The Tax Foundation released a fantastic list of notable state tax changes for 2023. It was so good, I wanted to post it here, rather than just tweeting it out, since not everyone uses Twitter. Here’s the link to the site, which includes personal income tax rate changes, corporate tax changes, sales and use tax changes, and a host of miscellaneous new and changed provisions.
Tax
Updated 2023 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 7% (higher than usual due to higher than usual inflation over the last year). 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 $2,000 to $22,500 (+$7,500 catch-up, up $1k, if you’re at least age 50).
- Max contribution to a SIMPLE retirement account will increase by $1500 to $15,500 (+$3,500 catch-up if you’re at least age 50).
- Max total contribution to most employer retirement plans (employee + employer contributions) increases from $61,000 to $66,000 (+$7,500 catch-up, again for those 50 or over).
- Max contribution to an IRA increases from $6,000 to $6,500 (+$1,000 catch-up if you’re at least age 50).
- The phase out for being able to make a Roth IRA contribution is $228k (married) and $153k (single). Phase out begins at $218k (married) and $138k (single).
- The standard deduction increases by $1800 to $27,700 (married) and by $900 to $13,850 (single) +$1,850 if you’re at least age 65 and single or $1,500 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 remains at pre-2021 rules at $2,000 per child, phasing out between $400-440k (married) and $200-220k (single).
- The maximum contribution to a Health Savings Account (HSA) will increase to $7,750 (married) and $3,850 (single).
- The annual gift tax exemption increases by $1,000 to $17,000 per giver per receiver.
- The lifetime gift / estate tax exemption increases to $12,920,000.
- Social Security benefits will rise 8.7% in 2023. The wage base for Social Security taxes will rise to $160,200 in 2023 from $147,000.
- Updated mileage rates for 2023 are due out later this year.
You can find all of the key tax numbers, updated upon release, on the PWA website, under Resources.
The Inflation Reduction Act Of 2022
On August 16th, President Biden signed the Inflation Reduction Act of 2022 into law. I’ll stay out of the debate on whether the Act will actually reduce inflation, but whether that’s true or not, the 273 pages of changes and additions to existing law will have some effect on many of our clients. Many of the provisions of the Act impact corporations exclusively (including a new 15% minimum tax, and the new 1% excise tax on stock buybacks), so I’m going to leave them out of this summary. The changes for individuals include the following:
1) Modifies the Non-Business Energy Property Credit (this is the credit for energy efficient windows, doors, roofs, etc.) starting in 2023 by extending it through 2032 and making it more robust:
- The $500 lifetime limit is changed to a $1200 annual limit, though individual types of property have lower limits.
- The rate increases from 10% of the cost to 30%.
- Home energy audits (30% up to $150) are now included as eligible for the credit, as well as exterior doors (30% up to $250 per door, $500 total), windows (30% up to $600), insulation (30% up to $600), heat pumps (30% up to $2k, not capped by $1200 overall max), HVAC units / water heaters / furnaces / boilers (30% up to $600), electrical panel upgrades to at least 200 amps as part of other energy efficient improvements (30% up to $600).
Energystar.gov will have updated information on each credit by end of 2022. That’s the most reliable site for ongoing energy credit information.
2) Extends the Residential Energy Efficient Property Credit (think solar panels on your roof) through 2034. This 30% credit had started to phase out and was reduced to 26% for 2022, on its way to zero in the coming years. Instead, 2022’s credit has been restored to 30% and that continues through 2032, phasing down to 26% in 2033 and 22% in 2034.
3) Replaces the old Qualified Plug-In Electric Vehicle credit ($7500 for qualifying electric vehicles but only for the first 200k vehicles sold by manufacturer) with the new Clean Vehicle Credit. This new credit:
- Runs from 2023 through 2032.
- Remains capped at $7500 (lower, depending on vehicle sourcing and assembly).
- Includes other alternative powered vehicles (e.g. hydrogen fuel cell)
- Has income restrictions… $150k single, $225k head-of-household, and $300k married filing jointly (though can use the lesser of the income in the year of purchase or the previous year to qualify). These are cliffs meaning that if you are even $1 over the limit, you receive no credit. It does not phase out slowly like most credits / deductions.
