How Retirement Rules Might (or Might Not) Change Under Trump


Nov. 20, 2024

Readers had questions about individual retirement accounts, distributions and access to brokerage accounts if they moved away from the U.S. Here are some answers.

Your retirement accounts may be the biggest component of your net worth. Or maybe those large balances are still only a goal, and you want to know if any changes coming in the next four years will help you get there — or get in your way.

Of the 1,200 or so money-related questions we’ve received from readers in the days since the presidential election, many have been about retirement. We have some answers for what we know and context for what we don’t yet know. Most of them have nothing to do with Social Security; my colleague Tara Siegel Bernard answered questions about that program last week.

But first, here’s an important caveat that is true in any administration, but especially in one like this: For things to change, President-elect Donald J. Trump has to want things to change, act on that desire and then succeed. If lawmakers are involved, they also have to have the desire, follow through and pass legislation.

There will be plenty of noise, but in this particular category, it’s possible that not much of substance will look different four years from now.

Not much. Neither Mr. Trump’s campaign website nor the Republican Party platform that it pointed to said anything about I.R.A.s or workplace retirement accounts like 401(k)s, with one exception that probably wouldn’t affect many people.

On his campaign website, Mr. Trump sounded off about environmental, social and governance, or E.S.G., funds and their place in workplace retirement plans. During his first term, the Labor Department issued a rule related to what sorts of funds an employer — which must act in employees’ best interest as a so-called fiduciary — can use in those plans.

Pecuniary factors — ones that could have a material effect on risk or returns — had to be primary. The department drew a sharp contrast between that and what it called E.S.G. funds’ “nonfinancial” goals, even though there was ample evidence that such funds perform well and that investors should consider climate and governance.

The complicated rule had the effect of giving employers pause about adding E.S.G. funds to the menu of 401(k) and similar plans and using those funds as the default investment for participants who had not yet selected funds on their own. The Biden administration reversed it. Mr. Trump intends to reverse the reversal with an executive action and a change in the law.

Mr. Trump did not address this during the campaign. Last year, federal legislation changed the rules around many of these withdrawals, raising the age when you must begin to 73.

The specifics can get complicated. The Internal Revenue Service has a fact sheet explaining the changes.

It’s possible. One high priority for Republicans is extending the tax cuts that Mr. Trump signed into law during his first term. But tax cuts have costs, and any new bill will try to offset those costs in a variety of ways.

Mark Iwry, a nonresident senior fellow at the Brookings Institution who was responsible for retirement policy in the Obama administration, said there was concern in some circles about the possibility of so-called Rothification. When you save money in a 401(k), it goes into your account before you pay income taxes. When you save in a Roth 401(k) or a Roth I.R.A., you pay income taxes on the money — but avoid paying taxes when you withdraw it later on.

If Congress limits the 401(k)-style pretax savings — for instance, by saying only the first $10,000 of 401(k) or similar savings can be free of income taxes while any remaining after-tax savings go into a Roth 401(k), up to the current contribution limits — the government will have more short-term tax revenue. That revenue could offset tax cuts elsewhere.

There is no way of knowing the odds of this happening. But as Mr. Iwry pointed out, it’s worth revisiting Mr. Trump’s comments during the 2017 debate over tax legislation, when he insisted that there would be no changes to 401(k)s.

You will probably face restrictions. Have a conversation with the company that has your money and prepare a detailed list of questions about your intended destination and every retirement and other account that you have or might want to open later.

Fidelity has an F.A.Q. on its website for people who live outside the United States, and it gives a general sense of the limits those investors might encounter once they move: Its phone representatives won’t give you advice about things like how to divide your money between stocks and bonds. Grandparents won’t be able to open new 529 college savings accounts. And you can’t buy new shares of mutual funds, though you can keep the ones you have and continue to reinvest dividends and capital gains.

Some people attempt workarounds like maintaining a U.S. address and, sometimes, trying to keep their brokerage firm in the dark about their whereabouts. Companies may not look kindly on that.

Yes. The Social Security Administration has a “Payments Abroad Screening” tool that allows you to search by country to make sure that any given country is eligible, but most are. New applicants for benefits must elect direct deposit, so you’ll want to have a thorough understanding of how any bank account outside the United States would work.

Have questions about the details? You can call the Social Security Administration for help (1-800-772-1213 — calling right at the opening minute at 8 a.m. can lead to lower hold times, especially later in the month) or visit a Social Security office.

 


Yes, Most People Probably Should Hold Off on Claiming Social Security

Nov. 15, 2024


Opinion Writer

I got a ton of mail on my Monday newsletter about why so many people claim Social Security benefits early. A lot came from readers defending their decisions to start drawing benefits as early as age 62 rather than waiting until 70, the age that I wrote is actually ideal for many people.

“The reason people take Social Security ASAP is because they need the money!” Peggy Bishop of Carlsbad, Calif., wrote. “What’s so hard to understand about that?”

Todd Grant of Deming, Wash., wrote, “To insinuate that people are claiming early for reasons that are not well thought out or understood is shaming and stress-inducing.”

People get just 70 percent of their full Social Security benefit if they claim at 62, the full benefit at 67 and 124 percent of the benefit if they claim at 70, as I explained.

Many readers said that while they didn’t absolutely need to start collecting Social Security early, they calculated that they would come out ahead by investing some or all of their checks in the stock market rather than waiting. Several even sent me their spreadsheets. I’ll get to those in a minute.

I acknowledge that there are legitimate reasons to claim early, some of which I mentioned on Monday and some of which I found out about from your emails. (Thanks again to my smart readers.) But as a general rule, I stand by what I wrote. The most important reason is also the hardest to explain, so I’m going to leave it for the end. And I should say, if it’s not already clear, that I am not a financial adviser.

I agree with Peggy Bishop that some people simply have to collect Social Security at the first opportunity. Maybe they have big expenses, or heavy debts, or lost their jobs or are burned out and need to retire. They don’t have enough savings to tide them over to age 70 without Social Security. Also, as I wrote Monday, if you have reason to think you will die young, collecting early makes perfect sense.

Saying you should delay claiming Social Security when possible is not the same as saying you should keep working past the breaking point of body and soul. I agree with the labor economist Teresa Ghilarducci, who in a book published this year (which I wrote about) said that the main solution to America’s retirement crisis isn’t working longer but shoring up retirement benefits. That said, if you can manage to delay claiming even though you’ve stopped working, you’ll likely come out ahead.

