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U.S. Treasury’s Series I Savings Bonds, or “I-Bonds” are a security that is issued by the US Treasury and can be purchased on their subsidiary site “Treasury Direct”. Since 1998, these securities have been tracking inflation. I-Bonds, together with EE Bonds, can be considered one of the safest investments as they are backed by the US Treasury. They can be purchased in $25 increments up to $10k/person/calendar year.
——The Rate of an I-Bond consists of 2 components – a fixed and a semiannual inflation rate. Combined, they make a “Composite Rate” which is the actual rate of interest the I Bond will earn over a six-month period. The Fixed Rate is established at the time you purchase the bond and lasts the full maturity of the Bond (30 years before it stops paying interest). The semiannual inflation rate is the rate that is linked to inflation and changes every 6 months (May and November each year). The current rate is 7.12%, the highest it has been since May 2000! This rate will stay through April 2022. If you purchase any time before then, you are guaranteed 6 months of interest at this rate.
——-Of course, one should take into consideration the limited liquidity of the bond, the funds are locked in for 12 months from the time of purchase. You can cash the bond at any time but would forfeit the last 3 months of interest. (Example: You buy the bond in April, hold it for a year and if the 3rd rate announced (Months 13-18) is not favorable, we would advise you to hold an additional 3 months (not to give back the 3 months at a more favorable rate) and then cash in the bond). Once the bond has been held for 5 years or more, the bond can be cashed at any time without penalty.
——–Taxation is an important aspect of all securities, and with I-Bonds, it is one of the benefits. Even though the interest that accrues on the Bond gets reinvested into the Bond lot, it does not create a taxable event. The only taxable event with I-Bonds is cashing them in. When you do cash them in, you only pay Federal Taxes, as State and Local Tax (if applicable) is omitted.
I-Bonds can only be purchased through the platform mentioned above – Treasury Direct. You will need to open an account at https://www.treasurydirect.gov/tdhome.htm You will be able to link an outside account to fund the purchase during the process of opening. We prefer our clients to link their Fidelity Brokerage Account if possible so that we can confirm the purchase(s) have been completed. This allows us to assist with the purchases as well.
Gifting is also an option for I-Bonds. You can gift in the name of children to save for their college (income limits may apply) You can also gift in the name of grandparents, spouses, or adult children if they do not want to open an account themselves. The limit of $10,000 per person per calendar year still applies.
4-28-22 is the last day you can place a bond purchase order at Treasury Direct and have it guaranteed to come out before the new rate takes effect. In conclusion, we recommend considering I-Bonds either as a 15-month CD or a Long-Term investment (up to 30 years), especially as a part of maintaining a diversified portfolio which is something that we at Lighthouse both preach and practice. Either way, ask a Lighthouse team member during your next meeting if they are right for you.
Sources:
https://tradingeconomics.com/united-states/inflation-cpi
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/IBondRateChart.pdf

As we head into the holiday season, we can’t help but reflect on all there is to be grateful for personally as well as here at Lighthouse Financial Advisors. Whether at home or at work, we value and appreciate the long-lasting relationships we’ve built and know how fortunate we are. In this time of reflection, it makes us realize how much gratitude, as a tool, can help with maintaining a positive mindset, keep us grateful for what we have, and to motivate us to stay on track with our goals in our everyday lives.
Gratitude is defined as “the quality of being thankful; readiness to show appreciation for and to return kindness.”
With the onslaught of Black Friday and Cyber Monday deals, advertisers aim to trigger an emotional response for something consumers are missing in their lives that only their product can solve. With a gratitude practice in place, you routinely take stock of what you have, and it has been shown that this helps to ease temptations for instant gratification. Although this year, instant gratification might not be so instant given the shipping and supply chain delays, reminding ourselves to be thankful for what we already have will help cut down on unnecessary spending and stay the course with our long-term goals.
Don’t get us wrong, we are always supportive of finding a deal or sale on an item you need or something that you’ve worked so hard to get. If that item is on sale, go for it! In that case, we are grateful you found it on sale!
“Remember, happiness doesn’t depend upon who you are or what you have, it depends on what you think. So, start each day by thinking of all the things you have to be thankful for.” — Dale Carnegie

The Chinese developer Evergrande has been in the news, the fear is they are over-leveraged and will soon miss interest payments to investors. This caused a big sell-off in the stock market on Monday and spooked some investors to the sidelines. As I write, the markets have recovered from the one-day sell-off. Investors who invested in over-leveraged products to earn a higher yield are now worried about the return of their principal ouch! The current risk-free return is close to .4% and with 2 plus % inflation the real rate return after inflation is negative -1.5% to -2% on cash, but you still have all your principal to spend yeah! We hear a lot where I can go for yield. Our recommendation has always been to build a spending plan (put those funds in the pantry savings accounts, savings bonds, A-rated bonds), own your house with a 30-year fixed mortgage (hedge against higher interest rates), and build a low-cost diversified stock portfolio (crops in the field). Most investors have done very well with this approach over the last 2 years balancing the negative interest rates with oversized equity returns. Everyone’s situation is unique, and we are constantly making changes so you can enjoy the ride. Legg Mason analyst Raymond DeVoe said it best: “More money has been lost reaching for yield than at the point of a gun.” And as our own Sean Lane likes to say, “Let’s bubble wrap the cash so you can spend your hard-earned savings.”

Biden tax plan – highlights from webinar “The Washington Update” from Andy Friedman

The immediate take away Andy thinks it won’t be 3.5 trillion but be closer to 1.2 & 1.5 trillion still a huge number. President Biden is sticking to his pledge those making less than $400,000 will not see a tax increase. The plan would take effect January 2022 and not be retroactive to 2021.