- Has MSRP restrictions… cars with MSRP over $55k and SUVs / light trucks over $80k are excluded.
- Requires that final assembly of the vehicle occurred in the US and that a certain percentage of the minerals used to make the battery were sourced from North America or certain other countries that have trade agreements with the US. These restrictions get tougher in later years (40% by 2024, 100% by 2029).
- Does not have manufacturer sales caps (i.e. Tesla’s that meet the above requirements would qualify).
- Allows purchasers to transfer their credit to the auto-maker starting in 2024 (means you get the credit as a discount off the purchase price, vs. having to pay full price and claim the credit on your taxes. No details on how this will actually work.
For 2022, the old rules apply, except that the new assembly requirements are in effect as of the signing of the Inflation Reduction Act. The Dept. of Energy has published a list of qualifying vehicles. If you were in a contract for delivery prior to 8/16 and receive delivery prior to the end of 2022, a special transition rule allows you to treat the vehicle as delivered on 8/15 (i.e. no assembly requirements).
The provisions of this credit are very complex. The conclusion here is to check with the manufacturer before making the final decision on what kind of car you want to buy and assuming the credit will be available. The sourcing / assembly restrictions, combined with the MSRP limits could make it tough for vehicles to qualify, especially early in the life of the credit.
4) Creates a new Previously Owned Clean Vehicle Credit that:
- Runs from 2023 through 2032.
- Is valued at the lesser of $4000 or 30% of the vehicle cost.
- Applies to clean vehicles that are at least 2 years old.
- Has income restrictions… half those of the credit for new vehicles ($75k single, $112.5k head-of-household, and $150k married filing jointly (though can use the lesser of the income in the year of purchase or the previous year to qualify). These are cliffs meaning that if you are even $1 over the limit, you receive no credit. It does not phase out slowly like most credits / deductions.
- Has vehicle value restrictions… vehicles over $25k are excluded.
- Has use restrictions… Can only use the credit once every 3 years. The credit can also only be applied once per vehicle.
5) Creates the new High-Efficiency Electric Home Rebate Program. This program provides qualifying low and middle-income families a total rebate of up $14k to purchase energy-efficient electric appliances. This includes up to $8,000 to install heat pumps, $1,750 for a heat-pump water heater, $840 for a heat-pump clothes dryer or an electric stove, $1600 to insulate and seal a house, $2500 on improvements to electrical wiring, and $4000 toward upgrade of electrical panels. The program will be administered by the states (states have to apply for their share of the $4.5B of Federal funding and there doesn’t seem to be any guarantee that all states will, or that their programs will exactly match those described above) and only those earning less than 1.5x the area’s median household income will qualify. The rebate can’t exceed 50% of the cost of the project if the family income is between 80-150% of the area median income.
An additional, more generalized rebate program, also administered by the states is also available. A retrofit that reduces a home’s energy use by at least 35% via insulation or other improvements is eligible for up to an $8k rebate, or 80% of the project cost, whichever is less. For smaller projects that reduce usage by 20-35%, a $4k rebate is available.
6) Extends two ARPA provisions dealing with the ACA (“Obamacare”) through 2025. As a result, those earning more than 400% of the Federal poverty line will still qualify for subsidies if their cost of purchasing a benchmark health insurance plan exceeds 8.5% of income. Without this extension, in 2022, the income cap would have been $51,520 for an individual in most of the country, and $106,000 for a family of four.
7) Modifies Medicate Part D and Medicare Advantage Plans to:
- cap monthly insulin costs at $35, starting in 2023.
- eliminate additional out-of-pocket costs, starting in 2024, for enrollees who end up with enough covered prescription drug bills to qualify for catastrophic drug coverage. This differs from today’s structure where enrollees still pay 5% of the bills even after they hit catastrophic coverage protections.
- cap annual out-of-pocket drug costs at $2000, starting in 2025
- allows Medicare to negotiate certain drug prices with manufacturers for the first time starting in 2026.
