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.

With so many changes happening around us — school winding down, warmer temps, the ability to travel and see friends — one change that we’re keeping an eye on closely here at Lighthouse Financial Advisors are the changes to the Child Tax Credit (CTC).  For 2021 only, the CTC will be expanded by the IRS under the American Rescue Plan Act (ARPA) of 2021 and will start to process advanced payments to qualified families with dependents.

What is the CTC? In simplest terms a child tax credit is meant to financially help families with the high costs of raising a family.

Who qualifies for the credit?

• For tax year 2021, families claiming the CTC will receive up to $3,000 per qualifying child between the ages of 6 and 17 at the end of 2021. They will receive $3,600 per qualifying child under age 6 at the end of 2021. (Previously, the CTC amount was up to $2,000 per qualifying child under the age of 17 at year’s end.)
• Single filers with an adjusted gross income (AGI) of $75,000 or less are eligible to receive the full credit. Those with an AGI between $75,000 and $147,000 (for children under 6) and $75,000 and $135,000 (for children between 6 and 17) are eligible for a partial
• The increased amounts are reduced and phased out for incomes over $150,000 for married taxpayers filing a joint return, $112,500 for heads of household, and $75,000 for all other taxpayers.

What does this mean?

• Many taxpayers will receive an increase in the benefit of the Child Tax Credit.
• The credit for qualifying children is fully refundable, meaning taxpayers can benefit from the credit even if they don’t have earned income or don’t owe any income taxes.
  • I.E. Before this change, certain low-income Individuals could only receive up to $1,400 per child as a refund, instead of the full $2,000 child credit, if their child credit was more than the taxes they otherwise owed. Under the new rules for 2021, people who qualify for a child tax credit can receive the full credit as a refund, even if they have no tax liability.
• The credit will include children who turn age 17 in 2021.
• Taxpayers may receive part of their credit in 2021 before filing their 2021 tax return in the form of monthly advances.

When Do the Monthly Advances begin?

• According to the IRS, the first payments will begin being sent to qualified recipients starting July 15th. According to WSJ, an estimated 39 million households will receive the monthly payments. It is expected that 50% of the payment amount will be sent at first, based on information gathered from the recipient’s previous tax returns.
  • E. July through December families will receive 1/12^th of their child tax credit they’re due (based off of 2020 AGI) each month via direct deposit or in the form of a check.
  • When you (or LFA) file your 2021 Income Tax Return you will need to report the total amounts received in monthly CTC advancements
  • You will then (if still eligible) receive the final ½ of your CTC when you/we file your return.

I think I qualify, what should I do?

• Eligible taxpayers do not need to take any action now other than to file their 2020 tax return if they have not yet already done so.
• LFA HIGHLY recommends keeping a log of any and all benefits received throughout the year (July thru December).
• Eligible taxpayers who do not want to receive advance payment of the 2021 Child Tax Credit do have the chance to opt-out of advance payments, instead choosing to receive it as a lump sum next year. The IRS will be announcing more information and steps on what taxpayers can do to update their information to ensure proper compliance with the rules by July 1^st.

If you’re interested in calculating the monthly amount you’re eligible to receive starting on July 15^th please never hesitate to reach out to anyone here at LFA.

As the next generation continues to work hard & graduate college, it is important to know what the next steps may be. Some of us are going into business, engineering, law, maybe even astronauts, etc. The world is competitive and as a result, we all aim to push ourselves to be the best we can be. Sometimes determining the future can be puzzling, but with a strong mindset and doing the simple things first, the future becomes more of a journey rather than a mystery. Being in the work force for 2 ½ years now has been an eye-opening experience, it has helped me evolve as an individual as well as motivate me to build out a strong foundation. Here are a few exercises the next generation can take to take flight off the runway:

1. Create your ideal vision and set your goals! Craft your plan and stick to it!

2. Setting your comfortable cash reserves/ “sleep at night” money. Recommend opening a high yield savings account at a financial institution such as Marcus or American Express which, although lower now in response to the Federal Reserve’s emergency rate cuts, still continue to offer some of the strongest yields available.

3. Create a reasonable budget and remember to save! An easy tip is to automatically set up a weekly/monthly transfer from your checking to a savings/brokerage account. However, make sure you continue to enjoy life and treat yourself when appropriate.

