation Reduction Act has been passed—so are 87,000 IRS agents going to kick down our doors, steal our dogs, and take away our birthdays? Steven and Ben sit down to answer this question and—more importantly—they discuss what is actually in this act and what will be passing into law. You will hear why $80 billion is going to IRS enforcement, what else is in the bill, and what this all means for you.
There’s a lot of information and assumptions going around, so Ben and Steven take the time to nail down what you actually need to know about the bill. Although it is unlikely that it will actually reduce inflation, you will hear how it actually may be providing some benefits to your taxes. You will also learn what other tax changes are happening and why many of them are directed at businesses rather than individuals.
What You’ll Learn In Today’s Episode:
- What to expect from the 87,000 new IRS agents.
- The tax benefits and opportunities you may see.
- The tax changes that will affect businesses.
- The changes that DIDN’T make it into the bill.
- How this will affect drug prices and hearing aid access.
- Where to park short-term cash in inflationary times.
Ideas Worth Sharing:
“We have to recognize that risk-free means low return.” – Benjamin Brandt
“Whether it’s taxes or inflation, we’re really looking at how this plays into our long-term plan. When we’re talking about tax-planning opportunities, that’s what we constantly come back to.” – Steven Jarvis
“For an aggressive investor who is retired, your biggest battle will be sequence of returns risk.” – Benjamin Brandt
Resources In Today’s Episode:
- Connect with Benjamin Brandt: LinkedIn
- Connect with Steven Jarvis: LinkedIn
- The HSA Tax Trifecta, Ep. 23
Share The Love:
If you like The Retirement Tax Podcast…
Read the Transcript Below:
Benjamin Brandt: Welcome back to The Retirement Tax Podcast. I am your humble co-host, as always, Benjamin Brandt. Joining me as always is Steven Jarvis. How you doing Steven?
Steven Jarvis: Ben, I’m doing really well.
Benjamin Brandt: Steven, I don’t know if you’ve been paying attention to the headlines at all, but I heard a rumor that 87,000 IRS agents are going to kick down my door and steal my dog and take away my birthday. Is there any truth to that rumor?
Steven Jarvis: Man, I heard they’re stealing cats. But other than that, yeah, it’s always fun when people get things in the headlines, because as we’re recording this, the Inflation Reduction Act — and we’re not ever going to say that again because that’s the official name of it. That’s not really what it’s accomplishing.
Benjamin Brandt: The only thing inflated are egos in Washington. That’s the only thing that is appropriate to talk inflation. Nothing’s going to be reduced in my opinion, but we don’t want to talk politics.
Steven Jarvis: But yeah, we’re not going to dive into politics. One of the things that came out of that was additional funding for the IRS. $80 billion with a B is going to the IRS over the next 10 years, primarily for enforcement is what they label that under. And part of that additional funding created essentially 87,000 IRS agent positions.
Now, some of those are filling positions that had gone open for a long time. It’s not entirely brand-new positions. But all that aside, we’ve got these big scary headlines. And some people conflate that with, oh, well, that’s 87,000 gun-toting, IRS criminal investigators who are going to kick down your door and take your cat or your dog. And that’s definitely not quite accurate, to say the least.
Benjamin Brandt: So, when we talk about agents, is this going to … we’ve mentioned in the show, I think 22 million backlogged returns, sort of the queue; are these to help alleviate that issue?
Or you mentioned enforcement, do we know that this is going to help us with the backlog? Or are they doing more offensive work than defensive? What do we know about those details?
Steven Jarvis: Yeah, it’s going to be a combination, at least from what we know now. They don’t call and ask my opinion, unfortunately. But the plan that’s being laid out is that yes, it’s going to help with the backlog, it’s going to help with the really poor customer service that people are getting from the IRS right now.
If we have any IRS employees listening, I do want to give a quick shout out. It’s such a thankless job. I get on the phone with the IRS at times, and the people I’ve talked to at least recently have been helpful and friendly, and they’ve got to just take it from people all day. So, would like to thank the people who are doing that.
But yes, this in part, is filling those staffing positions, but it is very intentional to be used to additional IRS audits, to do additional enforcement actions from the standpoint of making sure that people are actually paying the taxes they owe.
