Updated 2022 Tax Numbers

The IRS has released the key tax numbers that are updated annually for inflation, including tax brackets, phaseouts, standard deduction, and contribution limits.  Due to rounding limitations, not all numbers have changed from last year, but tax bracket thresholds have increased by just over 3%.  The notices containing this information are available on the IRS website here and here.  Some notable callouts for those who don’t want to read all the way through the update:

  • Max contributions to 401k, 403b, and 457 retirement accounts will increase by $1,00 to $20,500 (+$6,500 catch-up, which remains constant, if you’re at least age 50).
  • Max contribution to a SIMPLE retirement account will increase by $500 to $14,000 (+$3,000 catch-up if you’re at least age 50).
  • Max total contribution to most employer retirement plans (employee + employer contributions) increases from $58,000 to $61,000 (+$6,500 catch-up, again for those 50 or over).
  • Max contribution to an IRA remains at $6,000 (+$1,000 catch-up if you’re at least age 50).
  • The phase out for being able to make a Roth IRA contribution is $214k (married) and $144k (single). Phase out begins at $204k (married) and $129k (single).
  • The standard deduction increases by $800 to $25,900 (married) and by $400 to $12,950 (single) +$1,750 if you’re at least age 65 and single or $1,400 each if you’re married and at least 65.
  • The personal exemption remains $0 (the Tax Cuts & Jobs Act eliminated the personal exemption in favor of a higher standard deduction and child tax credits).
  • The child tax credit reverts back to pre-2021 rules at $2,000 per child, phasing out between $400-440k (married) and $200-220k (single).  Note: it’s possible that 2021 tax treatment may be extended to 2022 or beyond, if the Build Back Better plan passes Congress.  Stay tuned.
  • The maximum contribution to a Health Savings Account (HSA) will increase to $7,300 (married) and $3,650 (single).
  • The annual gift tax exemption increases by $1,000 to $16,000 per giver per receiver.
  • The lifetime gift / estate tax exemption increases to $12,060,000.
  • Social Security benefits will rise 5.9% in 2020.  The wage base for Social Security taxes will rise to $147,000 in 2022 from $142,800.

You can find all of the key tax numbers, updated upon release, on the PWA website, under Resources.

Q3 2021 Returns By Asset Class

This post contains the usual returns by asset class for this past quarter (by representative ETF), year-to-date, last twelve months, last five years, last 10 years, and since the covid low (3/23/2020).  While there is still no predictive power in this data, I’ll continue to post this quarterly for those of you that are interested. 

Last Quarter (7/1/21-9/30/21)
Year-To-Date (1/1/21-9/30/21)
Last 12 Months (10/1/20-9/30/21)
Since Covid Low (3/23/20-9/30/21)
Last 5 Years (10/1/16-9/30/21)
Last 10 Years (10/1/11-9/30/21)

A few notes:

  • A solid first two months of the quarter hit an ugly September, which left Q3 mixed to slightly down overall. Commodities led the way (+8%) for the second straight quarter as supply chain issues led to shortages in many areas of the economy. The Fed has softened its opinion on the transitory nature of inflation, and are indicating a chance for costs rising higher than their 2% per year target for some time. They’ve indicated that if the employment picture continues to improve, they’re likely to start tapering their bond purchases (quantitative easing) in the coming months, with rate hikes down the road in late 2022 / early 2023.
  • Rounding out the performance numbers by asset class: US Bonds, US Large Cap Stocks, US Real Estate, and High-Yield Bonds all returned between 0-1% in Q3. On the losing side were Foreign Developed Stocks (-1.5%), US Smalls Caps (-2.5%), Emerging Market Debt (-3.5%), and Emerging Market Stocks (-7%). The stability of bonds made more conservative portfolios outperform in Q3. But, as you can see in the 5-year chart and the “since covid low” chart, overall performance across the financial markets has been superb.
  • While commodities have continued to roar back over the past 18 months, the 5 and 10-year charts show just how far they’ve lagged behind other asset classes. Commodities generally track inflation over the long-term, and they really suffered after the financial crisis, the oil glut, and the early part of covid. Now, higher inflation has been pushing commodities higher. Whether that continues or not depends on whether supply constraints ease and on how quickly global demand returns following the peak of the Delta variant of covid (and whatever variant of concern comes next).

Proposed Credits & Deductions in the Upcoming Infrastructure & Broader Spending Plan

In the last post, I covered the potential “pay-fors” that would… well… pay for some of the spending, deductions, and credits enabled by the proposed infrastructure and broader spending legislation that Congress is working on passing via reconciliation this fall.  That proposed legislation is currently 645 pages, and subject to many changes as it makes its way through committees in both chambers.  There are many proposed changes to the tax code (enough to make the TCJA look simple) to go along with various spending appropriations.  The majority have to do with infrastructure incentives and credits for business.  But, there are a few notable ones for individuals/families.  Keeping in mind that this is just a proposal, here is a non-exhaustive list of the provisions that may provide some benefit to you:

