April Newsletter – 2021

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Rebate Checks, Child Tax Credits, Unemployment Benefits and More: What You Need to Know about the $1.9 Trillion Stimulus Package

The latest stimulus package – signed into law by the Biden Administration – is built to boost the middle class and low-income Americans, the goal being of course to speed up economic recovery. The $1.9 trillion American Rescue Plan focuses primarily on extending unemployment, providing rebate checks, enhancing a handful of tax credits for dependents, and giving states, hospitals, and schools additional funding to weather the road ahead.

What didn’t make the bill? The latest relief package does not include the widely discussed minimum wage hike or any relief when it comes to required minimum distributions (RMDs). Additionally, the bill did not include any of the major student loan forgiveness that had been previously discussed, though it did make some meaningful changes to student loan programs.

The rebate checks – everyone’s favorite topic – worked in 2020 to spur on spending, savings and enhanced economic activity. The expectation is that the trend continues. Low-income Americans are more likely to spend right away on things like groceries, giving the economy an immediate boost. And as we head into warmer weather, encounter pandemic fatigue and expand vaccination efforts, it’s likely that many middle-class families who might have escaped the pandemic’s financial fallout will put their extra dollars to work, too.

Let’s dig into five key points of the stimulus package and how the bill’s provisions might impact you and your loved ones.

Rebate Checks

The new relief package includes another round of relief checks, this time for a maximum of $1,400 for individuals, or $2,800 for married couples filing jointly. What’s different about this bill is who qualifies and for what amount.

Individuals with an adjusted gross income (AGI) of $75,000 or less will receive the full $1,400. The ceiling to receive $2,800 is $150,000 for couples filing jointly. Once your income tips over that threshold, phaseouts begin.

For an individual with more than $80,000 of AGI or a couple earning more than $160,000, the rebate will be fully phased out, and they won’t receive a check. This is a significant change from the previous two rebate checks that went out a bit more broadly based on income.

If you already filed your 2020 taxes the IRS will try to use those to see if you qualify. Otherwise, they will look to 2019 or use the most recent information they have on file to distribute the checks.

Tax filers will also receive an additional $1,400 for each dependent, as defined in US. Code Sec. 152, for 2021. In addition to children under age 18, that can include adult dependents, such as college students or elderly parents you claim on your taxes. However, remember that the taxpayer claiming the dependent will have to meet the income requirements to be eligible for the payments, as these too will be phased out.

Because income phaseouts are lower in this relief package, some people who previously received stimulus checks will not qualify for this round. But, on the other hand, adult dependents who otherwise did not qualify in the past will now qualify.

Planning point: While this year’s rebate is tied to your 2021 income, the IRS will issue checks based on your 2020 tax return, or your 2019 return if you have not filed yet this tax season. Given this, there are a few things to keep in mind:

  • If your income went up in 2020, thus phasing you out of a rebate check, but you haven’t already filed your taxes: Consider waiting to file until your check arrives. There is no claw back provision – you keep the rebate.
  • If you receive a check based on your 2019 or 2020 income, but your 2021 income exceeds the threshold: There is no claw back provision – you keep the rebate.
  • If you did not qualify based on your 2019 or 2020 income but would qualify based on your 2021 income: You will be eligible for a tax refund when you file taxes in 2022.
  • If you get the tax rebate, remember this is a refundable tax credit and you won’t have to pay taxes on the $1,400 check.

Child Tax Credit Increase

The stimulus package included a significant bump to the Child Tax Credit. For certain income brackets, the credit will temporarily jump from $2,000 to $3,600 per child under the age of 6 (as of December 31, 2021). A $3,000 credit (up from $2,000) is available per child between the ages of 6 and up to 17 in 2021.

Half of this extended credit is expected to be paid out to families in the summer and through the fall of 2021, although the details on this process have not yet been finalized.  Families could spend what they receive immediately, then claim the remaining tax credit when they file their taxes in 2022. Time will tell if and when the IRS can execute such a system.