1. Tax rates – top rate moved from 37% to 39.6%

———–a. Over 5 million income 3% excise tax on the amount over

———–b. Major marriage penalty

———————————-i. $400,000 for Single

———————————-ii.$450,000 for Married (War on working couples)

2. Capital gains will move from 20% to 25% – not the 39.6% the president wanted on incomes -over $400K (COULD be retroactive to 9/13/2021)

3. Phase-out of section 199A 20% business income deduction for incomes over $400K

4. Another big hit to small businesses 3.8% Medicare surcharge on Sub Chapter S Income

5. Roth conversions and back door Roth’s

————a. For Roth conversions income must be below $400,000

————b. Eliminating back door Roth’s

6. The favorable treatment for carried interest will be pared back to require 5 year holding period for long term capital gains

7. Legislation will go after “BIG” IRAs value cannot exceed $10 Million amount over must come out & taxed right away. And they just wanted to be funny, if the IRA is over $20 million then 100% is tax immediately – WOW some tax hit in one year with the state tax close to 60%

8. Also, for IRA’s only allowed to hold SEC registered investments

9. Estate taxes

————a. Looking for a reduction in the exemption from $11.7 Million to $5 Million

————b. Step up in basis will be preserved

10. Corporate tax rate will move from 21% to 25%

11. Corporations with overseas net income will have to pay 16.5% on those earnings

12. No repeal on 1031 exchanges

13. To get votes might increase the SALT deduction from $10,000 – for high tax states CT, MA, MD, NJ, NY, CA

We are staying on top of all the changes above. We constantly monitor your unique tax situation and will make changes to stay one step ahead of Uncle Joe.

Social Security Trust Fund In The News

Social Security Trust fund is set to run dry in 2034, one year earlier than last year when it was expected to run out in 2035. We can thank the pandemic. Given the current situation in Washington, DC expect this issue to be pushed out a few years. Potential ways the solve the problem, increase the tax base on income on which Social Security is taxed (Yes, another tax increase on both employers and employees, a double whammy for self-employed) Move the age you can claim benefits from 62 to 65, full retirement age from 67 to 70 & full benefits at age 73. If your income is over a certain amount, you would receive no Social Security. Of course, this would be subject to a phase-in – NO current Democrat or Republican will touch this with a 10-foot pole. It will be a mad scramble as we get closer to 2034.

The number one way younger people can protect themselves is to take full advantage of retirement plans and save, save. If you’re a boomer & see a working millennial or Gen Z, give them a hug. Gen Alpha good luck you’re on your own!

Technology has been rapidly evolving for several years now, even more since the Covid-19 pandemic began. Over the last year our dependence on emails, computers, phones, and various software programs to stay up to date with work and personal life has undoubtedly increased. Unfortunately, hackers’ techniques have continued to evolve during the pandemic as well. Most of us by this point have received typical junk mail for shopping, phone calls for car warranties, and of course the most recent – tax scams! The IRS continues to warn Americans of specific tax scams to be on high alert about. These scams have tricked people into believing their legitimacy by playing off of the public’s misunderstandings of the quickly changing tax laws and also by using extremely realistic phishing content. With so many questions on the new tax measures, many individuals find themselves searching extensively over the internet looking for answers. Below are a few situations to be aware of and some tips on how to avoid their traps.

1. Economic Impact Payments/Stimulus Checks
   a) Taxpayers may receive emails, phone calls, texts, or even physical mail. Be cautious when clicking on email attachments or links and delete any potential threats if possible. Block and report any potentially suspicious activity.
   b) Main targets have been elderly individuals and those who filed their returns via direct deposit. Cybercriminals will often try to capture login credentials by pretending to be a trusted source (a company or person) and attempt to obtain your personal information. They can then try to gain access to your personal routing and account numbers. Reminder: the IRS will only initiate with a taxpayer via verified US mail, so be careful not to fall for any alternative forms of communication.
   c) For those who elected for physical checks, checks can be taken from mailboxes. Any potentially lost checks should be reported to the US Postal Service.
2. Unemployment Benefits
   a) Covid-19 has caused a historic amount of unemployment claims. Cybercriminals have the capability of tapping into individual bank accounts or attempting to change bank account numbers to deposit to a different source. Be sure to enable available security features and privacy settings as well as notifications to alert you of transactions.
   b) Fake unemployment forms exist – they could be sent electronically or physically mailed. Hackers have been reported to file claims on behalf of individuals using stolen information.
3. Child Tax Credit Payments
   a) Tax payments began this July to eligible US taxpayers based on their 2019 & 2020 tax returns and are already considered the most vulnerable form of spam.
   b) Watch out for any forms of communication expressing help to speed up payments or to help track payments (only valid source would be the IRS.gov portal)
   c) The most common scam of the new child tax credits are phone calls and emails offering to help walk you through the signup process for the payments. Be aware that eligible taxpayers are automatically accounted for by the IRS based on 2019 and 2020 tax returns and will be issued payments directly.

These latest tax scams are all avoidable by taking proper cybersecurity measures, remaining alert/vigilant, and reporting any potentially suspicious activity. Be sure to enable two-factor account authorization when available and turn on available alerts for bank/credit card transactions. When in doubt about a source it is best to err on the side of caution. Technology is a great advancement in our society, but unfortunately, it also comes with the risk of cybersecurity threats. By implementing some simple strategies correctly, you can help reduce your risk and hopefully stop costly breaches before they happen.