4. Manage to pay bills/loan payments on time such as credit cards, any student loans, & utilities. Important to keep your debt low especially with high interest rates on loans & credit cards.

5. Open & fund a Roth IRA to start building up after tax retirement assets. With an adjusted gross income within $125,000 – you would be eligible to contribute up to $6,000. Having a mix of pre & after-tax dollars gives you options similar to having multiple pots cooking on the stove.

6. Participate in your employer sponsored retirement plan such as 401, 403b, or self-employed plan. For those of us entering into or who are in the earlier side of their career, the current contribution maximum is $19,500. By investing in retirement now, you have the potential for fantastic long-term earnings.

7. If you have a comfortable side cash reserve, invest in a liquid brokerage account. This is a great way to invest for longer term by taking some risk to seek more growth compared to your savings account

8. Invest in your career, you are your most valuable asset. Whether it is going for additional degrees, professional designations or participating in webinars/information sessions.

9. Most importantly – DO WHAT YOU LOVE TO DO! Only you know this answer, too many young individuals are working without a purpose. Life is too short to waste being unhappy. Follow your heart and you are in great hands!

As we head into the final week of the 2020 Presidential campaign it is important to examine how a Joe Biden victory could potentially impact your taxes in 2021 and beyond. Biden’s proposed strategy is to focus on the highest earners and particularly those that make over $400,000. The country’s finances are in dire straits and whichever party wins will need to implement changes quickly to raise revenue. At this time, President Trump has not released any new plans to adjust the tax code. As expected, neither candidate spoke at length about taxes during the debates since no one wins by discussing tax increases!

It is very important to remember who controls the Senate will have a large bearing on whether Biden or Trump can fully implement their plans. Below is a preliminary look at Biden’s proposals.

Top Marginal Tax Rate – return to the top marginal rate of 39.6% on ordinary income above $400,000. Currently, the top marginal rate is 37% on taxable income above $622,050 for joint filers and $518,400 for single filers.

1. 1. Capital Gains and Dividends Taxes – any profits above $1 million regardless of total income would pay 39.6%. As it stands now, joint filers with income below $80,000 pay no capital gains tax. Those with income between $80,000 and $496,600 pay 15%. The tax is 20% on income above $496,000.
   2. Social Security Tax on Income above $400,000 – calls for 12.4% tax split 50/50 between employee and employer. Currently, Social Security taxes are only on the first $137,700 of wage income. Self-employed people would pay the full 12.4% over $400,000.
   3. Cap on Itemized Deductions – Biden proposes a cap on amount of deductions (charity, mortgage interest, etc.) for those making over $400,000 to 28%.
   4. Phase-out the Qualified Business Income Tax Deduction – perhaps one of the most complicated aspects of Trump 2018 tax cuts, the QBI deduction allows owners of pass-through entities (self-employed, LLCs, S Corporations) to potentially deduct 20% of qualified income if several factors are met including what type of business. Biden would eliminate the deduction for those making over $400,000.
   5. Estate Tax Exemption Reduction – the current law increased the per person exemption to $11.58 million per person for 2020. Biden’s plan would reduce the per person exemption back to the 2017 level of $5.49 million per person.
   6. Loss of Step-up in Cost Basis – perhaps the most controversial of Biden’s proposal, this would eliminate the step-up in cost basis for inherited assets. Under current laws, appreciation on investments, businesses, real estate, etc. gets a step-up in basis when the owner dies so the heirs inherit the asset at current market value and would owe zero capital gains tax if sold immediately.
   7. Reinstate Home Buyers Credit – similar to law passed in 2008, this would provide a tax credit of up to $15,000 for first-time home buyers.
   8. Expand Child and Dependent Care Credit – minimal details provided so far but this would increase the tax credit for joint filers who both work to cover childcare and school expenses.
   9. Corporate Tax Increase – increase rate from 21% to 28% and enact a 15% minimum “book tax” on corporations with income above $100 million. Both Biden and Trump want to make sure companies are avoiding paying taxes in the United States

It is always interesting (or perhaps scary) to hear proposals.  It is important to note that plans evolve and the pandemic has greatly altered the norm. Tax policy is not entirely up to the president so all components will be negotiated whether one party holds the majority or not. Regardless of the outcome, I highly recommend speaking to your tax advisor if you have concerns!