8) Increases funding for the IRS by $80 billion. While this isn’t a provision directed at individuals, it’s possible it could impact you since a bigger IRS budget means more enforcement (i.e. audits), but, on the bright side, better taxpayer service. Commissioner Rettig has written a letter describing what the IRS plans to do with the money, in case anyone wants his perspective.
Special 2021 Deduction For Non-Itemizers Giving To Charity
Giving Tuesday is coming up at the end of November, so here’s a special reminder about this year’s “bonus” charitable deduction. As part of the CARES Act in 2020, Congress authorized a special charitable deduction for 2020 only for people who aren’t able to itemize due to the standard deduction being higher than their itemized deductions. The limit was $300, and that was the case whether Single, Head-Of-Household, or Married Filing Jointly. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, passed late last year extended this deduction into 2021 and doubles it to $600 for joint filers.
As with last year, to qualify, the donation must be in cash, it must be to a qualifying organization (which is the same as for charitable donations as itemized deductions), it must be made by 12/31 (2021 this year), and appropriate records must be kept. As with itemized deductions, you can check whether the organization qualifies using the IRS’s Tax Exempt Organization Search. A $300 or $600 deduction may not sound like a lot, but many people have already made, or are about to make, some cash contributions for friends, colleagues, or family members that are raising money for various organizations. If you’re going to make the contribution regardless of the tax benefit, you might as well take the tax benefits that are available. In most cases, substantiation simply requires an acknowledgement from the organization (including stating that you received no benefits for your donation) and a cancelled check or credit card statement. (For detailed record keeping requirements and special cases, see Charitable Contributions – Deductions & Recordkeeping in the blog archives.) So save those “thanks for your contribution” acknowledgement emails and keep a running list of your cash donations this year, whether you itemize or not. They will come in handy to the tune of up to $300 or $600 in deductions at tax prep time.
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.
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.
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.
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.
Special 2020 Deduction For Non-Itemizers Giving To Charity
It’s Giving Tuesday, so here’s a special reminder about this year’s “bonus” charitable deduction. As part of the CARES Act, Congress authorized a special charitable deduction for 2020 for people who aren’t able to itemize due to the standard deduction being higher than their itemized deductions. The limit is $300, and that’s the case whether your Single, Head-Of-Household, or Married Filing Jointly. To qualify, the donation must be in cash, it must be to a qualifying organization (which is the same as for charitable donations as itemized deductions), it must be made in 2020, and appropriate records must be kept. As with itemized deductions, you can check whether the organization qualifies using the IRS’s Tax Exempt Organization Search. A $300 deduction may not sound like a lot, but many people have already made, or are about to make, some cash contributions for friends, colleagues, or family members that are raising money for various organizations. If you’re going to make the contribution regardless of the tax benefit, you might as well take the tax benefits that are available. In most cases, substantiation simply requires an acknowledgement from the organization (including stating that you received no benefits for your donation) and a cancelled check or credit card statement. (For detailed record keeping requirements and special cases, see Charitable Contributions – Deductions & Recordkeeping in the blog archives.) So save those “thanks for your contribution” acknowledgement emails and keep a running list of your cash donations this year, whether you itemize or not. They will come in handy to the tune of up to $300 in deductions at tax prep time.
Election Blues (And Reds)
Given the market volatility around the 2016 election results and election day tomorrow, I thought it would be a good idea to do a Q&A-style post about the election and its potential impacts.
Q: Who’s going to win the presidential election?