  • Increases the credit for adding solar to a residence back to 30% of the cost.  Extended through 2031, then phases down to 26% in 2032, 22% in 2033, and then expires.  Includes residential battery storage technology as well.
  • Extends the non-business energy property credit (energy-efficient windows, doors, furnaces, , water heaters, etc.) to 2031 and expands the credit to 30% of the cost from the current 10%.  Additionally, it eliminates the (frustrating and hard to track) lifetime limit and replaces it with a $1200 annual limit.
  • Creates a new Plug-In Electric Vehicle Credit ranging from $4000 to $12,500 (limited to 50% of the cost), depending on battery capacity, assembly location, and what portion of the vehicle is made with domestic parts.  It won’t apply to vehicles weighing more than 14,000 lbs or vehicles with an MSRP exceeding certain thresholds. The credit phases out starting at income of $400K single / $800K Joint.
  • Creates a new Plug-In Electric Vehicle Credit for purchase of used qualifying vehicles.  Much lower income thresholds, lower credit amount, and the vehicle must be at least 2 years old.
  • Creates a new credit for certain electric bicycles, and reinstates the employer provided fringe benefit for bicycle commuting (with the max benefit raised to $52.50/mo from $20/mo)
  • Extends the enhanced Child Tax Credit ($3k per child age 6-17, $3600 per child age 5 or under), as created by the American Rescue Plan (ARPA) earlier in 2021, including monthly checks of half of the expected amount of the credit, through 2025 (previously expired in 2021).  However, instead of defaulting to including the monthly checks, the default will be to not have monthly checks sent and the taxpayer will have to opt in in some manner to be determined at a later date by the Treasury/IRS.  Income phaseouts continue to apply as defined in ARPA (phaseout for the original $2k is $200K Single / $400K Married, and for the enhanced $1600 it’s $75K Single / $150K Married.
  • Makes the Child Tax Credit permanently (until changed by future legislation) refundable.  This means the credit amount can exceed the taxpayer’s total tax liability for the year and the taxpayer will still get the full credit.  No longer reverts back to the pre-ARPA rules after 2025
  • Extends the $500 credit for “Other Dependents” through 2025.
  • Makes the Dependent Care Credit changes from APRA permanent.  That increased the maximum qualifying expenses to $8K for one child or $16K for two or more children.  The amount of the credit starts at 50% of qualifying expenses.  If income exceeds $125K, the credit percentage is reduced, until it drops to 20% at $400K.  It then completely phases out if income exceeds $500K.  Also makes permanent the income exclusion for employer provided Dependent Care Assistance (e.g. Dependent Care Flexible Spending Accounts) at the ARPA enhanced level of $10,500 per year (up from the $5k limit pre-ARPA).  Note that employers still need to adopt this change in order for employees to take advantage of it.
  • Creates a new credit for caregivers of 50% of qualified expenses up to a $4K maximum credit.  Begins to phase-out at $75K of income.  This is for people who care for those with long-term care needs in their own home.
  • Enhances the Earned Income Credit.
  • Creates a new credit for contributions to a Public University that provide infrastructure for research.  The credit, available through 2032, is 40% of the amount contributed to the qualifying project (lots of rules as to what qualifies).  Note: this is a credit, not a deduction, so you don’t have to itemize to take it.

Tax Increases & Retirement Funding Limits Incoming

The House Ways and Means Committee released a tax plan designed to pay for (part of?) the bi-partisan Infrastructure Bill and the larger spending bill that Democrats are trying to pass through a process known as “reconciliation”.  The House tax plan contains fewer tax hikes and fewer changes to the tax code overall than President Biden’s initial plan released earlier this year.  While the President’s plan always seemed unlikely to garner enough support, the House plan has the makings of a real starting point for negotiation.  The Senate is moving forward with its own legislation and eventually, both Chambers will need to pass a bill, then reconcile into one bill which is re-passed.  With the Democrats having slim margins in both the House and Senate (courtesy of the VP tie-breaker there), it will be difficult to get enough support from the progressive and more moderate side of the party at the same time.  They’ll either need to do that or bring some Republicans on board in order to get enough votes to pass the broad package.  In summary, there are bound to be a lot of changes to the details here, but we’re close enough to actual proposed legislation, that I thought it would be a good idea to lay out the key portions of the current proposal.  As a side note, there is a fair shot that some/all of the changes will wind up being last minute, end-of-year, potentially retroactive to this year changes.  The timing of enactment and the effective date of each change are going to determine whether or not any action can/should be taken to minimize the impact of tax hikes, or take advantage of temporary opportunities for deductions, credits, etc.  December is going to be a fun month tax-wise, as it has been for the past several years.  Stay tuned.

