This past summer, Congress passed the “One Big Beautiful Bill” (OBBB). The main thing this bill accomplished was to make permanent the temporary tax reductions passed in 2017, during Trump’s first term. Some new provisions are also included in the OBBB: In the previous tax bill, the state and local tax (SALT) deduction was limited to $10,000. This was very unpopular with people who live in high tax states. In the new law, the limit was raised to $40,000. This will be a major tax benefit for our community as the $10,000 limit adversely affected most taxpayers who itemized deductions. Note: For high earners, the limit remains at $10,000.
A big change is that people aged 65
and over will receive an extra deduction of $6,000 per person. And if you
bought an American-made new car in 2025, you can deduct up to $10,000 of
interest. (Will that encourage people to buy new cars instead of used cars?) In
addition, each child under 17 gets a tax credit of $2,200. That is an increase
from $2,000. Even those with no tax liability could get a refund of $1,700 per
child! Do the math; it really adds up for large families. Obviously, you had better
read the fine print to see what qualifies for favorable tax treatment.
Trump Accounts
A new provision that is getting a
lot of press is Trump accounts. First a riddle: If you had put $10,000 into a
mutual fund 40 years ago, what would it be worth today? Answer: over $500,000! Yes,
over half a million dollars. That is even without adding any additional money. If
a family invested $200 per month for 40 years in the S&P 500, they would
have over $1.1! Wow! The easiest way people have become rich in this country is
by investing steadily in the stock market – and never touching it until
retirement. This is a secret the rich know and the poor do not seem to be aware
of. That means that if you can cut out the waste – the soda, chips, lattes, and
all those impulse purchases, you can accumulate a bundle.
To “teach” this valuable lesson to American
children, a new law introduces Trump accounts. The goal is to get people to
save money in the child’s name. Some points regarding these accounts:
1) This is available to all American
citizens under age 18 with a social security number. This includes Americans
living abroad (i.e., Israel)! Children born from January 1, 2025 until December
31, 2028 will receive a free $1,000 contribution from the federal government.
Michael Dell, CEO of Dell computers, will also contribute $250 in some zip
codes.
2) The money is invested in
low-cost index funds and grows untouched. It functions like an IRA for
children. The child owns the funds, but an adult (typically the parent) is the
custodian until age 18. Generally speaking, the child cannot withdraw money
before age 18.
3) After age 18, the money converts
to a traditional IRA and is meant to be a retirement account for the child.
That means it is subject to the rules of IRAs: Any withdrawals before age 60
are subject to income taxes and a penalty. (As with all IRAs, you can withdraw
$10,000 for a first-time home purchase or higher education expenses without
paying a penalty, but you might owe regular tax.)
4) A maximum of $5,000 can be deposited
each year by parents or others. These contributions are not tax deductible.
5) An employer is allowed to
contribute $2,500 per employee (not per child). This would be pretax. Better
keep excellent records to know which money went in pretax and which was post-tax.
6) You can apply at
form.trumpaccounts.gov.
Other Accounts to Consider
It is clear that accepting the free
$1,000 is a no-brainer. But check whether the Trump accounts for older children
are more beneficial than some of the other saving strategies, such as UTMAs
(Uniform Transfer to Minors Act), 529 educational savings accounts, and Roth
IRAs.
Since you are not getting a tax
deduction for Trump accounts, why not just save money in a non-Trump account.
These are called UTMA accounts, where the parent is guardian for the child’s
money. This allows the child to withdraw the money after age 18 with no rules
and limitations.
Then there are 529 accounts. If you
have limited cash, putting money into a 529 account allows for tax-free growth,
tax-free withdrawals for college, rollover to a Roth IRA, and a deduction on
the state tax return for the year the money was put in.
If your child has a job, he or she
can put money into their own Roth IRA, which grows tax free. This may be your
best bet for teenagers.
Finally, the average family with
limited means might be better off putting the money into the parent’s tax-deductible
401k before they consider saving for the child’s retirement.
People need to weigh all possible
options and carefully ponder what makes the most sense for them. Hopefully,
with some careful work and budgeting, people will be able to save money and
accumulate significant savings.
Eli Pollock CPA can be reached at
elipollock2@yahoo.com