The benefit phases out at $50 per $1,000 over the income threshold, which is $75,000 for single filers and $150,000 for married couples filing jointly. That means, for example, a couple who earns $175,000 would receive a $2,350 credit for their toddler, rather than the full $3,600. Since they are $25,000 over the range it would equate to a $1,250 reduction (25 x $50).

Families whose income exceeds those limits remain eligible for the normal $2,000 credit; that credit phases out for families (filing jointly) who earn $400,000 and $200,000 for single filers.

Another new provision? In 2021, the credit is fully refundable. This will help some lower-income individuals with young children get money back into their hands next year.

A Tax Break on Unemployment Income

If you lost a job last year, know that the American Rescue Plan offers unemployment tax breaks and extends benefits.

While unemployment benefits are taxable, the new legislation says that individuals who make less than $150,000 do not have to pay taxes on up to $10,200 of unemployment compensation received in 2020. The line is $20,400 for those married filing jointly. That’s more money in your pocket, for you to cover expenses and put back into the economy.

If you qualify for this benefit but have already filed your 2020 taxes, you might need to file an amended return – the IRS has not yet issued guidance on that point.

If your income exceeds those listed amounts, you will continue to owe taxes on any unemployment compensation received last year.

Extended Unemployment Benefits

The legislation also extended federal unemployment benefits for another 25 weeks, until September 6. This extension relates to benefits administered through the Pandemic Unemployment Assistance program, which covers self-employed workers, gig workers, part-time employees and other people who are typically ineligible for traditional unemployment benefits.

There was a lot of discussion in the days leading up to the passage of the bill to expand the unemployment weekly benefit from $300 to $400.  However, the bill was passed to extend the existing $300 weekly unemployment benefit passed in December of 2020, not to increase it.

Student Loan Forgiveness

If you or your dependents were looking for student loan relief, you’re probably disappointed. Though many hoped to see student loan forgiveness in the stimulus package, the bill fell short. It did not include wide-ranging forgiveness for those burdened by high loan amounts and weakened job prospects.

Here’s what the American Rescue Plan did address: Student loan amounts forgiven from 2021 to 2025 are income tax-free. Typically canceled debt is treated as income – as if the borrower received money to pay off the debt. Under the new legislation, that is not the case, so any canceled debt from 2021-2025 will not be taxed.

This could set up another provision later on in the year – it’s possible this provision will be extended or even made permanent. Borrowers are hopeful it’s a signal. Expect a lot of attention in this area moving forward.

Other Provisions and Tax Benefits:

COBRA Continuation Premium Assistance: The bill did provide a tax credit that applies to premiums for COBRA continuation coverage between the passage of the act and September 30, 2021. The credit is non-taxable and fully refundable for those that qualify.

Employee Retention Tax Credit: The Employee Retention credit that was first passed in the CARES Act in 2020, and extended in December of 2020, was further extended out to the end of 2021.

Housing Support: The American Rescue Plan included aid for millions that are struggling with rent. Roughly $21.6 billion in emergency aid is dedicated to helping low-income renters who are struggling to keep up with their housing costs. This money can also be applied for and distributed out to landlords to cover back rent or missed utility payments. Additionally, there was about another $10 billion designed to help prevent homelessness through voucher, mortgage, and homeowner assistance programs.

What is Next?

Though the legislation will have longer-term impacts on debt given the $1.9 trillion price tag, like its predecessors, the American Rescue Plan will likely have a positive short-term effect on spending and GDP. Getting money in the hands of Americans helps spur spending and saving.  For those still without employment, the extended unemployment benefits and additional tax benefits will provide much-needed relief.

With vaccines going out and COVID-19 cases coming down in many areas, we could see a shift away from COVID-19 relief efforts at the federal level and a shift toward other tax or infrastructure policies next in DC.

 

Inflation & the Fed

We believe inflation is still, and always will be, a monetary phenomenon. It is defined as “too much money chasing too few goods and services” – but that doesn’t mean every period of higher inflation is going to look exactly the same.