Readers brought up other cases where claiming early might be the right decision, although it’s impossible to generalize. One is if you have children living at home who can also collect benefits because you’re retired. Another is if you are the younger, lower-earning member of a couple; it might make sense for you to claim early while your spouse waits to 70. But it works only if your spouse dies first and not very old.

Some people may choose to collect early because they want to travel and enjoy life while they’re still healthy. That’s fair, although it would be more profitable to scrounge up the travel money without starting Social Security if possible. Likewise, if you can’t sleep at night worrying about the risk of delaying Social Security, then you need to do what’s right for your own peace of mind and forget what the economists say.

Some readers said that if they wait until age 70 they’ll have only a few years to enjoy the checks. Life expectancy at birth was 73.5 years for men and 79.3 years for women in 2021, according to the Social Security Administration’s 2024 Trustees Report. But if you’ve managed to survive until 62 your odds are better: Life expectancy at that age was 81 for men and 84.1 for women.

A reason I heard again and again for collecting early is the fear that benefits will be cut to deal with the system’s financial imbalance. The Times published an article about those worries on Thursday. “I expect reduced benefits or means testing to be introduced at some point, so I might as well get what I can now,” Eric Eidsmoe of Midland, Mich., who just turned 62 and decided to take Social Security right away, wrote to me.

It’s plausible that Congress might increase taxation of Social Security benefits or apply a less favorable cost-of-living adjustment, for example. On the other hand, I don’t think any future Congress will drastically reduce benefits for current recipients. That would be political suicide — retirees are a powerful voting bloc — as well as unfair to people who are too old to go back to work to make up the difference. That’s why more of the burden of fixing Social Security is likely to fall on current and future generations of workers, who have more ability to absorb the hit — say, by working longer.

On the political point, another group of readers made clear just how risky it would be for Congress to reduce benefits for current recipients. They strongly disliked my line that Social Security is “the government’s money.” M. Scott Owitz of Shokan, N.Y., wrote: “I paid that money, it is my money, matched by my employer, sweated out over 41 years of nursing practice. Don’t believe for one second it’s the government’s money.” (I continue to insist that people don’t own their projected Social Security benefit the way they own the money in their 401(k). Each generation pays taxes to the government to cover benefits to their elders, not themselves. But that’s a topic for another day.)

Now let me get to the most common reason people gave for claiming early, and why I think that it’s attractive but wrong. It’s the idea of comparing the return on delaying your Social Security with the return on taking your checks early and investing them.

On this point I consulted with Laurence Kotlikoff, a Boston University economist who sells the financial-planning software Maximize My Social Security and MaxiFi Planner and was one of the authors of the 2022 study that my Monday newsletter mentioned.

For starters, Kotlikoff said, investing in the stock market is highly risky, and the risk of a very large decline in your assets increases over time. It’s like the cone of uncertainty for a hurricane’s path: the farther into the future, the bigger the chance of an extreme deviation from the central tendency. In contrast, the check you get from Social Security gets about 8 percent bigger for each year you delay (versus roughly 10 percent annual gains for stocks), and that’s guaranteed, aside from the political risks I mentioned above. Plus the benefit is adjusted annually for inflation.

Instead of comparing the “yield” on Social Security with that of stocks, compare it with something that it more closely resembles: TIPS, or Treasury Inflation-Protected Securities, which are backed by the full faith and credit of the federal government and cover you against inflation. Thirty-year TIPS are currently yielding about 2.3 percent a year.

Another point in Social Security’s favor is that you are an individual, not an average. Yes, on average stocks do better. But if you personally run out of money before you die because you plowed more money into stocks instead of opting for a bigger Social Security benefit, it will be cold comfort that on average stocks tend to outperform.

Longevity matters a lot. As Suzanne Shu of Cornell and John Payne of Duke found in a paper last year, some people want to collect early to reduce the risk that they’ll die young and effectively get ripped off by the system. But as Mary Jo Napoli of Columbus, Ohio, astutely pointed out, if you die young you won’t regret it because you’ll be dead.

The break-even point — where the money you get from delaying exceeds the money you get from collecting early — gets talked about a lot, but is the wrong framework for decision-making. That’s because Social Security is old-age insurance, not an investment. (It’s right there in the official name.) It keeps paying no matter how long you live, even to 120, when your 401(k) is down to $4.01. “Economics says to value benefits through your maximum, not your expected, age of life,” Kotlikoff wrote in an email.

Think of Social Security like fire insurance. For most people, the premiums they pay for fire insurance will vastly exceed the benefits they collect, because their houses won’t burn down. That doesn’t make fire insurance a bad deal; people don’t feel cheated if their houses aren’t engulfed in flames. Similarly, giving up that early benefit is the price you pay for extra insurance — in the form of bigger checks later — against the risk of living a very long life. As I wrote Monday, it can even pay to use up some of your retirement savings now so you can delay claiming Social Security.

I realize that this isn’t what you hear from a lot of financial planners, or even from Social Security itself. Several readers told me that they went to Social Security offices to discuss when to start their benefits and were advised to claim early. Some said they were told that they could get tens of thousands of dollars if they backdated their claiming age to six months earlier. The lure of instant cash could cause a lot of people to make poor decisions. In an email to me, the Social Security media relations office said the claiming date is “a personal decision,” adding, “People should remember that by choosing to start their benefit earlier, their monthly benefit amount may be lower for the rest of their life.”

I like the way Jeffrey Horton of Green Valley, Ariz., summed things up in his email: “If recipients understood that they are in fact buying something valuable with their deferral at age 62 (not only receiving an increased payment at age 67, but also addressing their longevity risk), they might be persuaded to take advantage of what the government is offering.”


It started with a text and cost her $20,000. Why investment scams are getting harder to spot

By 

L. was having a tough time when Leena reached out.

It was summer 2023. L., who’s in her 30s, had relocated to another state from the Bay Area for a job that didn’t work out. (The Chronicle is referring to her by her first initial under its confidential sources policy, since people who have been victims of scammers are likely to be targeted again.) She was stuck in her apartment lease, making pricey payments on the car she’d just bought while trying to leverage her three degrees and a lengthy work history at top companies into a new job.

It was “a very vulnerable time,” she said.

That vulnerability helped make her a prime target for an investment scam that cost her more than $20,000 and took a psychological toll as well as a financial one — a situation the Better Business Bureau says is increasingly common.

According to the bureau’s 2023 Scam Tracker report released this month, investment scams reached a three-year high in 2023, with 1,378 reports. 2024 is on track to be an even bigger year for scammers, with 737 reports just in the first half of the year. The median victim lost $4,000. 