Benjamin Brandt: Okay. So, would this be a good time to go through what else is in the bill and what maybe these IRS agents are going to be on the lookout for?
Steven Jarvis: Yeah. So, I’ll kind of share a little bit, at least my thoughts of what this really means for our average listener, because it can feel really scary. Even though we’ve clarified, hey, they’re not all going to have guns and kick down your door. It still can sound scary of, hey, this means my audit risk might go up.
And that is true. The IRS is going to be doing more audits. There’s a lot of kind of political maneuvering of who that’s going to be targeted at and at what income levels or types of business owners, I don’t have the final answers on that.
The way I approach this and for me and my team, this doesn’t change at all how we’re preparing taxes, because we already started from a place of, we want to do this right. We want to pay the money we owe and not leave the IRS a tip, but we’re already approaching this from a standpoint of if the IRS were to come ask us questions, we want to be confident in our answers.
So, I’m not going to volunteer to go through extra audits, but I’m not concerned about the outcome if they do happen because of that approach we’re taking.
Benjamin Brandt: Okay. So, what other things are in the bill? I know that there were some extensions of the Affordable Care Act premiums out into, I believe it was 2025.
So, with the CARES Act, there was some smoothing of these premiums. So, if you accidentally entered too much, there was this cliff that happened. So, they’re smoothing that out for another few years. Is that my understanding, correct?
Steven Jarvis: Yeah, that’s actually one of the pieces that I am pretty excited about for a lot of the clients that I work with, who benefit from that, that you can see a tangible benefit for certain taxpayers from this bill.
So, a little bit more context in how that works; the premium tax credit, which you you’re eligible for, if you’re getting your insurance through the marketplace. There used to be a really hard cliff at 400% of the poverty level, is how they use that. And we all know that percents mostly just mean marshmallow to us, which is why some people would fall in this trap of accidentally going over that edge.
And so, the CARES Act for 2021 and 2022 took away that cliff. So, even if you were over that threshold, you wouldn’t just automatically lose all of it. And so, what this new legislation did, one of the things it did, was extend that through 2025. So, now we have an additional period of time where there’s a little bit more flexibility.
And to other topics that we cover on this show, one of the things that does is create a little bit more opportunity to look at Roth conversions, for example, because people who are getting the premium tax credit a lot of times because of that cliff, it was really dangerous to try to intentionally increase your income, because you might lose out on thousands or tens of thousands of dollars of this premium tax credit. And now, we have some more flexibility there.
Still, something we want to look at really closely and not just kind of make general assumptions about, but potentially some flexibility there.
Benjamin Brandt: 2025 could be a real interesting year, if the smoothing of the premium subsidy cliff goes away and the Tax Cut and Jobs Act resets back, that could be two things that could sort of interact. And it’d be a very important year to very carefully calculate your Roth conversions.
Steven Jarvis: Most definitely. And that’s a great point to make about this most recent tax law change is that it didn’t change — other than a couple of these really specific things, it’s not changing the sunset of the Tax Cuts and Jobs Act, which was the big one from a few years ago. Those rates are still going to go up in 2026 when that act sunsets.
One thing that was kind of in the news earlier this year as a potential tax law change that did not end up in this bill, was the idea of reducing the federal estate tax exemption. Right now, it’s just over 12 million for an individual, which means potentially 24 million for a couple.
So, they talked about really reducing that, that didn’t make it in this bill. But those numbers are essentially set to cut in half and 2026 when the Tax Cuts and Jobs Act expires.
Benjamin Brandt: Okay. There’s some changes to corporate income tax as well?
Steven Jarvis: Yeah. Again, this is one similar to talking about 87,000 IRS agents banging down your door, the minimum corporate tax rate is one that the headlines might feel kind of ominous and scary, but it’s very specific and narrow who that actually impacts.
And so, it’s a minimum 15% corporate tax rate on companies making over a billion dollars in revenue. And there’s some pretty specific definitions of how they’re classifying having a billion dollars of income. But they’re really specific rules on how that’s being classified. So, it’s going to affect a very small number of companies.
So, no reason for small business owners to suddenly be concerned that, “Oh, now my minimum tax rate is going to 15%.”
Benjamin Brandt: Unless Jeff Bezos is one of our listeners. If so, “Hey, Jeff, how’s it going? Let me borrow the yacht on the weekend if that would be okay.”