A: There’s no way to know for sure at this point, and it’s pretty likely that we won’t know tomorrow night either. But, if you believe the polls and the work of statisticians such as Nate Silver (fivethirtyeight), Biden has about a 90% chance of winning. If you believe the betting markets, Biden has about a 60% chance of winning. These are two very different ways of analyzing the election probabilities. Analyzing the polls is essentially using the estimated margin of error in each poll and weighting the polls by their likely accuracy to determine the mathematical chance of the overall margin of error being big enough for Biden to lose and Trump to win despite the polling averages showing a lead for Biden on average. The betting markets on the other hand are showing the odds that a bettor on Biden would be willing to take (betting $3 for a chance to win $2 more) vs. what a Trump better would be willing to take (betting $2 for a chance to win $3 more). The betting is purely opinion-based and is an average of what all bettors think is going to happen in aggregate. It’s possible that both are somewhat skewed. I don’t really believe the hype around Trump supporters lying to polls, but it’s possible that they’re harder to reach to poll. It’s also well known that the betting markets are male-dominated and that Biden’s lead over Trump is much lower among men than women. Since people often bet in a way that favors what they’d like to see happen, that could skew the odds toward Trump’s side. If I had to guess, I would go somewhere in between and say that Trump has about a 30% chance of winning. That means I’d be willing to bet $3 to win at least $7 on him, or be willing to bet no more than $7 to win at least $3 on Biden. 30% is not zero. The favorite doesn’t always win, as we saw in 2016. A good baseball hitter gets a hit about 30% of the time. There are lots of hits in baseball. There are more outs though.
Q: What about the Senate?
A: 538 gives the Democrats about a 75% chance of taking control of the Senate (including a 50-50 split with a Democratic president), with the most likely scenario being 51-49. Betting markets. again, have the race closer with Democrats having a 60-65% chance of winning. The closest races are in GA (2), NC, IA, ME, and MT. Interestingly, the second GA senate seat is a special election to fill a vacant seat and has multiple candidates from both parties. If a majority isn’t reached, a runoff will take place on January 5, 2021. That could be the seat that decides control of the Senate and a runoff has a decent chance of happening at this point.
Q: What impact will the election results have on the stock market?
A: I don’t think that answer would be clear even if we knew today exactly how every race would turn out. That’s because there are so many potentially offsetting impacts. Here are some of the possible scenarios:
- Biden wins, the Democrats take control of the Senate by several seats, and the Democrats keep decisive control of the House – corporate tax rates likely increase (clearly bad for stocks), taxes on higher income individuals likely increase (probably bad for stocks, at least short-term), higher regulation (probably bad for stocks, at least short-term), large stimulus package gets passed (probably good for stocks, at least short-term), more certainty (probably good for stocks), less pressure on global trade (probably good for stocks) less political angst (impeachment, oversight inquiries, etc… probably good for stocks).
- Biden wins and the Democrats control the Senate and the House by a small margin – tax picture a little more blurry, regulation still likely to increase, still likely to get a large stimulus package, but allocation to state/local may be a bit smaller, still a boost to global trade, a little less certainty, still less political angst.
- Biden wins and the Dems & Republicans each control one chamber – tax changes are unlikely (probably good for stocks as a relief to the alternative), smaller stimulus likely (probably bad or less good for stocks at least short-term), still a boost to global trade, more political angst.
- Trump wins and the Dems control both chambers – tax changes very unlikely, large stimulus likely, much more political angst, and global trade challenges continue (worsen?).
- Trump wins, the Republicans hold the Senate, and Democrats hold the House (status quo) – tax changes unlikely, stimulus likely smaller with less support for state/local and maybe a big battle to get it done at all, political angst steady, and global trade challenges continue (worsen?).
Longer-term, I really don’t think it matters who wins. Take a look at the chart below from Capital Group:
Sure, there are some dips in that chart, but for the most part it’s a steady upsloping line for 87 years regardless of party. By the way, I don’t think one can make any conclusions about which party is better for the market from that chart because the market prices in election results prior to the election and certainly prices in likely policy changes between election and inauguration. The takeaway should be that from a purely stock market perspective, if you zoom out far enough, it doesn’t really matter who wins a single presidential election.
Q: You said that we probably won’t know the result of the election tomorrow. Why not? When will we know?