The Federal Trade Commission said consumers lost more than $10 billion to fraud in 2023, $4.6 billion of which was lost to investment scams like the one L. was victimized by. Its Consumer Sentinel Network received 301,840 reports of investment scams in 2023 alone.

Alma Galvan, a spokesperson for the Better Business Bureau, said there’s no stereotypical profile of a scam victim. She’s spoken to people of all ages and education and income levels. The Bureau’s report found that more than 60% of targeted individuals were approached virtually — by text, email, social media and dating apps.

Scam started with a text

L. got a text from a number she didn’t recognize. It was Leena. They’d met at a party in another part of California where L. used to live and had lots of friends. 

L. vaguely recalled meeting Leena. Sort of. She’d met lots of people at events over the years and didn’t remember every single person she’d ever talked to. She figured Leena was a friend of a friend, and in that moment, she needed a friend.

Soon, they were texting almost every day. Leena was fun and interesting and glamorous. She traveled a lot and sent photos to L. where she was chicly dressed, with perfect makeup, having the time of her life. Leena loved shopping at high-end stores and playing golf. She said she’d be in L.’s city soon to visit family in the area, and they started to plan a meetup. They became close. 

They talked regularly for a month. Leena started to bring up how she was funding her lifestyle. 

“She mentioned that she has an ecommerce retail business that has changed her life,” L. said. “And like, maybe one day she’ll tell me more, but she’s not rushing into it.”

More details emerged: It was an online business opportunity for new entrepreneurs based out of Hong Kong, and she was getting 20% to 30% returns on her investment. The job gave her financial freedom and let her travel the world and buy anything she wanted. 

It sounded like a dream to L., who was still struggling to find work and needed a way to pay her bills. L. asked Leena to introduce her to the boss — whom she called “the master” — and get set up with her own store.

The role of cryptocurrencies and AI

Two burgeoning industries in the Bay Area have bolstered the scamming world: cryptocurrencies and artificial intelligence. 

Some people in the world have made real money investing in cryptocurrency, which makes victims think, “Why not me, too?” Galvan said. There are sites and apps that let you use Bitcoin, Ethereum and other cryptocurrencies to make purchases from places like PlayStation and Apple. The Los Angeles Lakers play at Crypto.com Arena. 

These things all help normalize new forms of payment so that it seems more business-savvy than scammy when your new job asks you to set up a crypto wallet. 

“The explosion in popularity of cryptocurrency over the last five years pushed the once complicated technology into the public sphere,” the Better Business Bureau report found, saying scammers “prey on the public’s lack of knowledge about the subject.” Nearly half of all investment scams reported to the Better Business Bureau Scam Tracker since 2021 involved cryptocurrency.

And artificial intelligence allows scammers to craft endless text messages, email blasts, training materials and websites instantly from thin air. 

Doubts, then a deal 

L. was familiar with ecommerce, marketing and drop shipping through her previous work. The training materials they gave her were extensive and looked legitimate. 

She researched the company and found some bad reviews. And she couldn’t find any social media presence or advertisements for the company, which made her even more suspicious. When she confronted Leena’s boss about it, he got defensive and said maybe they shouldn’t work together. He had a smooth explanation for every question she asked. L. felt like she couldn’t let the opportunity go, so she swallowed her doubts.

It worked like this: L. would manage an online store. She didn’t have to pay any money until customers started ordering things. She wasn’t required to pre-purchase inventory or anything like that. But once orders started coming in, she had to pay for the items being shipped.

When the money started coming in from customers, she did a little test. She tried withdrawing $20 from the shipping platform to her bank account. It worked. The money was real.

‘We’re being deluged’

Eva Velasquez, president and CEO of the Identity Theft Resource Center, said if you feel like you’ve been getting blasted by scammy texts, LinkedIn messages, Instagram DMs, job ads and emails, you’re not the only one.

“We’re being deluged,” Velasquez said. “The use of generative AI and these large language models makes this stuff so much more believable.”

Scammers can now automate their entire operation, she said. A chatbot can be running a romance scam. One person can be running a thousand of those chatbots from one phone. And generative AI also allows scammers to create realistic-seeming photos that won’t be findable with reverse image search. (L. suspects the photos Leena sent her were AI-generated.)

The Better Business Bureau report states romance scams are on the rise. Despite the name, only some are romantic in nature — “many strike up platonic friendships,” the report says, like scammers did with L.

Discovery and aftermath

Customer orders got bigger and bigger, and L. got more and more excited watching her money grow. She got legitimate-looking invoices and emails with questions from customers. The company asked her to use a crypto wallet to send larger amounts, but she couldn’t get the site to work, so she sent international wires instead. At one point, when she couldn’t afford to fund an order, Leena loaned her $500.

About three weeks in, she got her biggest order yet. L. had to withdraw $15,000 from her savings to cover it. Suddenly, something felt off. She decided to talk to the boss and ask to withdraw all the money that was sitting in her account — $27,332.55. She made up a story about needing it for a sick relative in another country.

He told her that wouldn’t be a  problem — she just needed to pay him 35% of her earnings up front to cover taxes. She told him she knew that wasn’t how taxes worked: She would withdraw her money and handle the taxes on her own. He pivoted, threatening to donate all her earnings to charity.

At that point, she knew it had all been a scam. She was out more than $20,000 of her own money she’d invested in funding orders.

She filed reports with the police, her bank, and other organizations that track scams and help victims, including leaving a review of the ecommerce store on the Better Business Bureau’s website. She describes the experience as traumatic.

Since then, she’s moved to another state and is starting her own business. She’s been targeted by four scammers since her fraudulent ecommerce experience. One was a romance scam. One claimed to be the Prince of Dubai. One claimed to be Keanu Reeves’ mom. And one, when she confronted him about what he was doing, pivoted and said he wanted to make an honest living. He asked for a donation to help him buy a computer so he could learn to code instead of scam. 

How to spot a scam

We all know the saying, “If it sounds too good to be true, it probably is.” Every person who’s been scammed has heard that expression, too. But it’s difficult in the moment, with a new friend or boyfriend or girlfriend pressuring you, to not get excited about a business or investing opportunity that could change your life.

Here are common hallmarks of modern scams.