Currently Included in the House Plan:

  • An increase in the top marginal income tax rate from 37%, back to where it was pre-TCJA at 39.6%.  In addition, the 32% and 35% brackets would be compressed so that the top bracket begins at $400K Single / $450K Joint.
  • A 3% “surtax” on those earning more than $5M in a given year.  A surtax is just a fancy way of adding to the income tax rate, effectively creating a new top bracket of 42.6% for those earning > $5M.
  • An increase in the tax rate on long-term capital gains (LTCG) tax for upper-income taxpayers (in the top tax bracket for LTCG which starts at ~$450K single / 500K joint) from the current 20% to 25%.  Note: this provision would become effective as of 9/13 if I’m reading it correctly (i.e. sales prior to that date would be taxed at the existing rate, sales on or after would be taxed at the new rate).  If true, there’s no ability to sell in advance, though since the rate is only going up 5%, and that might change in a future administration, I can’t see why anyone would sell anything other than for a short-term need anyway.
  • A decrease in the corporate tax rate from the current 21% to 18% for low-income (up to $400K) corporations and an increase to 26.5% for high-income (over $5M) corporations.
  • Limits on the 199A “20% small business deduction” to a max of $400K Single / $500K Joint.  Those aren’t income limits to take the deduction…  they’re limits on the max amount of the deduction.  There had been an alternate proposal (Wyden plan) to eliminate the Specified Services Trade or Business provisions as well as the W-2 income and unadjusted basis of assets provisions, and instead just institute income limits.  That’s not included in the House plan.  (Of course it’s not…  it would have simplified something!)
  • Contributions to IRAs / Roth IRAs would be prohibited if their value (in aggregate in case there are multiple accounts) exceeds $10M in value and income for the year exceeds $400k single / $450k joint.
  • Add a new Required Minimum Distribution (RMD) to IRA, Roth IRA, and defined contribution (e.g. 401k) accounts (in aggregate) that exceed $10M in value if income for the year exceeds $400k single / $450k joint.  The RMD would be 50% of the amount that exceeds $10M.  Additionally, if the balance of those accounts exceeds $20M, a 100% distribution is required from the Roth portions until the total balance is less than $20M or the Roth accounts are exhausted.
  • Roth IRA conversions and 401k Roth Conversions would be prohibited for those with income over $400k single / $450k joint.  Additionally, after-tax contributions to 401k and the conversion of after-tax contributions to Traditional IRAs would be prohibited regardless of income (i.e. the end of the “backdoor Roth” and the “mega backdoor Roth”).
  • IRAs would not be able to hold 1) private investments that can only be offered to “accredited investors”, 2) securities in which the owner has a >= 50% interest (10% if not tradable on an established securities market), and 3) the securities of an entity in which the IRA owner is an officer.
  • Lifetime gift / estate tax exclusion is reset to its 2010 level of $5M per individual (adjusted for inflation) instead of that happening after 2025 as scheduled by TCJA.
  • Changes to bring most Grantor Trusts back into the estate of the grantor and to eliminate the valuation discount frequently used when gifting portions of family limited partnerships (FLPs) to the next generation.
  • More money for the IRS to boost its audit programs.  Everyone hates and audit, but this is sorely needed.  The IRS lacks the resources to keep up with tax cheats.

Notably Not Currently Included:

  • Increase in the State And Local Tax (SALT) maximum deduction.  This is the cap put in place as part of the TCJA that limits both single and joint filers to a maximum Federal deduction of $10k for taxes paid to states and localities.  Several high-tax state representatives in the House have said they will not vote for any tax and spend package that doesn’t relax the current SALT limit, and House leadership has implied that a change to the SALT deduction is still on the table and may be added to the bill at a later date.
  • Loss of Basis “Step-Up” at death.  This feature of the current tax code allows those who inherit property (real estate, securities, farms, businesses, etc.) to have the cost basis of the property reset to its value on the date of death of the owner.  This allows substantial gains to go untaxed if the property is held until death.  The President’s tax plan would curb basis step up, but such curbs were not included in the recent draft from the House.  The head of the Senate Finance Committee has indicated that this may wind up in the Senate bill, so it’s not dead yet either.
  • Elimination of tax-free loans from securities portfolios.  The current tax code allows owners of brokerage accounts to use the account as collateral to take out loans.  The proceeds from the loans can then be used to support expenses, rather than selling assets and potentially paying capital gains tax on those sales.  This practice helps to avoid selling assets such that basis can be stepped up at death (see bullet above) and capital gains tax is never collected.

Q2 2021 Returns By Asset Class

This post contains the usual returns by asset class for this past quarter (by representative ETF), year-to-date, last twelve months, last five years, last 10 years, and since the covid low (3/23/2020).  While there is still no predictive power in this data, I’ll continue to post this quarterly for those of you that are interested. 

Last Quarter (4/1/21-6/30/21)
Year-To-Date (1/1/21-6/30/21)
Last 12 Months (7/1/20-6/30/21)
Since Covid Low (3/23/20-6/30/21)
Last 5 Years (7/1/16-6/30/21)
Last 10 Years (7/1/11-6/30/21)

A few notes:

  • Another solid quarter in Q2 for all assets classes. Commodities led the way (+15%) as the world got a strong whip of inflation. Whether that’s transitory as the Fed expects or not, remains to be seen. Real Estate Investment Trusts (REITs) (+12%) were close behind. US Large Cap (+8%), Foreign Developed (+6%), US Small Caps (+5%) and Emerging Markets (+5%) also had great quarters. Emerging Market Bonds (+4%) were the winners in fixed income, with High Yield (+2%), US Aggregate Bonds (+2%), and Short-Term Corporate Bonds (+1%) close behind. Treasury Inflation Protected Bonds (not shown on the charts) were +3% in the quarter, again on the back of higher consumer prices.
  • While commodities have roared back over the last year, the 5 and 10-year charts show just how far they’ve lagged behind other asset classes. Commodities generally track inflation over the long-term, and they really suffered after the financial crisis, the oil glut, and the early part of covid.
  • All assets classes have shown positive returns since 3/23/20 (the Covid low), amidst the worst pandemic in a century. US Small Caps are now up 130%+ over that period, dominating the other asset classes. Just about the time that the world was assuming the worst and fearing the most as lockdowns started in the US, the bottom was in for the financial markets. Yet another, among numerous historical examples, of why it doesn’t make sense to sell in the midst of a crisis, no matter how bad it looks.

More Checks Coming From The IRS


  • The Child Tax Credit has been enhanced (more per child, more children qualify) for 2021.
  • The IRS is going to be sending checks (or direct deposits) monthly starting in July for up to half of the credit they think you’re eligible to receive based on prior year tax returns.
  • The actual credit will be reconciled on your 2021 taxes.  If you receive payments you shouldn’t have, your refund will be reduced or the amount you owe will be greater (i.e. you have to pay the IRS back).  If you didn’t receive payments you should have, you’ll get the credit when you file.
  • The easiest way to deal with this, by far, is to do nothing.  Let the IRS pay who they think they should pay and reconcile it all at tax time.  But, you can take action if you prefer a different result.


One of the many tax law changes coming out of the American Rescue Plan Act (ARPA), passed earlier this year, is an enhanced Child Tax Credit for 2021.  Instead of $2k per child under 17, you’ll now get $3k per child under 18 or $3600 for each child under 6, subject to income phaseouts.  The extra $1k or $1600 starts to phase out at incomes over $75k Single, $112,500 HoH, and $150k MFJ.  The phaseout of the original $2k remains the same as in previous years at $200k Single/HoH and $400k MFJ.  In addition to the larger credit and more children qualifying, Congress worded the law change such that the IRS has to pay half of the expected credit to each family during the tax year.  That’s right, more checks or direct deposits on the way for many families. 

Those payments will begin in July and continue monthly for the remainder of 2021.  The IRS will send half of their estimated amount that you are due to receive via those six monthly payments.  How will they estimate what you’re due to receive?  They’ll use your income and number of qualifying children as shown on your 2020 tax return (or 2019 if you haven’t filed 2020 yet) to project your Child Tax Credit under the new law.  In January 2022, if you received any advanced Child Tax Credit payments, you’ll receive Letter 6419 from the IRS.  This is a new input to your tax documents and will be used to reconcile what you received vs. what you qualify for based on your 2021 actual situation (income and qualifying children).  If the IRS didn’t send you enough money, the remaining amount will be added as a credit on your 20201 return.  But, if the IRS sent you too much, in most cases, you will have to pay that back via an additional tax that will reduce your refund or increase the amount you owe for 2021 when you file.

If you don’t want the advance payments, or you want to update your information so that the IRS can more accurately project what your 2021 Child Tax Credit will be (income, children, etc.), you can use the IRS’s new Child Tax Credit Update Portal to do so.  Be aware that currently, you can only opt out through that site.  It will be updated later this year to allow you to make changes to your situation without opting out.  At that point, you’ll also be able to update your direct deposit information or your mailing address for a paper check.  Be aware that this is a brand new IRS tool that was rushed out to meet the law’s requirements, during a pandemic, with short-staffing.  I’m not saying the IRS is incapable of doing this right, but history is not on their side, even during normal times.  Additionally, identity verification is required to use the Update Portal.  You’ll either need an existing IRS account, or you’ll have to use sign in via ID.me, an independent identity verification service that the IRS uses to make sure you’re you.  Setting up an IRS account has historically been difficult for some people, leading to snail mail letters in order to complete the registration.  I haven’t gone through the ID.me process myself, but I’ve heard that it works, though it’s exceptionally tedious.  Also note that if you’re married, both spouses will have to opt out of advanced Child Tax Credit payments in order to make sure you receive nothing.  The IRS says that “unenrolling applies to the individual only.” If one spouse unenrolls and the other doesn’t, they will receive half the joint payment they were supposed to receive with their spouse.

The IRS has also launched a tool they’re calling Advance Child Tax Credit Eligibility Assistant.  This one doesn’t require any registration.  It just allows you to enter information from your 2020 or 2019 tax return so that you can see what they are calculating and if you’ll be receiving payments if you don’t opt out or adjust your data.

The bottom line: unless you’re extremely bothered by the chance of having to repay advanced payments at the time of filing, I recommend that you just ignore this whole process.  If the IRS sends you money, consider it a loan that might have to be repaid and just make note that you’ll need your Letter 6419 that reports the total in order to file your 2021 taxes.  Using that letter, your tax preparer will reconcile the payments received with the actual Child Tax Credit and everything will balance out when you file your 2021 taxes.