A: Each state has their own method of counting ballots. The NY Times recently attempted to summarize those methods. The battleground states have some significant differences. Florida, for example, has already counted many ballots received by mail and will release those counts along with in-person early voting by 8:30pm eastern. Election Day ballots will be counted through the night, but no additional mail-in ballots are allowed after 11/3. So we’ll know who won FL by 11/4 morning barring a 2000-like “hanging-chad” incident. Ohio also plans to release pre-election day votes 11/3 evening (by 8pm) and will count election day votes through the night. But, in stark contrast to FL, they will allow ballots postmarked by 11/3 and received by 11/13 to count, and then won’t provide updated results as those ballots come in. As of 11/2, officials say that full statewide results may not be known until the election is certified by the state on 11/28. Since the state knows how many mail-in ballots were sent out, it will know the maximum that could be received, but if neither candidate leads by enough to make it statistically impossible for the mail-in ballots to swing the results, it sounds like Ohio can’t be called until 11/28! 538 recently published a graphic with their opinion of the state-by-state portion of the vote that should be counted on election night:
There is a chance that one of the candidates will have enough of a lead in battleground states, that that ballots received and counted after 11/3 won’t matter and the election results could be known on 11/3 or 11/4. Again, we can rely somewhat on betting markets to gauge opinion of the probability. PredictIt has a wager on when the election will be “called” by both CNN and Fox News. That wager shows the odds of being called on:
- Election Day = ~23%
- November 4th = ~31%
- November 5th = ~7%
- November 6th or 7th = ~6%
- Later in November = ~18%
- December or later = ~15%
Personally, if I were a betting man, I like the combination of after 11/4 for better than even odds. Maybe that’s more of an emotional hedge though. I certainly hope for a result by the 4th!
Q: What’s the market going to do if we don’t know who won or if the election is contested?
A: We know the stock market didn’t like the 2000 election result process (the FL “hanging chad” election), but it wasn’t exactly catastrophic, as the chart of the S&P 500 shows. It also wasn’t long-lasting.
A contested election that results in not only recounts, but lawsuits that potential swing a result from one candidate to another, etc., could be temporarily much worse. But it’s unlikely that an election with a large margin of victory would be contested and even lower chance that it would reverse the result. So, a very close election with no clear result, that leads to social unrest could certainly hurt financial markets temporarily. Some unrest is likely no matter what the result given current political polarization. The less clear the result is and the more it seems to change, the higher the risk of extreme volatility. I have a high degree of confidence that the next president will be inaugurated on January 20th, regardless of how the election goes. With all of that said, the stock market does a very good job of factoring-in event probabilities and their impacts (including support by the Federal Reserve if things really go off the rails). That means the market is likely to respond very positively, all else being equal, to a clear winner. There’s no way to game the system without a crystal ball or time machine.
Q: Give it to me straight, all-in-all is tomorrow night going to be a mess for the stock market?
A: If you define mess as volatile (bouncing sharply in either/both directions), I’d say that’s much more likely than on an average night. If you define mess as the market falling sharply, I don’t think anyone knows in advance. The better question though is whether what happens tomorrow night matters. I made this short post at about 11pm on election night 2016. Stock futures were down 4.5% at the time and got slightly worse as the result became clear. By 8am, futures were barely down. By the close on 11/9, stocks closed up a little over 1% from the election day close, completely reversing the overnight pullback. By the end of 2016, they were up almost 10% from the day of the election and even now, mid-pandemic, they’re still up over 50% (S&P500) from that election. People are on edge over the election for reasons that far outweigh finance. I get it. The moral of the story here is that there’s little/no reason to let predictions of, or even actual, stock market volatility add to your anxiety.
To summarize:
- For the markets, the election is all about probabilities. While Biden is favored to win and the Democrats are favored to narrowly take the Senate, neither is anywhere near a sure thing.
- There are dramatic, offsetting impacts to the economy and financial markets, at least short-term, in every possible scenario. Each is currently priced in, probability-weighted.
- It may take a while for election results to unfold with certainty.
- It may be chaotic in the markets for a while and that could include big down or up moves as a clearer picture of the future arrives.
- Long-term, the 2020 election barely matters from a financial point of view. If you’re feeling anxious, try to zoom out for perspective. Stick to your plan. Things are going to be ok.
Note: Many of the links in this post are being updated periodically with new information as election information evolves (538, NY Times, etc.).
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