  • Cryptocurrency. Scammers take advantage of people’s lack of knowledge. If you don’t know anything about cryptocurrency, be wary of anyone asking you to get involved.
  • Texts from strangers. Many scams begin with an unsolicited message saying they’re a friend of a friend, like with L. Another type of scam known as a “wrong number” will send you an urgent-seeming message meant for someone else, then strike up a casual conversation when you correct them.
  • Artificially generated text and images. There’s no guaranteed way to tell if any message or photo was made by AI. But there are things to look for. The Better Business Bureau says AI text tends to be robotic with repetitive words and phrases. And AI-generated images may have strange textures, blurry spots, or glossy effects, especially in backgrounds.
  • Investment training. Scammers set up “investment schools” with “patented,” “tested” or “proven” methods for doubling, tripling or quadrupling your money, often with investments in allegedly new cryptocurrencies, real estate or precious metals. 
  • Guaranteed returns on your investment. There’s no such thing.
  • Scam recovery offers. If you’ve been scammed, don’t trust anyone who reaches out and says they can help. “Most of the time we never see (victims) getting their money back,” Galvan said.

Galvan outlined steps you can take to thoroughly “do your homework” before making an investment: 

  • Run a search on FINRA’s BrokerCheckAnyone involved with an investing business in the United States must be licensed, and FINRA will pull it up.
  • Look for certifications. Ask for the company’s business certifications and check with the state they’re registered in to make sure it exists.
  • Search the Better Business Bureau Scam Tracker. It lists scams reported from all over the country.

Reach Jessica Roy: [email protected]


Advice | Here's how long it takes workers to become 401(k) millionaires

By Michelle Singletary, The Washington Post
May 31, 2024

If you're an investor, you may not want to hear this, but wealth building is all about slow and steady.

A large part of the appeal of cryptocurrency or meme stocks is the lure of big returns made quickly. If you believe hundreds of social media posts, becoming rich can be as easy and immediate as a microwaved meal.

But crypto and meme stock prices can crash as spectacularly as they rise. The hype around such speculative investments does a disservice to people who need to save for retirement. It sets up unrealistic expectations.

Want to be a millionaire?

Look at the behavior of workers who have invested their way to seven-figure retirement accounts. One key characteristic among them is patience.

New data from Fidelity Investments shows the number of 401(k)-created millionaires reached an all-time high in the first quarter of 2024.

The number of people with $1 million or more increased to 485,000, a 43 percent jump from the same three months last year, according to Fidelity, one of the nation’s largest administrators of workplace retirement accounts. The company provides a quarterly analysis of 45 million individual 401(k), 403(b) and IRA retirement accounts.

The news was good for retirement investors across the board: Average account balances climbed to their highest level in more than two years.

The average 401(k) balance was $125,900, up 6 percent from the previous quarter and 16 percent from a year ago. IRA balances jumped to $127,745, an increase of 10 percent from the fourth quarter of 2023 and 17 percent higher than a year ago.

The number of 401(k) millionaires in plans administered by Fidelity is small — about 2 percent. However, you can learn a lot from their investment habits. Here’s what it takes to reach millionaire status.

They are patient investors

These aren’t microwave millionaires. They know it takes time to grow their portfolios. They have been investing in their plans for an average of 26 years, with an average balance of $1.58 million.

As can be expected, the millionaires are predominantly Gen X (individuals born between 1965 and 1980) and baby boomers (born between 1946 and 1964). The average age is just shy of 59 years old.

As your earnings increase, contribute as much as you can.

The contribution limit for employees who participate in 401(k), 403(b) and most 457 plans, as well as the federal government’s Thrift Savings Plan, increased to $23,000 for 2024, up from $22,500 last year. If you are 50 or older, a catch-up provision allows you to contribute an extra $7,500 for a total limit of $30,500 to an employer-sponsored retirement plan.

In Fidelity’s data, 57.8 percent of the millionaires hit the limit at the end of 2023.

They consistently contribute to their plan

The millionaires have an average contribution rate of 17 percent.

Fidelity said record-high contribution levels and positive market conditions pushed average account balances to their highest levels since the fourth quarter of 2021.

In the most recent quarter, total average 401(k) savings rates reached a record high of 14.2 percent, driven by employee and employer 401(k) contributions.

This savings rate is a milestone. It’s the closest it has ever been to Fidelity’s recommendation that workers contribute at least 15 percent of their gross income to their workplace plan. This could include a combination of their savings and a matching contribution from their employer.

Most employers offer a program whereby employees can sign up for an “automatic increase.” To ease the shock to your budget, you might direct your employer to boost your contribution by 1 or 2 percent annually. Or after receiving a raise or jump in income, you take part of that money and boost your contribution level.

They grab the match

If there’s a company match, 401(k), millionaires take advantage of the benefit.

Over the last 12 months, 81 percent of workers in a 401(k) and 403(b) received some type of employer contribution either through company match or profit-sharing, according to Fidelity.

The most popular match is a dollar-for-dollar match on the first 3 percent and then 50 cents on the dollar on the next 2 percent.

They don’t panic at market downturns

These investors don’t let turbulence in the stock market or bear markets — a period of falling stock prices — chase them away from equities. In fact, they see tumbling markets as a flash sale. It’s an opportunity to buy more stock shares at lower prices.

They leave the money alone

Understandably, when money is tight, many workers look to their retirement accounts for a bailout.

Keep your retirement money invested. Don’t cash out when changing jobs, a move that would result in a 10 percent early withdrawal penalty if you are under 59½ years old.

If you can, leaving the money to grow gives you the best opportunity to become a millionaire. It’s a slow and steady pace that may not be exciting, but it has allowed ordinary investors to become extraordinarily wealthy.

 


Why many electric vehicles will no longer qualify for a $7,500 subsidy

By Maxine Joselow, The Washington Post
May 3, 2024

Americans buying electric vehicles will no longer be able to claim federal tax credits of up to $7,500 if their cars contain Chinese materials, the Biden administration announced Friday, the result of a landmark 2022 climate law that sought to reduce U.S. reliance on clean-energy components from China.

The final rule from the Treasury Department codifies a draft rule from December that sharply limited the number of EVs that qualify for the credit. Only 22 of the more that 110 EV models on sale in the United States are eligible for the credit this year, according to the Alliance for Automotive Innovation, a trade group.

The announcement comes amid broader difficulties facing the EV sector nationwide. The growth of U.S. EV sales has slowed in recent months, and Tesla CEO Elon Musk this week laid off hundreds of employees in the Supercharger division, casting a pall of uncertainty over other automakers’ agreements to use Tesla’s expansive charging network.

The rule underscores the challenges facing President Biden as he seeks to accelerate the nation’s energy transition while reducing its dependence on Chinese firms. At the moment, Beijing controls almost all stages of the supply chains for EV batteries, solar panels and other green technologies crucial to the fight against climate change.