For more information, please see the IRS’s Resources and Guidance page on this topic, which includes FAQs, User Guides, YouTube Videos, and News Releases.

Q1 2021 Returns By Asset Class

This post contains the usual returns by asset class for this past quarter (by representative ETF), last twelve months, last five years, and last 10 years. There is no year-to-date this quarter since Q1 and year-to-date are the same. I’m also retiring the chart that shows returns since the financial crisis lows of 3/9/2009 and have replaced it with a new chart that shows returns since the covid low (3/23/2020).  While there is still no predictive power in this data, I’ll continue to post this quarterly for those of you that are interested. 

Last Quarter (1/1/21-3/31/21)
Last 12 Months (4/1/20-3/31/21)
Last 5 Years (4/1/16-3/31/21)
Since Covid Low (3/23/20-3/31/21)

A few notes:

  • Another great quarter for equities in Q1, following the spectacular Q4. US Small Caps led the way (+10.3%), followed by REITs (+8.8%), Commodities (+8%) led by energy, US Large Caps (+6.4%), Foreign Developed (+4.5%), and Emerging Markets (+4%).
  • It was a tough quarter for Bonds as interest rates rose, especially on longer-dated treasuries. The Federal Reserve indicated that they are likely to hold overnight rates at 0% through at least 2022, but longer term treasuries reacted to the increased likelihood of inflation with the US 10-yr Treasury rising to 1.74%, up from 0.93%, just a quarter ago. High-yield (“junk”) Bonds eked out a positive return (+0.6%), with US Short-Term Corporates losing 0.6%, and US Aggregate Bonds losing 3.6%. Local Currency Emerging Market Bonds fared worst at -7.1%.
  • Over the last 12 months, all assets classes have shown positive returns, amidst the worst pandemic in a century. US Small Caps are now up 120% from their Covid low on 3/23/2020.

American Rescue Plan Act (ARPA) of 2021

With the latest covid relief / stimulus bill now signed into law, I wanted to give the usual summary of the key financial planning / tax-related elements that may impact clients. Another round of stimulus checks has gotten most of the press to date about the $1.9 trillion legislation, but there are quite a few provisions, including those stimulus checks, in here that are worth noting:

  • Direct Payments (Stimulus Checks) – $1400 per eligible individual, $2800 for joint filers, and $1400 per qualifying dependent (which include full-time students under 24 and adult dependents this time). The payment begins phasing out at $75k per individual filer and $150k per joint filer, and is completely phased out at $80k individual and $160k joint, regardless of the size of the payment (different that in previous rounds of stimulus). See the graphic from the Tax Foundation below for a visual depiction of the phaseouts. The IRS will use 2020 income if available, otherwise 2019 to determine the payments. These will be reconciled on 2021 tax forms so that anyone who should have received a payment based on 2021 income and didn’t, will get a credit for the missing amount. Anyone who received a payment and shouldn’t have based on 2021 income will not have to pay it back. Payments are set to start going out the weekend of 3/13/21.
  • Unemployment Benefits:
    • Extension to the first week of September of the additional $300/week of Federal unemployment benefits which is added on to existing state benefits.
    • New provision that exempts the first $10,200 per person of unemployment benefits from tax for 2020. Limited to those with AGI < $150k single or joint (all filers, no phaseouts). The IRS is expected to provide guidance in the coming weeks for those who already filed their 2020 returns and treated the unemployment benefits as taxable. Note that this is for 2020 only. It currently does not include 2021 benefits. The IRS has released guidance on how this should be reported for tax purposes for those who have not filed yet. Tax software will need to be updated over the next few weeks to reflect the change and make sure everything passes through to state returns correctly.
  • Child Tax Credit – formerly $2k per child under age 17, now raised to $3k per child for children age 6-17 and $3600 for those under age 6. Lower income phaseouts apply to the expanded credit through (starting at $150k married, 75k single and reducing the enhancement portion of the credit by $50 for each $1k of income over the threshold). The law also instructs the IRS to pay the Child Tax Credit periodically (monthly?) for the 2nd half of 2021, meaning additional periodic checks to be received by qualifying taxpayers. Keep an eye on this. While we don’t know yet how it will be implemented, if you start receiving checks for the credit through the year and you have withholding set to take the credit into account, then you’ll need to adjust withholding or you’ll wind up owing the credit back in April. When the IRS sets this up, they’re supposed to provide a website which will allow you to opt out. Keep in mind that the IRS hasn’t even opened some mail from mid-2020 yet, so they have a bit on their plate. A good article from Kiplinger in available with more details.
  • Dependent Care Credit – For 2021 only the credit will be worth up to 50% (was 35%) of eligible expenses up to $8k for one child or $16k for more than one (was $3k/$6k) with a sliding scale % based on income. It is reduced at income levels over $125k and reduced below the previous lower bound of 20% at income levels over $400k (i.e. this is a reduction in credit available at those levels vs. previous years).
  • Dependent Care Flexible Spending Accounts (DCFSA) – for 2021 only, you can contribute a max of $10,500 (instead of the usual $5k) toward a DCFSA. But, your employer’s plan has to enact this change and they are not forced to do so. They’d also have to allow mid-year changes in contribution level (which was authorized under the last covid bill). Note that because of the enhancement to the Dependent Care Credit (see above), and the fact that any contributions to a DCFSA reduce the amount of expenses that qualify for the Dependent Care Credit, many taxpayers (generally AGI< mid $100,000’s) would be better off foregoing a DCFSA and using the Dependent Care Credit instead. Again, just for 2021.
  • Affordable Care Act (ACA) – increases subsidies for plans purchased through the ACA exchanges. This includes the level of subsidy for a given income level and the eligibility for any subsidy for a given income level (now > 400% of the Federal poverty level). Total cost after subsidy, regardless of income cannot exceed 8.5% of income. Effective for 2021 and 2022. Also, big change, excess subsidies received for 2020 only will not need to be paid back. And, (even bigger!) if you have any unemployment benefits in 2021, you’re subsidy for 2021 only is 100% of the cost of the second highest Silver plan available to you, regardless of your actual income.
  • COBRA Subsidies – covers 100% (!!!) of COBRA premiums for eligible individuals who are unemployed (lost job or reduced hours, not voluntary termination), and their families, Effective from enactment through 9/30/2021.
  • Earned Income Tax Credit (EITC) – for 2021:
    • raises the maximum credit for those without children to ~$1500
    • makes 19-24 year old workers eligible if they are students
    • makes those over age 65 eligible
    • can use 2019 income to determine EITC instead of 2021.
  • Student Loan Forgiveness – will not be taxable for 2021-2025 (normally debt forgiveness is taxable as income). Note that the new law does not actually forgive any student loans.
  • Employee Retention Credit (ERC) – extended to 12/31/2021, adds new clauses that allow newly formed businesses post 2/15/20 to claim (which wouldn’t be able to claim the credit because they don’t have the required decline in revenue), and adds special benefits to “severely financially distressed employers” with revenue down 90%+ to the same quarter of 2019.
  • Paid Leave Credits – credits for employers that provide paid leave under certain situations (which is no longer mandated). For 4/1/21 – 9/30/21, eligible wages climb to $12k per employee (from $10k), includes vaccination leave as qualified, and increases the leave for self-employed individuals to 60 days (from 50).
  • Executive Compensation Limits – Businesses currently can’t deduct compensation > $1M for CEO, CFO, and the next three highest paid employees. This legislation increases that to the next eight highest paid employees starting in 2027.
  • $15B for new Economic Injury Disaster Loans (EIDL) grants and clarification that EIDL grants are non-taxable and the expenses the money is used to pay are still deductible.
  • $22B toward emergency rental assistance for individuals and families struggling to pay rent and utilities. Renters must meet several conditions to receive the assistance.
  • $10B toward assistance for homeowners struggling to pay their mortgage, utilities and other housing costs.
  • $86B toward rescuing multiple soon-to-fail-without-help union pension plans. The plans that will receive the money cover approximately 11 million people in various unionized trades.
  • $25B Restaurant Revitalization Fund to be administered by the SBA. These are non-taxable grants for qualified businesses.
  • $7B additional funding for Paycheck Protection Program (PPP), mostly under the same rules as before.
  • $350 Billion for state and local government support, which could create more state/local level tax changes or stimulus actions.
  • Various other spending allocations for K-12 schools, vaccines, testing, etc., that are beyond the scope of the financial planning discussions so I won’t dive into the details here. You can read the table of contents of the actual bill/law and dive into those areas if you’re interested. The non-tax provisions are mostly written in English rather than legalese/financialese.

Q4 2020 Returns By Asset Class

This post contains the usual returns by asset class for this past quarter (by representative ETF), as well as year-to-date, last twelve months, last five years, and since the financial crisis lows of 3/9/2009.  While there is still no predictive power in this data, I’ll continue to post this quarterly for those of you that are interested. 

Q4 2020 (10/1/20 – 12/31/20)
Last 12 Month (1/1/20 – 12/31/20)
Last 5 Years (1/1/16 – 12/31/20)
Since ’09 Bottom (3/9/09 – 12/31/20)

A few notes:

  • While US Large Cap Stocks (S&P 500) had a fantastic quarter in Q4 (+12%), Foreign Stocks, both Developed and Emerging, actually outperformed (+16-17%), and US Small Cap Stocks completely dominated (+27%), finally playing a bit of catch up and topping their all-time high set back in 2018. All major asset classes were positive for the quarter. This was a quarter where many who try to market-time suggested caution was needed given a second wave of covid, a US election that could have dire consequences, gridlock and lack of stimulus from Congress, and a climax to BrExit. Trying to time the stock market and believing you’re smarter than all other investors, in aggregate, is a fool’s game. Q4 2020 is just another example.
  • Along those same lines, just look at 2020 performance as a whole. The worst pandemic in a century and stocks end the year strongly positive almost across the board (only REITs were negative as a major asset class).
  • On the 5-year chart, we can see that even commodities have now eked out positive returns, after being down almost 25% in March of this year due to covid. It’s been a rough decade for commodities, especially energy with supply glut after supply glut, followed by a pandemic-induced bout of demand destruction. Perhaps zero interest rates are starting a new uptrend here. There’s till a lot of oil and gas out there though, so it would be difficult for a rise in energy prices to not be met with more supply coming online fairly quickly.