Today’s case for higher inflation is easy to understand. The M2 measure of the money supply is up about 25% from a year ago, the fastest year-to-year growth in the post-World War II era. And while measures of overall economic activity such as real GDP and industrial production are still down from a year ago (pre-COVID), Americans’ disposable incomes are substantially higher, boosted by massive payments from the federal government with more “stimulus” on the way.

Right now, the consumer price index is up only 1.7% from a year ago. But, this year-ago comparison is set to soar to 2.5%, or higher, as we drop off the big declines in prices we saw during February – April 2020. The extent of this increase will likely be held back by the government’s measure of housing inflation (which only focuses on rental values, not home prices). Excluding rents, inflation will be more like 3.0% this year, and will likely move up by about another percentage point in 2022.

Producer prices are already up 2.8% from a year ago, with much faster growth in prices further up the production pipeline. Does this mean we are heading back to double-digit inflation, bell-bottoms, disco balls, and the return of Jimmy Carter-style stagflation?

We think we are a long way from that. As Mark Twain once said, “History doesn’t repeat, but it often rhymes.” In the 1970s, if the Fed would have fought inflation harder early on, we would have never seen it hit double-digits. As a result, for now, we are thinking more of the late 1980s, not the 1970s.

Consumer prices rose only 1.1% in 1986 as oil prices collapsed, but then it revived in 1987, rising above 4.0% by late Summer. To fight this rise in inflation, the Fed raised short-term interest rates by about 140 basis points, to about 7.3% from 5.9% towards the end of 1986.

As the 10-year bond yield rose in 1987, the stock market took it on the chin and crashed in October. Alan Greenspan responded by providing as much liquidity as needed to restore confidence in the financial markets, and had the Fed cut short-term rates through early 1988. The money supply didn’t soar, but short-term interest rates were lower than the trend in nominal GDP growth (real GDP growth plus inflation), signaling loose monetary policy.

Once the smoke cleared from the stock market crash, the Fed found itself behind in the inflation-fight. Inflation jumped to 5.4% in 1989, before Iraq invaded Kuwait, and then higher oil prices from the war pushed it to 6.3% after the invasion.

As a result, the Fed eventually lifted short-term rates to almost 10.0% to get inflation under control. The result was the tight-money-induced recession of 1990-91, which some still wrongly blame on the Iraqi invasion.

We don’t know if the late-1980s pattern is the one we’re about to follow. What we do know is that just like with the stock market crash of 1987, the Fed has demoted inflation as its top concern and pushed COVID recovery to the top of its list. Letting M2 growth rise to 25%, and holding rates at basically zero, in spite of an economic recovery, is the proof.

The biggest question is how quickly the Fed turns its attention to inflation as it builds and how far will they go to fight it. In the 1970s, it was double-digit inflation, in the 1980s, it was 5% to 6% inflation.

Either way, this Fed has made it clear that it will remain easy through 2022. As are result, we remain bullish on the economy and stocks, but cautious on bonds as inflation picks up. We all need to wait until 2023 to see what history we rhyme.

 

Did you Know?

NEED LESS SPACE

– 278 executives surveyed in August 2020 anticipate they will reduce their office space footprint by an average of 30% when their current leases come up for renewal.  Those surveyed report that a successful “work from home” experience during the pandemic has decreased their need for daily office space (source: McKinsey Global Institute).

QUICK, BEFORE RATES RISE

– 13% of outstanding home mortgages nationwide as of 12/31/20, i.e., 7.2 million mortgages out of 53.9 million mortgages, were refinanced during 2020 (source: Federal Reserve Bank of NY).

AND IN THE NEXT YEAR

– 2020 was the 10th year in the last 70 years, i.e., 1951-2020, that the US economy had contracted.  Our nation’s “gross domestic product” (GDP) shrunk by 3.5% last year.  Following the 9 previous “down” years, the US economy has rebounded in the next year with positive growth 7 out of 9 times, growing by an average of +3.3% per year for all 9 “bounce back” years (source: Commerce Department).

 

Quotes:

“You don’t have to see the whole staircase, just take the first step.” Dr. Martin Luther King, Jr.

“Time is the most valuable thing a man can spend.” – Theophrastus

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