The speed of America’s shift away from these supply chains could have major consequences — not only for EV drivers, but also for U.S. climate goals and national security. If the Biden administration moves too quickly to choke off Chinese supplies, it could miss its target for half of new cars to be zero-emission by 2030. Too slowly, and the United States could cede competitiveness in the EV market to a strategic rival for decades to come.

“The faster you can deploy EVs, the better it is for reducing greenhouse gas emissions. But the faster you can onshore supply chains, the better it is from a national security perspective or an economic competition perspective,” said Jane Nakano, a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies, a foreign policy think tank.

Some lawmakers in both parties have accused the administration of prioritizing its climate goals over the need to curb dependence on China. Sen. Joe Manchin III (D-W.Va.), a key author of the 2022 climate law known as the Inflation Reduction Act, said in a statement on the final rule that “the Administration is effectively endorsing ‘Made in China.’”

“The Administration has made clear from Day 1 of implementing the consumer electric vehicle tax credit in the Inflation Reduction Act that they will break the law in pursuit of their goal to flood the market with electric vehicles as quickly as possible,” Manchin said.

John D. Podesta, senior adviser to the president for international climate policy, defended the administration’s approach on a call with reporters on Thursday previewing the announcement.

“We want to see EVs built here in America, with components and critical minerals sourced from the U.S. and our allies and partners,” Podesta said. “Automakers already are significantly reorienting their supply chains.”

Under the final rule, EVs will no longer qualify for the federal tax credit if they contain battery components that were manufactured or assembled by a Chinese firm. Beginning in 2025, the restrictions will widen to include any critical minerals in the battery that were extracted, processed or recycled by a Chinese entity.

After Treasury issued the draft rule in December, several popular EV models no longer qualified for the subsidy, including the Ford Mustang Mach-E. The final rule could dissuade some cost-conscious drivers from buying EVs, slowing the pace of adoption, said Corey Cantor, a senior associate for electric vehicles at BloombergNEF.

“What keeps people from buying electric cars? Surveys show upfront cost and charging anxiety,” Cantor said. “The tax credit helps alleviate that upfront cost.”

The EVs that are still eligible for a full $7,500 tax credit include Ford’s F-150 Lightning pickup truck, Volkswagen’s ID.4 crossover SUV and Tesla’s Model Y, according to a federal database. Several models from Rivian qualify for a partial $3,750 credit.

Unlike the draft version, the final rule allows automakers to continue buying Chinese graphite until 2027 while still qualifying for the subsidies. Major automakers had lobbied for the temporary reprieve, warning that without it, every EV model on the market would be ineligible for the credit.

Graphite is used in virtually all anodes, the negatively charged portion of EV batteries. China produces around 70 percent of the world’s graphite and refines around 90 percent of the material.

John Bozzella, president and CEO of the Alliance for Automotive Innovation, which represents General Motors, Ford, Toyota, Stellantis and other automakers, praised Treasury for “providing some temporary flexibility in terms of where the critical minerals in EV batteries can be sourced.”

“That’s helpful as more automotive supply chains and battery production is localized to the U.S. and our allies,” Bozzella said in a statement.

The Inflation Reduction Act established strict conditions for claiming the tax credit of up to $7,500 for new EVs. It limited these subsidies to EVs without any battery components manufactured or assembled by a “foreign entity of concern” — a term often applied to adversaries such as China, Russia, Iran and North Korea.

The law left it up to the Energy Department to define what, exactly, constitutes a “foreign entity of concern.” In final guidance issued Friday alongside the Treasury rule, the Department of Energy determined that the definition includes any firm headquartered in China, as well as any firm in which the Chinese government controls 25 percent of the board seats or equity interest.


Advice | How to take the home office deduction without triggering an audit

By Michelle Singletary, The Washington Post
March 22, 2024

We are less than a month away from the April 15 tax deadline.

As of March 8, the IRS had processed nearly 62 million returns, with the average refund hovering just over $3,100.

Recently, I hosted an online chat to answer readers' tax questions. I was joined by Eric Bronnenkant, head of tax at Betterment, a digital investment advisory firm. Here are his answers to some questions we couldn't get to, which have been edited for clarity and brevity.

My home office is in a spare bedroom. In addition to my desk, computer, printer, etc., I have some personal items in that room: The closet is where I keep my clothes, anf the bookshelves hold my cookbooks. Is that a problem for the home office deduction? If so, could I solve that problem by claiming only the square footage of the room occupied by the desk and printer?

Bronnenkant: The home office deduction is not allowed currently for expenses related to being a W-2 employee. [It’s] allowed only for self-employed individuals. One key requirement for the deduction is that a portion of the home needs to be exclusively used for business purposes. Given that this seems to be mixed use, qualifying for the deduction may be challenging. See IRS Publication 587, “Business Use of Your Home.”

Singletary: The 2017 Tax Cuts and Jobs Act eliminated employee business expenses on Schedule A. This means that unless you are self-employed, an independent contractor, or working a gig job, you cannot take the home office deduction.

“Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home,” the IRS says.

If you work as an employee but also earn self-employment income, you might still be able to deduct your home office expenses.

Don’t be afraid to take the deduction if you qualify for it. For tax year 2021, the most recent year for which complete figures are available, the total value of the home office business deductions was just over $12.8 billion, according to IRS data.

To avoid a tangle with the IRS, make sure the dedicated space in your home is used exclusively for your enterprise.

On IRS.gov, the standard mileage rate for 2023 is 22 cents per mile driven for medical or moving purposes for qualified active-duty members of the armed forces. Is the mileage deduction for medical purposes only applicable to such service members?

Bronnenkant: Unreimbursed medical expenses (including medical travel mileage, which has no military requirement) are deductible as an itemized deduction in excess of 7.5 percent of adjusted gross income (AGI). However, there are a few challenges. Claiming the deduction requires medical expenses exceeding the relatively high 7.5 percent floor and total itemized deductions that exceed the $27,700 standard deduction when filing jointly ($13,850 for single filers).

When the qualified business income, or QBI, was created a few years ago, it was not clear whether my wife and I (married filing jointly; both are federal government workers; and neither is a Realtor) could claim the deduction for one rental real estate property. Can we claim it?

Bronnenkant: Rental properties can potentially qualify for the QBI deduction. The IRS has provided guidance for taxpayers on how to analyze their situation to see whether their rental property is a qualified trade or business for QBI purposes. This is an area where having a tax professional to assist may be helpful.

Singletary: Just for more background, this type of deduction allows eligible taxpayers to deduct up to 20 percent of their qualified business income on their taxes. For more information, go to irs.gov and search for “Qualified Business Income Deduction.”

