Latest Edition of the Tax Newsletter
Hi Former 15.518ers (plus):
Sorry for my delay with this edition. I had to finish my textbook revisions before my publisher killed me (not sure why all three books get revised so close together!). I hope you all had a very nice Thanksgiving.
As I predicted before, I am staying on some OBBB provisions. Some of you wrote asking about the new Trump Accounts so I will cover those. Then I will talk about the Estate and Gift Tax Changes in the OBBB.
Trump Accounts
After covering the Child Tax Credit last edition, some of you sent in your new baby photos (super cute!) and asked what I thought about the Trump Accounts (let me note that there are about 200 people signed up for this newsletter and probably range in age from something like 28 – 40+). I will describe the Trump Accounts here, basically the description from the aforementioned tax textbook revision (with some edits). Trump Accounts are a new tax-advantaged way to save for your kids, mostly for your kids’ retirement.
Note that the Trump Accounts cannot really be created until July of 2026 so a lot of the details are not worked out yet. Also, note that while it is not uncommon for some tax things to be named after politicians (e.g., Roth IRAs are named after a former Senator, William Roth of Delaware), there is a movement to change the name of the Trump Accounts to 530A accounts (so similar in naming to 401K, or 529 accounts – named after the Tax Code section where the rules reside).
The OBBB introduced Trump Accounts for children under 18. As a sort-of “baby bonus”, the U.S. Treasury will contribute $1,000 to each Trump Account established for U.S. citizens born during 2025-2028. Individuals (e.g., parents) can make after-tax (i.e., nondeductible) contributions to Trump Accounts for any calendar year before the year the child turns 18. Annual contributions from individuals are capped at $5,000 (indexed for inflation).
The current target date for the government to open accounts for eligible beneficiaries of the $1,000 is July 2026. After July 4, 2026, accounts can be opened for children under the age of 18 (with a social security number) who were not part of the baby bonus pilot program. For example, a parent could contribute $5,000 in 2026 to a Trump Account for a child who was already ten-years old. Once the account is open and funded by the government and/or the kid’s parent/grandparents, the funds are locked up until the child turns 18. At that time, the account will need to be converted to an IRA.
Trump Accounts have no earned income requirement for the child for a contribution to be made to the account (recall that Roth or Traditional IRAs do have an earned income requirement, with some exceptions). For children that do have earned income, note that contributions to Trump Accounts do not count against the annual limits to contributions to a child’s traditional or Roth IRA Account. Thus, a child with earned income could have contributions to both a Trump Account and a Roth IRA (or Traditional but generally you should do Roths for working kids) in the same year.
Trump Accounts can also receive up to $2,500 per year (indexed for inflation) in contributions from the parent’s employer or, if applicable, the child’s employer. In addition, state and local governments as well as tax-exempt entities, such as charities and churches, can make contributions to Trump accounts in certain cases. I have no idea how common these types of contributions will be.
Children are eligible to make withdrawals from their Trump accounts starting in the year that they turn 18. Withdrawn individual contributions are tax-free, however, earnings are subject to taxation at the ordinary income tax rate. All other contributions (i.e., the $1,000 from the federal government, contributions from employers, state and local governments, and tax-exempt entities) are treated as pre-tax contributions and thus count as taxable income upon withdrawal. If the withdrawal is after age 18 but before age 59.5 then the 10% penalty for early IRA withdrawals applies, unless they are for a qualified purpose (higher education, a first-time home purchase (up to a certain amount), or a business (and maybe some health costs)). By potentially including both pre-tax and after-tax contributions, Trump Accounts can be thought of as a hybrid of a non-deductible IRA (from the 15.518 framework, a Savings Vehicle II) and a deductible IRA (Savings Vehicle VI – because some contributions are pre-tax). (If you look back to your book or in this Newsletter Edition 2, see the math for SV 2. To make it work for a Trump Account you would need to adjust it by only including the parent’s/grandparent’s/kid’s contributions in the final term of the equation – so the I in the last term of ‘+t*I’ would not include the government contribution of $1,000, or any of the contributions from employers, state and local governments, or tax-exempt entities.)
As of now the rules are such that, until the year the child turns 18, funds in Trump Accounts must be invested only in low-cost mutual funds or ETFs that track the S&P500 or other broad U.S. equity market indices. After 18, the child (then an adult) can continue to make contributions to the account subject to the rules and limits for traditional IRAs (e.g., the child must have earned income).
So…keeping in mind that nothing I say in these newsletters is actual tax advice…what do I think of these accounts? Well, the spirit of the accounts is good. These accounts are trying to help people save via the $1,000 for the three years 2025-2028, and by providing incentives to save (tax deferral). I am a fan of that part. However, these are going to be complicated. Using AI, the estimate of the number of babies born to US citizens is roughly 10 million over the years 2025-2028. The idea that roughly 10 million accounts of $1,000 each will be created is kind of wild. How many of these accounts will be forgotten about? And there will be a selection effect in the sense that the people that really need them will possibly be the most likely to lose track of the account or not understand the accounts.
Are they better than a 529 account? If you are strictly saving for college and the funds will be used for college costs (or other eligible education costs), the 529 account is better because withdrawals are tax free (and contributions to both types are non-deductible). The Trump Account withdrawals of earnings are taxable even if used for education. If you run the math, you are better to just keep the ‘free’ $1,000 in the Trump Account and then contribute any additional amount you can contribute into a 529 account.
If you are not saving for college, the Trump Account will likely dominate a 529 account because there are penalties for 529 accounts if the funds are not used for education. But what about other alternatives? It really depends on your situation – when will the kid need the money, what will they use the money for, do they have earned income, etc. Hopefully, the above has helped enough to enable you to do your own analysis based on your own situation.
It is a social-economic experiment – it will be interesting to see how it works.
Estate and Gift Tax Changes
Moving to the other end of our lifecycle, there were changes in the Estate and Gift Tax limits as well. If you recall, in Trump 1, the estate tax exemption was doubled to a $10 million base, and then that amount has been adjusted up for inflation every year. The exemption was scheduled to revert back to a lower amount, around $7 million via the rules in the TCJA. The OBBB “permanently” increases the federal estate and gift tax exemption to $15 million per individual (and this will be adjusted for inflation), effective for deaths and gifts starting January 1, 2026. So if an individual dies with an estate of $20 million in 2026, $5 million of that estate will be subject to the Federal estate tax. For married couples, this effectively allows a combined exemption of $30 million with proper planning and the use of portability rules. (Remember to port (move) that exemption from the first-to-die spouse to the second-to-die spouse, the estate tax return of the first-to-die spouse has to be filed and filed in a way to provide portability). You may think the $15 million/person is too low, too high, or just right. All those opinions are totally fine, I am just telling you the rules.
Note that I put the permanently above in quotes because that just means that the amount is not scheduled to automatically change per the OBBB. However, if a new president is elected and has control of congress and they want to change that, they could.
The annual gift tax exclusion (which is in addition to the lifetime exemption discussed above) is $19,000 in 2025, and will also be $19,000 in 2026.
That is enough for today. I’ll try to get one more edition out before the end of 2025! If you want to see prior editions of this newsletter, they are here. Also, I mentioned before that I was invited to write a paper for the 100th Anniversary of The Accounting Review (the main association journal for academic accounting publications). The published version of that paper is also on the same site as prior newsletter editions if anyone is interested.
Thanks,
Michelle