But other than that, this is specifically targeted like companies like Amazon that have sort of been in the headlines for not … they invest heavily in research and development and things like that. So, they’re not paying a lot of income tax on billions and billions of income.
Steven Jarvis: Yeah, it’s very narrow group that it’s going to affect.
There’s a couple other things that have been in the news this year about potential tax laws changes that didn’t make it in this bill that I wanted to comment on as well, because one of them is something that we have talked about on the show, this idea of doing a backdoor Roth.
And earlier in the year, there was a lot of talk of, “Hey, let’s get rid of that, that shouldn’t have been there to begin with.” And while that might come up again, at some point in the future, that was not in this bill.
So, things we’ve talked about before as far as pursuing a backdoor Roth strategy, those are all still the same, even after this tax law change.
Benjamin Brandt: And the only other thing that I can think of that would have a retirement spin on it, it’s really more of a health insurance spin on it, would be that Medicare can now negotiate drug prices. We’ll have to see how this all ends up. But I believe that is going to result in a cap, an out-of-pocket cap for how much you’ll be spending on your prescription drug prices.
And then the other thing I saw in the news was now you’ll be able to get hearing aids over the counter. So, kind of possibly positive outcomes for your average person, we’ll see how it all fleshes out. But there’s some positive in there, but it’s fairly minor.
Considering six months ago, it wasn’t called the Inflation Adjustment Act, it was called something else, but it had a lot more in it. The things that did sound a little bit more scary, but this is a kind of a more of a lukewarm bill than something that’s going to be really affecting our listener’s retirement.
Steven Jarvis: Yeah. And I want to circle back just for a second to, again, this whole 87,000 IRS agents.
Our last episode of the show, we talked about documentation and keeping good records for our taxes. And we recorded that a while ago before the bill passed. Hopefully, we didn’t have any influence on how this bill came out. The IRS is saying, “Oh, wait, let’s go talk to those guys.” Pretty sure that’s not how it worked.
But go back and listen to that again. If you have any questions about, well, what if I do end up in that very small — it’s still a very small percentage of people who are going to be audited. What if that does happen to me?
It really just comes back to making sure that we have an intentional approach where we’re following this philosophy of let’s pay what we owe, nothing that we talk about should be construed as we’re trying to avoid taxes from like a legal standpoint.
If we’re paying what we owe, if we’re keeping records of why we made the decisions that we did, those audits aren’t going to be fun, but you’re going to get through them just fine.
Benjamin Brandt: And then the worst-case … I don’t I want to say worst case scenario, but the likely scenario is if there is money found that you owe, you would pay the money and then it would potentially be some interest in penalties as well. Especially when we’re talking about your average retirement investor, that’s living off of their IRA, living off of social security, things like that.
So, as scary as it sounds, you’ll very likely be able to survive an audit without any major penalties. And if you practice good documentation like we talk about, you’re going to be much closer to being able to get through this without a lot of pain. So, keep listening to the show.
Steven Jarvis: Definitely. And we certainly appreciate all of our listeners. We love hearing from our listeners, and of course, we love answering listener questions. So, please keep taking that opportunity to send them in to us. And we’ll go ahead and answer a listener question now.
So, Ben, question for this week, “Where should I park short-term cash in these inflationary times? Vanguard seems to not have too many options that return like a treasury note. How do I buy treasuries?”
Benjamin Brandt: Okay, well, there’s a few different ways to approach this. By the way, thank you to our listeners for writing in questions. We just capped off our fifth annual listener survey.
Every summer, we reach out to our listeners on the Retirement Starts Today show and our everyday Saturday newsletter, and we say how can we improve the show? And we’re including this show in the fold as well.
So, we’ve got a few hundred fresh questions and Steve and I are excited to tackle each of them.
So, this question, “Where do I park short-term cash?” That’s tricky. That’s just tricky. There is the risk-free rate. And right now, there’s not a lot of risk to be had out there. There’s not a lot of return to be had.
Any extra return that we have, we’ve got to take on extra risk. So, especially with interest rates rising, things that used to be relatively low-risk, like bond funds, corporate bond funds, things like that — they’re being drastically repriced because interest rates are rising. Not only are they rising, they’re rising quickly.