I bought a Bolt EUV last year and have a letter saying that I qualify for up to a $7,500 tax credit. My tax preparer says I will receive $0 back since my best option is to use the standard deduction on my IRS tax form. Can this be right?

Bronnenkant: Claiming the tax credit for EVs (electric vehicles) is allowed for people who take the standard deduction or itemize. The biggest challenge for many to qualify is that the tax credit is nonrefundable (can only reduce tax to zero), meeting the income limit, and having a qualified vehicle.

Singletary: As EV prices fall, interest in this credit is likely to rise.

The Inflation Reduction Act of 2022 changed the rules for this credit. To qualify, the IRS says you must buy it for your own use and use it primarily in the United States.

For more information, go to irs.gov and search for “Credits for new clean vehicles purchased in 2023 or after.”

In addition, your modified AGI may not exceed:

  • $300,000 for married couples filing jointly.
  • $225,000 for heads of households.
  • $150,000 for all other filers.

I inherited a vacation rental home. Every year, my tax software limits my deductions to match my expenses, even though the expenses are significantly higher than my income. Why is that?

Bronnenkant: The IRS limits rental deduction to rental income for activities it deems to be not-for-profit. Here is a citation from IRS Publication 527, “Residential Rental Property (Including Rental of Vacation Homes): “If you don’t rent your property to make a profit, you can’t deduct rental expenses in excess of the amount of your rental income. You can’t deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year.”

Do I have to pay taxes on removing funds from a certificate of deposit before the maturity date?

Bronnenkant:There is no tax penalty for early withdrawal from a CD. However, the penalty that the bank charges is considered to be a deduction (no itemization required).

My mom has been in the hospital or long-term care facility since November. I’ve been paying her bills, as I have access to her accounts. However, I don’t have enough knowledge to complete her taxes. If she is not able to answer questions accurately before the deadline, what are my options?

Bronnenkant: Taking care of a loved one is challenging. Stepping in and helping with their taxes is probably a role that may not have been expected. Getting copies of prior years’ returns is helpful in identifying sources of income. IRAs, pensions, Social Security and investment income are common for retirees. If tax returns are unavailable, it may be prudent to request copies from the IRS by using Form 4506-T, “Request for Transcript of Tax Return.”

Singletary: While you look for the documents you need, you can have your mom request an extension electronically, which gives her six extra months to file her return. Go to irs.gov/extensions for details.

One caution: Though the IRS gives you more time to file your return, you’ll have to estimate what you owe and pay by the deadline.

 


An IRS Chiller Case of the Disappearing Dependents


IRS Dirty Dozen Campaign Warns Taxpayers To Avoid Offer In Compromise ‘Mills’

Kelly Phillips Erb, Forbes Staff
Apr 3, 2023,03:55pm EDT

Owing taxes can be stressful. Unfortunately, the actions of some companies can make it worse. As part of its "Dirty Dozen" campaign, the IRS has renewed a warning about so-called Offer in Compromise "mills" that often mislead taxpayers into believing they can settle a tax debt for pennies on the dollar—while the companies collect excessive fees.

Dirty Dozen

The "Dirty Dozen" is an annual list of common scams taxpayers may encounter. Many of these schemes peak during tax filing season as people prepare their returns or hire someone to help with their taxes. The schemes put taxpayers and tax professionals at risk of losing money, personal information, data, and more.

(You can read about other schemes on the list this year—including aggressive ERC grabs here, phishing/smishing scams here and charitable ploys here.)

Tax Debt Resolution Schemes

"Too often, we see some unscrupulous promoters mislead taxpayers into thinking they can magically get rid of a tax debt," said IRS Commissioner Danny Werfel.

"This is a legitimate IRS program, but there are specific requirements for people to qualify. People desperate for help can make a costly mistake if they clearly don't qualify for the program. Before using an aggressive promoter, we encourage people to review readily available IRS resources to help resolve a tax debt on their own without facing hefty fees."

Offers In Compromise

Legitimate is a key word. Offers in Compromise are an important program to help people who can't pay to settle their federal tax debts. But, as the IRS notes, these "mills" can aggressively promote Offers in Compromise—OIC—in misleading ways to people who don't meet the qualifications, frequently costing taxpayers thousands of dollars.

An OIC allows you to resolve your tax obligations for less than the total amount you owe. You generally submit an OIC because you don't believe you owe the tax, you can't pay the tax, or
 exceptional circumstances exist.

Because of the nature of the OIC—and the dollars involved—the process can be time-consuming. It can also be confusing for taxpayers who may not have a complete grasp on their finances.

First, you must complete a detailed application, Form 656, Offer in Compromise. You must also submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses, with supporting documentation (generally, bank and brokerage statements and proof of expenses).

You'll also need to submit a non-refundable fee of $205 and payment made in good faith. The payment is typically 20% of the offer amount for a lump sum cash offer or the first month's payment for those made over time. Generally, initial payments will not be returned but will be applied to your tax debt if your offer is not accepted. Payments and fees may be waived if the OIC is submitted based solely on the premise that you do not owe the tax or if your total monthly income falls at or below income levels based on the Department of Health and Human Services (DHSS) poverty guidelines.

The IRS will examine your application and decide whether to accept it based on many things, including the total amount due and the time remaining to collect under the statute of limitations. The IRS will also review your income—including future earnings and accounts receivables—and your reasonable expenses, as determined by their formula. The IRS will also consider the amount of equity you have in assets that you own—this would include real property, personal property (like automobiles), and bank accounts.

Criteria

Before your offer can be considered, you must be compliant. That means you must have filed all your tax returns and paid off any liabilities not subject to the OIC. After you submit your offer, you must continue to timely file your tax returns, and pay all required tax, including estimated tax payments. If you don't, the IRS will return your offer.

Additionally, you cannot currently be in an open bankruptcy proceeding, and you must resolve any open audit or outstanding innocent spouse claim issues before you submit an offer.

Representation

You can probably tell—it's a lot to consider. You may want representation. A tax professional can help marshal you through the process and offer practical guidance, while communicating what fees could look like.

By contrast, according to the IRS, an OIC "mill" will usually make outlandish claims, frequently in radio and TV ads, about how they can settle a person's tax debt for cheap. Also telling: the fees tend to be significant in exchange for very little work.

Those mills also knowingly advise indebted taxpayers to file an OIC application even though the promoters know the person will not qualify, costing taxpayers money and time. You can check your eligibility for free using the IRS's Offer in Compromise Pre-Qualifier tool.