Dec 2020 COVID Relief

This one hasn’t gotten a fancy name yet (that I know of) like the CARES Act since it is attached to the 2021 Consolidated Appropriations Act (the “2021 spending bill” that funds the government), so I’m just referring to it as the Dec 2020 COVID Relief Bill. It was signed into law on 12/27/2020 and consists of ~$900B of funding, not to be confused with the $1.4T in general “keep the lights on” type funding in the rest of the Act. The full Consolidated Appropriations Act is 5,593 pages. I cannot claim to have read the whole thing. However, I’ve skimmed through it and read enough summaries now to feel comfortable calling out the top line virus-related items and the key tax and personal financial planning items for you. This list below includes the COVID Relief Bill portions, the relevant tax and financial planning-related items from the rest of the Act, and a few other callouts. Here goes:

  • Direct Payments (“stimulus checks”) – ~$170B for direct payments to taxpayers. $600 per individual earning $75k or less, or $1200 per couple earning $150k or less, +$600 per dependent child under age 17 (e.g. $2400 for a family of 4 earning $150k or less). Above the $75k/150k threshold, the payment amount drops by $5 for every $100 of income until it is completely phased out. Income used is the lower of 2019 or 2020. Payments will be sent out by direct deposit or check based on 2019 income, but can be trued up on the 2020 tax return if income was lower or more children were born. For more details, see this fantastic article from Forbes, and this nifty chart from the Tax Foundation
  • Unemployment Benefits – $120B. extends emergency Federally funded benefits (including that for self-employed) for 11 weeks and provides a $300/week Federal amount in addition to existing state-provided benefits.
  • Paycheck Protection Program (“PPP”) – $284B extends PPP v 1.0 and issues a new round of funding for PPP v2.0 Additionally, reverses the IRS interpretation that business expenses used to qualify for PPP forgiveness were not deductible. They clarified that those expenses are deductible. It also broadens the list of qualifying expenses for forgiveness to include operating expenses, supplier costs, property damage costs, and PPE expenses, still subject to the limitation that non-payroll expenses cannot exceed 40% of the forgiven loan amount. Not exactly auto-forgiveness for small loans (many were calling for this), but the Act does tell SBA to create a one-page form to apply for auto-forgiveness (*smacks my head*) for loans < $150k. Side note: Auto-forgiveness = Ease of use as the main course, but with a large side of increased fraud. I think this auto-forgiveness means that an applicant would get forgiveness even if payroll was reduced during the covered period, so long as the PPP money wasn’t used improperly and no fraud was involved. PPP v 2.0 is for businesses w/ < 300 employees (<500 if accommodation or food service) and that had at least one quarter of 2020 with revenue at least 25% lower than the same quarter in 2019. Max loan is $2M or 2.5x avg monthly payroll whichever is less, (3.5x for accommodation or food service).
  • Vaccines, Testing, Health – $63 billion for vaccine distribution, testing and tracing, and other health-care initiatives, most of which will be administered by the states.
  • Transportation – $45 billion for transit agencies, airlines ($15B specifically allocated for airline payroll support), airports, state departments of transportation, and rail service.
  • Education & Childcare & Broadband Support – $82B in funding for colleges and schools, including support for HVAC upgrades to mitigate virus transmission + $10 billion for child care assistance + $7B for enhanced broadband access.
  • Nutrition & Agriculture – $26B for food stamps, food banks, school/daycare feeding programs, and payments, purchases, and loans to farmers and ranchers impacted by covid-related losses.
  • Rental Assistance – the eviction moratorium is extended through 1/31/2021 (for now). $25B is authorized to help troubled renters and landlords by paying future rent and utilities as well as back rent owed or existing utility bills.
  • SBA Loan Relief – The CARES Act authorized SBA to pay up to six months of principal and interest on existing Section 7 SBA Loans for impacted borrowers. This Act extends that by another three months.
  • Economic Injury Disaster Loans (EIDL) – $20B in additional funding for businesses in low-income communities + $15B of dedicated funding is set aside for live venues, independent movie theatres, and cultural institutions.
  • Credit for Paid Sick + Family Leave – this was created by the Families First Act and is now extended through 3/31/2021 (was 12/31/2020).
  • Employee Retention Tax Credit – created under the CARES Act, is extended through 6/30/2021 and improved. It’s now up to 70% of wages capped at $10k of wages per employee per quarter, instead of 50% capped at $10k in total. Business qualifies if revenue for the quarter was down at least 20% from the same quarter in 2019. Important: it appears this credit is now allowed along with a PPP Loan (under the CARES Act, it was one or the other), though you still can’t double count the same wages for the credit and PPP forgiveness.
  • Payroll Tax Deferral – the president signed an executive order in September allowing employers to opt in to a payroll tax deferral for employees. Almost no one did (except the government) because it was too risky on the employer and deferral for a few months was pretty meaningless. Those that did were supposed to repay the deferral by 4/30/2021. That has now been extended to 12/31/2021, giving more time to spread out the payback.