So, we’re actually seeing in some corporate bond funds, stock-like returns on the downside. The S&P is down like 10% year-to-date. Some of our corporate bond funds also down 10% year-to-date.
So, we’re getting bond funds returning negatively like stocks. So, normally, a treasury fund, things like that would be relatively risk free. U.S. bonds, things like that. That is not the case today.
So, we just have to recognize that risk-free means low return. So, there are a couple options we could really look at our retirement budget and look at our portfolio and say, “Is this extreme short-term need within the next, let’s say two or three years, or is this something more along the line of five to six years where I could potentially see some risk if I can leave it invested long enough.”
You could look at CD ladders. The interest rates have been coming up and we are seeing that with clients being reflected in some CDs. So, we could make a six-month, 12-month, 18-month, two-year CD ladder. And we would get some return potentially not more than inflation, but any positive return that we get takes a little bit of the bite out of inflation.
If we’re talking about, I don’t want to say smaller amounts of money, but if we’re talking about a super-sized emergency fund — let’s say your emergency fund ideal size is 25,000, and you’ve got 35,000 in there, maybe a stimulus check that you never spent or tax return that you haven’t reallocated yet; we could look at something like I bonds, inflation bonds.
You and your spouse could each put $10,000 a year into something like that. And those are returning, 7, 8, 9% is similar to the recent inflation rates you’ve been seeing in the news.
So, there are places to do that. If you want to buy an I bond, you can’t do it through Vanguard, you have to go specifically to, is it TreasuryDirect, Steven to set up an account and do those sort of things?
So, you wouldn’t be able to do it through Vanguard. You’d have just another account to maintain.
I’ve heard stories that that’s relatively pain-free. I’ve heard stories that say it is kind of aggravating. I guess it all depends on your patience level and your technology-savvy level. But I would say if it’s a short-term investment, don’t expect great returns, don’t expect to be in inflation for now.
Reexamine your investments if they’re actually intermediate or long-term investments, let’s invest accordingly. And then we would probably very likely beat inflation.
Check out I bonds. But other than that, hope that your growth stocks are doing their job and that’s to outpace inflation. Our bonds and cash are really more of an insurance policy to make sure that we’re going to get the income we need.
So, it’s growth stocks for the long-term, bonds and cash for income for the short-term. And that’s a total return fund and rebalance accordingly. And that’s how I think people should do it. But that’s just one podcaster’s opinion.
Steven Jarvis: Ben, I certainly appreciate not just you sharing your opinion on that, but since I’m the CPA side of this duo, I love hearing the intentionality behind how you communicate it.
And there’s a couple things you mentioned in there. Even though the question is related to short-term cash, that we got to take a step back and whether it’s taxes or inflation that we’re really looking how does this play into our long-term plan?
Because as we talk about different tax-related planning opportunities, that’s what we constantly come back to, of what’s that timeline look like? Where do we have the opportunity to make choices?
And then any part of this, I do have a crystal ball on my desk. It doesn’t work currently or ever. And so, we’re kind of left doing the best we can with the information that we have, whether that’s related to investing or taxes — I’m just glad that we can be here to provide a little bit information on that.
Benjamin Brandt: Absolutely.
Steven Jarvis: Kind of on the other side of this question about short-term cash, but another listener question said, “I’m an aggressive retired investor. Can I keep it going through my retirement? Do some people do this? I seem to have excess retirement savings and I have handled the 2022 plunge just fine.”
So, really this question of, well, is there some point where I’ve got to stop aggressively investing?
Benjamin Brandt: Yeah, I would say maybe, probably not. So, full disclosure, the clients that I work with, I would say are middle of the road investors. They’re not hyper, hyper aggressive, they’re not hyper, hyper conservative.
They’re somewhere between going skydiving on the weekends versus watching paint dry on the weekends. My clients are kind of firmly in the middle between those two investing styles.
It sounds like you’re kind of more of the, “I’m filling out my 1040 under the canopy of a parachute kind of an investor,” which I like, but that’s not who I personally serve. Most of those investors are, do yourself investors anyway, so they’re not going to use an advisor. So, I’m going to assume that you’re in this camp.
Can I stay in aggressive the whole time throughout retirement? I think you can, if you’re managing your own investments. How you approach required minimum distributions and how you approach taking income off of those is going to be very unique.