“Pennies On A Dollar”

What about those promises that taxpayers can routinely settle for pennies on a dollar? Not true. Generally, the IRS will not accept an offer if they believe you can pay your tax debt in full through an installment agreement or equity in assets, including your home. That's why the IRS tends to reject a majority of OICs that are submitted. The acceptance rate is less than 1 in 3, according to the 2021 Data Book.

The IRS will generally approve an OIC when the amount offered represents the best opportunity for the IRS to collect the debt. It’s true that there’s a formula that the IRS uses to figure out how much they think they can collect from you. But there is some wiggle room to account for special circumstances, including a loss of income or a medical condition. It’s worth noting those are the exceptions, not the rule.

Collections

While submitting an OIC may keep the IRS from calling you, it doesn't stop all collections activities—don’t believe companies that suggest that submitting an OIC will make your tax debt disappear. Penalties and interest will continue to accrue on your outstanding tax liability. Additionally, the IRS may keep your tax refund, including interest, through the date the IRS accepts your OIC.

You may also be liened. In most cases, the IRS will file a Notice of Federal Tax Lien to protect their interests, and the lien will generally stay in place until your tax obligation is satisfied.

Be Skeptical

An OIC is a serious effort to resolve tax debt and shouldn't be taken lightly. Be skeptical—if it sounds too good to be true, it likely is. If you're considering an OIC, hire a competent tax professional who understands the rules and is willing to level with you about your chances of being successful—including other options. Don’t fall into a trap that can make your situation worse.

 


No, that is not the IRS calling you

Columnist
March 31, 2023 at 10:04 a.m. EDT
 

This is an updated column. It originally ran Aug. 12, 2016.

I knew the calls were a scam.

Like so many, I’ve been getting calls from people pretending to be from the IRS. A few times a week, I get an automated message telling me that I need to call back a number in reference to the money I owe.

I called the number once. A man identified himself as an IRS employee. Then he asked a question that was, I guess, meant to frighten me.

“Do you have a criminal defense attorney?”

“No, why?” I asked.

“This is an important matter with the IRS and you need an attorney,” he said.

I told the man I knew this was a scam. He immediately hung up on me.

Before I share my next would-be swindle story, I need to tell you that I sometimes call the number back because I want to see what the scammers are saying to get people to send money. Don’t do what I did. Don’t engage these criminals. If you get one of these calls, hang up immediately.
 

But there was the time I got a call that had me stunned by the brazen and bizarre way the guy tried to scam me.

The caller identified himself as Frank Cooper. I checked the caller ID, and the number came up “Jamaica 1-876-387-5721.” The man first claimed he was calling on behalf of Publishers Clearing House.

I had won $2.5 million, he said. Oh, and I would also be getting an S-Class Mercedes-Benz — “champagne white.”

In an effort to convince me that the prize was real, he even gave me a check number — 5122285365. He told me to repeat the number, which I did as I played along.

By the way, I could hear others in the background spinning a similar tale.

Anyway, I was told that a “licensed merchant banker” near my neighborhood was ready to hand me my check, which was in a locked briefcase. The caller gave me what he said was the combination code — 4981776. Again, he asked me to repeat the number.

And then came the con.

“But you can’t get the money unless you register with the IRS and pay a fee of $8,000,” he said.

“Wait, if this is a prize, why do I have to pay a fee?”

“Ma’am, do you want your money or not?” the man said, raising his voice with an indignant tone as if I were the fool. “How do you not know that you must register with the IRS?”

Then he switched his language to sound as if he were actually representing the IRS.

I was instructed to withdraw the cash from my bank account, split it into two bundles of $4,000 and put the money in envelopes that I should wrap in newspaper. Then I was supposed to make my way to the nearest FedEx Office parking lot and call when I got there to get the address to mail the money overnight express.

“That hardly seems safe,” I said. “What proof do I have that you have received the cash?”

“Get insurance on the mailing,” the guy said.

I clearly was asking too many questions, so Cooper put his “general manager Ray Kingston” on the line.

“Are you ready to send the money?” the supposed Kingston asked.

Tired of this foolishness and fraud, I said, “Now, you know this is a scam.”

The next thing I heard was a dial tone.

The sad thing is that lots of people are falling for schemes like these. In many cases, the scammers threaten people with arrests to try to scare them into paying. The IRS would never ask you to pay your taxes using a gift card. The IRS will not ask for debit or credit card numbers over the phone.

The losses stemming from IRS impersonation cases from October 2013 through March 2022 amount to $85 million, according to TIGTA. The scams involved almost 16,038 victims. Victims span across the United States, but California, New York, Texas, Florida and New Jersey are the top five states based on the number of victims. And those are just the reported cases.

If you get such a call or if you’ve fallen victim, go to tigta.gov. Click the button for “Report Waste, Fraud, Abuse.” Become more informed on IRS phone scams and other impostor scams by going to ftc.gov/imposters.

And if someone calls claiming to be from the IRS, hang up immediately unless you initiated contact on a matter you know is legit.

 


Why California taxpayers could get an unpleasant surprise if they file for this deduction

 

As short-term interest rates soar and banking fears rise, more investors are stashing their cash in short-term Treasury securities, either directly or through government money market funds.

Last month, yields on six-month Treasury bills topped 5% for the first time in 16 years only before a burst of panic buying in the wake of Silicon Valley Bank’s failure pushed yields below that threshold this week.

In addition to being backed by the U.S. government, the interest on Treasury securities is exempt from state (but not federal) income taxes. That’s a nice perk in California, where the top tax rate is 13.3%, highest in the nation.

If you buy Treasurys directly – through a brokerage account or the government website TreasuryDirect.gov – you’ll pay federal tax on the interest but can deduct it on your California tax return.

If you own shares in a government mutual fund, you generally can deduct on your state taxes the percentage of annual dividends that came from Treasurys and a small number of other government securities.

However, if you live in California, New York or Connecticut, which have a tougher rule for these dividends, you may get no state-tax deduction. 

This was especially true in 2022, as some California investors may discover when they prepare their tax returns. 

For example, T. Rowe Price has two government money funds: Government Money and U.S. Treasury. On their 2021 returns, shareholders everywhere could deduct 86% and 87% of their dividends, respectively. For 2022, shareholders in most states could deduct only 27% and 21%, respectively. But those in California, New York and Connecticut got zero state-tax exemption.

To understand why, it’s important to know what these funds invest in, their confusing nomenclature and California’s special rule.

Money market funds invest in short-term, high-quality securities. Although they’re not guaranteed, they’re generally considered a relatively safe place to put money you may need within a few years. They are sold by mutual fund companies and should not be confused with money market deposit accounts offered by banks, which are guaranteed, up to a limit, by the Federal Deposit Insurance Corp. 