  • Lookback for Earned Income Tax Credit and Refundable Child Care Credit – taxpayers can, but don’t have to, use 2019 income instead of 2020 income to qualify for these in 2020.
  • Residential Solar Tax Credit – this was reduced to 26% of the cost of the project in 2020, scheduled to drop to 22% in 2021, and then eliminated after 2021. The Act extends the 26% credit for 2021 and 2022, dropping to 22% for 2023. It is now eliminated in 2024, unless additional legislation is passed.
  • Employer Paid Student Loans – Employers can continue to give up to $5250 per year tax-free to employees for student loan principal and interest repayment (either direct to the loan or to the employee to pay the loan). This is extended through 2025 (was set to expire at the end of 2020).
  • Tuition Deduction / Lifetime Learning Credit – The tuition deduction, unless extended in other legislation, is gone. Instead, there is now a higher income threshold for the Lifetime Learning Credit, now sync’d up with the American Opportunity Credit phaseout ($80-90k single / $160-180k married).
  • Student Loan Payment Forbearance – this WAS NOT extended in the Act. Student loan payments resume 1/1/2021.
  • Retirement Plan Distributions / Loans – The CARES Act allowed up to $100k of distributions from retirement plans for covid-impacted individuals, waiving the 10% penalty, and allowing the amounts to be repaid over 3 years such that no net tax would be owed. It also raised the 401k loan amount to the minimum of $100k or 100% of the balance (from $50k or 50%). These were effective through 12/30/2020. This treatment is now extended to non-covid-related Federally declared disaster areas between 1/1/2020 and 2/25/2021 where the individual has their principal place of residence and is economically impacted by the disaster.
  • Retirement Plan Required Minimum Distributions – these were waived by the CARES Act for 2020. This WAS NOT extended by the new Act. RMDs will be required for 2021 unless additional legislation is passed.
  • Medical Expenses Deduction – the deduction for medical expenses has been bouncing back and forth between a 7.5% AGI floor and a 10% AGI floor for years. It’s 7.5% for 2020 and was supposed to revert back to 10% for 2021. The Act sets this to 7.5% PERMANENTLY. One thing I can stop writing about every year!
  • Mortgage insurance premiums – remain deductible for another year through 2021.
  • The taxability of forgiven housing debt (foreclosure/short-sale) – is extended to 2025, but the amount is reduced to $375k single / $750k married.
  • Charitable Giving – The $300 charitable contribution deduction for those who don’t itemize is sticking around for 2021 now and joint filers will get $600 instead of $300 for 2021. Remember this is for cash donations only and donations to a Donor Advised Fund don’t count. And, the cap on the portion of your income you can give via a cash donation (other than to a Donor Advised Fund) and deduct stays at 100% for 2021.
  • Healthcare & Dependent Care Flexible Spending Account (FSA) flexibility – The Act allows plans to allow 2020 unused amounts can carryover to 2021 and 2021 can carryover to 2022. Additionally, the Act allows 2021 elections to be modified even though benefits enrollment is now closed for most employees. However, this only updates what the law will allow employer plans to do. The plans themselves would have to adopt the change in order for employees to be able to use the increased flexibility. Check with your benefits rep to see if your plan is adopting / has adopted the change.
  • Educator’s Deduction – this is the $250 per year that teachers get to deduct for money spent on school supplies for their classrooms (as if that’s all teacher’s spend on their classrooms). PPE and cleaning supplies now qualify for that $250.
  • Business Meals – for business owners, restaurant meals are 100% deductible for 2021 and 2022 (formerly only 50% deductible) as long as they meet the requirements of the previous 50% deduction (i.e. non-lavish, taxpayer is present, etc.). Note that this still does not include employee expenses, only schedule C filers. Applies to dine-in or take-out.
  • Surprise Billing Fix – an attempt to reduce the amount of “surprise billing”, which typically occurs when a patient goes to an in-network facility and uses an in-network doctor, but is provided services by an out-of-network provider along the way (e.g. anesthesiology, transportation, etc.). There are lots of carve outs and exceptions, so I’m skeptical of how much this really fixes, but it’s a start at least, going into effect in 2022. I’m sure much more will be written on the implications here soon.
  • Financial Aid Changes – Student Loan Application (FAFSA) simplification – lots of changes here, but they don’t go into effect until 2023. In the interest of time, I’ll table this one for now. Just know there are changes coming. Additionally, the number of Pell Grants will be increased.

In order to reach a bipartisan agreement, both of the following WERE NOT INCLUDED in the Act:

  • Business liability protection (i.e. can’t sue if you get covid at a business as long as they were following CDC guidelines), which Republicans wanted
  • State and Local Aid above and beyond that specifically budgeted for the items in the Act, which Democrats wanted.

I suspect there will be more to come, though the type of relief/stimulus likely depends on the outcome of the GA Senate run-offs. There is already a proposal to increase the $600 direct payments to $2000, supported by the House and the President, but that will have a difficult time in the Senate. We’ll have to wait and see what happens.