So, you’re going to use some combination of a safe withdrawal rate and keeping track of your required minimum distribution. So, we’re going to save 4% per year.
Now, a traditional 4% rule would say, day one of retirement, you analyze what 4% of your portfolio is. We convert that into an income number, so 40,000 per million, and then we’re going to increase that 40,000 by inflation every year and we’re never going to look at our portfolio again.
And that’s based on back testing for 30-year increments. And it’s basically always worked. Again, not my favorite way to do things. I like more of a guardrails approach, but we’re answering your question specifically.
So, you would want to do something like the 4% rule, but you’re not looking at year one of retirement. You’re looking at your account balance every year, because for an aggressive investor, that’s also retired and taking income, your biggest battle is going to be against sequence of returns risk.
So, let’s say you’ve got a million-dollar portfolio and year one, you need, let’s say 4%, 40,000, 4% also keeps us friendly for required minimum distributions at least to start. And then year two, let’s say we’re an aggressive investor and it’s 2022, now we’re at 900,000, take 4% of 900,000. The next year we recovered our 1.1 million, take 4% of 1.1 million.
So, your sequence of returns risk is significantly reduced because you are reassessing that 4% every year, rather than keeping it at 4% and not moving it. Even if the market gets really, really bad, that’s for like a half stock, half bond portfolio. You’re a hundred percent stocks I’m assuming.
So, we’re just going to lower our income or increase our income based on our January 1st retirement value. So, again, wildly inappropriate for 99% of investors, but hey, I want to talk retirement with every investor. So, that means sometimes high progressive people.
So, reevaluate with that income every year. It’s like you said, you have excess retirement savings. So, if we needed to cut our income back 20% in a year, we can. But if we’re optimistic long-term investors, and it sounds like you are, you’re going to be able to collect a lot more income doing this strategy. It’s just going to be more volatile.
So, also, probably want to defer social security and do some of those things, build yourself a nice base of income, so that these big volatility swings in your income won’t impact you as bad.
Obviously, you got to pay your utility and go to the grocery store, whether your account did amazing or awful lot last year. So, you’ll want to have a nice base. So, yes, you can absolutely stay aggressive your entire life, there’s just a really unique way to go about it.
Again, that’s not how I work with clients, but I’m more than happy to sort of go down this path of hypotheticals with you. So, very exciting. But yes, you can stay aggressive your whole life if you’re a wild man, which it sounds like you are, so good on you.
Steven Jarvis: And for any of our listeners who are thinking, “Well, wait, where’s the tax answer in these questions?” Part of the reason we include some of these other questions in here is that even though I’m the tax guy here, taxes are just one passenger on the bus. They’re not the driver. This has to fit into the bigger picture.
And if you’re listening to Ben and thinking, “Hey, I could actually use more information about other aspects beyond taxes,” be sure and add his other podcast to your list. Don’t replace what we’re talking about here, but the Retirement Starts Today Podcast, Ben covers a lot more topics besides just taxes like we do here.
Benjamin Brandt: Yeah, I think I saw a stat once that the average podcast listener listens to seven different podcasts. So, I hope we’re among your top two on that.
Steven Jarvis: Most definitely.
Benjamin Brandt: That’s what I love about this show is that on The Retirement Tax Podcast, we’re talking about the confluence of retirement planning and income tax. And I really think that’s where the magic happens, so we can analyze both of these with equal weight.
So, that’s why I love recording these episodes on the first and 15th of every month, just like payday.
Steven Jarvis: Yeah. Well, Ben, it’s been a pleasure recording with you as always. Thanks for your insight on those listener questions.
For our listeners, please remember that while the 87,000 IRS agents sounds scary, you don’t need to reinforce your doors. This isn’t 87,000 people that are going to come kicking.
Benjamin Brandt: Excellent. I love to hear it. I’m going to sleep a little bit better tonight knowing that. So, until next time, don’t let the taxman hit you where the good Lord split you.
Hi everyone, quick reminder before you go. While Ben and I feel very strongly about the information we’re sharing on this podcast, it is for educational purposes only, and should not be taken as specific tax, investment, or legal advice. You need to make sure that you are working with a professional to evaluate how these concepts apply to your specific situation before you take action.