There are three types of money market funds.

• “Prime” funds hold cash and securities issued by the government, government agencies, corporations and in certificates of deposit. Their dividends are largely taxable at the federal and state level. You won’t find government or Treasury in their names.

• “Municipal” or “tax-exempt” funds buy securities issued by state and local governments.  Their dividends are exempt from federal tax, and from state tax to the extent they came from securities issued in your home state.

• “Government” funds normally invest at least 99.5% of assets in cash, U.S. government securities and/or repurchase agreements that are fully collateralized by cash or government securities. 

Some of these U.S. government securities are exempt from state and local taxes, namely Treasurys and a limited number of government-agency securities. Other government securities, such as those issued by Fannie Mae and Freddie Mac, are not exempt from state and local tax.  Repurchase agreements are also not exempt. Nicknamed “repos,” these are essentially short-term – often overnight – lending agreements.

“Treasury” money market funds are a type of government fund that normally invest in cash, Treasurys and/or Treasury-backed repos, but not other government securities. Funds labeled “Treasury Only” or “100% Treasury” generally invest only in Treasurys, not repos.

Each year, fund companies issue a report showing the percentage of dividends that came from government securities eligible for a state-tax exemption, so shareholders can figure out how much of their federally taxed dividends they can deduct on their state return.

For example, if 80% of a fund’s dividends came from eligible securities (primarily Treasurys),  80% of dividends are generally exempt from state tax. 

California, however, only allows a state-tax exemption if at least 50% of the fund’s assets at the end of each calendar quarter were in these eligible government securities. (New York and Connecticut have this same rule.)

If the fund meets that 50% of assets test, then shareholders in these three states can deduct whatever percentage of dividends came from eligible securities, just like shareholders in other states.

But if the fund fails the 50% test, none of its dividends are exempt from state tax in the three states.

In 2022, many government money funds shifted a much larger percentage of assets from Treasurys (which are state-tax exempt) into repurchase agreements (which are not). 

As a result, shareholders in many government money funds got a much smaller state-tax deduction. And because of the 50% rule, many in California got zero deduction.

Let’s take a look at Vanguard’s Federal and Cash Reserves Federal money funds, which are the nation’s largest and third-largest government money funds, respectively, according to Crane Data.

In 2021, they each derived almost three-fourths of dividends from eligible government securities. And both met the 50% of assets test, so investors in all states could deduct nearly three-fourths of their dividends on their state-tax returns.

But in 2022, Vanguard Federal and Cash Reserves Federal got only 38% and 53% of dividends, respectively, from eligible securities. Both failed the 50% test, so shareholders in California, New York and Connecticut got no state-tax deduction, while investors in other states could deduct 38% of dividends and 53% of dividends, respectively.

Notice that a fund, like Cash Reserves, could get more than 50% of its dividends from Treasurys but still fail the 50% of assets test. 

Investors in the firm’s third government fund, Vanguard Treasury, could deduct 100% of dividends in 2021 and 2022.

So why did so many fund managers favor repos over Treasurys last year, which cut into state-tax deductions?

Money market funds can enter into repurchase agreements with the Federal Reserve Bank of New York as part of its program to maintain the target federal funds rate. These agreements are backed by the New York Fed’s Treasury holdings. Most other investors cannot access this program.

During the pandemic, “you had a ton of stimulus money coming into the system,” said Doug Spratley, a T. Rowe Price fund manager. Municipalities, corporate treasurers and individuals who had excess cash gobbled up short-term Treasurys. This “pushed yields on Treasury bills below overnight repos, sometimes by one-fourth of a percent or more,” he said. 

So money funds piled into the New York Fed’s repurchase program.

Also, when interest rates are rising, investors want to be in short-term securities, so when their investments mature, they can reinvest at higher rates. Overnight repos are the shortest term possible.

The New York Fed program “is the single biggest holding in money funds now,” said Peter Crane, publisher of Money Fund Intelligence.

Buying a “Treasury” money fund doesn’t guarantee a tax exemption in California because many of these funds can invest in repos.

California investors who want a guaranteed state-tax deduction should look for money funds that invest in Treasurys only, not repos. Sometimes you can tell by their names (such as 100% Treasury or Treasury Only), but not always.

For example, the Schwab Treasury Obligations Money Fund invests in repurchase agreements while the Schwab U.S. Treasury Money Fund does not, Schwab spokesman Mike Peterson said via email.

Investors should also compare the yields on Treasury-only funds to other government and prime funds. 

Normally, yields on Treasury-only funds lag yields on funds that can buy repos and other government securities, but they could still be higher on an after-tax basis. Today, their yields are very close.

As of Monday, the average seven-day yield for retail money funds was 4.33% for prime funds, 4.06% for government funds and 4.12% for Treasury funds (including Treasury-only funds), according to Crane Data.

Investors can also guarantee themselves a state-tax deduction by buying Treasurys directly, but they’ll have to take charge of reinvesting the proceeds as they mature, unless they set up automatic reinvestment.

Normally, a Treasury-only money market fund would be considered one of the safest bets out there. But because of the looming fight in Congress over the federal debt ceiling, there are some concerns.

Treasury-only money funds “have higher relative risk to a U.S. government default than prime and government (money funds) that can diversify investments into other instruments,” Fitch Rating said in a report.  (Fitch is owned by Hearst, which also owns The Chronicle.)

Since Jan. 19, when the U.S. government hit its debt limit, the U.S. Treasury has been using extraordinary measures to meet its obligations. At some point, called the X date, it will exhaust those and could conceivably default on some obligations, including Treasury securities.

The X date is likely between July and September, but could hit as early as June.

Treasury-only funds “could face increased volatility in the Treasury market and heightened investor redemptions as the debt ceiling deadline approaches,” Fitch wrote.

To reduce this risk, fund managers would likely cut back on Treasurys maturing around the expected X date, Fitch said. It currently expects the ceiling will be raised or suspended to avoid a default, although that opinion could change.

Pete Gargiulo, a director with Fitch, said he can’t give investment advice, but “if you are buying Treasury bills directly,” the debt ceiling “is a consideration. The timing can be very challenging.” He said “fund managers have been through debt-ceiling standoffs before. They have navigated these waters. That’s one benefit of being in a Treasury-only money market fund.”

But Crane said he doesn’t think the “state-tax bonus” of being in a Treasury-only fund is worth the risk. “Wait until after the debt ceiling is raised, or better yet, buy a California municipal money market fund,” he said.