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!

Open Enrollment, which varies by company but generally takes place in the Fall, can often be a stressful time as trying to make sense of your company’s benefits can seem like a daunting task. It is an important time however, as it allows you the opportunity to adjust your benefits based on any changes that have taken place or might take place over the coming year. Many employers may make slight changes to their plans and it is important that you review them to ensure you are taking advantage of all your options and getting the coverage you need. On occasion, some employers may even require action on your part in order to stay enrolled. It is important to carefully review the documents provided to you so you can be sure to make the necessary adjustments to options that best fit your needs and keep your coverages current. Open enrollment is also a great time to review the amount of money you are contributing to retirement and seeing if you can increase it as well as review beneficiaries to make sure they are up to date on life insurance or 401k plans.

A few important things to consider:

What Changes Have Taken Place to The Plans Offered?

It is important to look at not just the difference in premiums for the plans, but also the more detailed changes such as coinsurance and copayment amounts. You should also check to see if there is a different deductible amount. These offerings can vary depending on the size of your employer and you may have several different options to choose from. Depending on your situation a plan with a higher deductible may make sense for you however, if you are planning on having a child within the next year, a more traditional plan with a lower deductible may make more sense. You will want to weigh the out-of-pocket expense to you for each plan and consider the likelihood that you will reach those maximums. There may also have been a change in providers which could mean your regular doctor or dentist is no longer in network under the new insurance. You will want to check before going to a doctor to ensure coverages, be aware if pre-approvals are needed, and to avoid out-of-network costs. Lastly, you will want to review life insurance and disability insurance coverages. There may be low cost options available to you for life insurance as well as disability and if you have others depending on you it might be wise to take advantage of these offerings.

Have My Needs Changed This Year or Will They Change Over the Next Year?

It is easier to make changes and sign up during open enrollment. For example, perhaps dental insurance did not make sense when you were single but it may make more sense once you have children. Additionally, you may need to start using that Flexible Spending Account for daycare or health costs or utilize Dependent Care Flex Spending if it’s offered. Contributions to both are tax-free as well as withdrawals made for qualified expenses. You will need to tell your employer how much to take out from your gross pay for the year. You will also need to use this money within the year as it does not roll over like an HSA. With an HSA, which is typically offered with a high deductible health insurance policy, the money is tax deductible, earnings are tax-free, and withdrawals used for qualified medical expenses are also tax-free. The other benefit of an HSA is it’s a portable account, meaning if you change jobs, the money will go with you.

How Will Things Affect My Take-Home Pay?

For existing employees, this is the time to ensure you are taking full advantage of any 401k plan your company offers. Many employers offer a company match (up to a certain percentage) that is free-money you should not leave on the table. You should consider how this will affect your take home pay when deciding how much you can contribute. Insurance premiums, contributions to HSA’s and 401k’s should all be factored into your budget so you are sure your money is going to work for you in the best possible way. It is important to remember that many of the benefits will come out before your taxes as this lowers your taxable income and may make it so that you do not notice the changes as much.

Final Thoughts

There may be other options offered during open enrollment as well. For instance, they may offer a legal plan to assist in your preparation of estate documents. When it comes to additional coverages though, be sure to read the fine print and don’t be fooled by marketing language. Make sure to review the coverages and cost in detail to be sure there is real value to you. Fully understanding the benefits is key to ensure you are making informed decisions and fully taking advantage of the benefits your employer provides. Is your open enrollment period approaching? As always, Lighthouse Financial Advisors, Inc. is here for you and ready to assist you navigate through the process.

One of the most common sources of conflict in relationships is money. If you are lucky enough to have found someone who you are compatible with, the last thing you want to do is jeopardize the life you are trying to build together because conversations around money are getting in the way.  Discussions about finances between partners often become emotionally charged, especially when it involves different values around money.  Fortunately, whether it’s about spending habits, saving for a desired goal, investing or paying off debt, having healthy discussions about finances is a skill that couples can learn to develop together.

Understanding what drives your partner’s emotions about money is key to turning these discussions into honest and productive conversations.  It can be helpful to discuss together what your experiences were like with money growing up.  In some households, speaking about money can be considered taboo while in others they are open discussions. These early experiences shape the way we view money and inform our decisions as adults on how we choose to spend, or not spend. Understanding that your partner grew up with a financially irresponsible parent due to a gambling problem can go far when trying to understand why your surprise purchase of an expensive custom suit quickly became a serious issue. On the flip side, your partner’s understanding that your purchase of a custom suit was because you felt you could finally afford it and deserve it seems less frivolous when it’s known that you grew up with years of being bullied as a child for your second-hand clothing.

The benefit to understanding your partner’s emotional connection to money is that it can open the door for truly honest conversations.  If you both come from a place of understanding you create a safe space to share information, even if it means sharing things you may not be proud of.  Hiding debt or overspending is a deception that can have serious adverse effects on a relationship.  Like lying, it can wear away at the trust that exists between you and could be your downfall.  It’s imperative to have an honest conversation about any debt or unhealthy spending habits.  If you can agree to a plan to pay off the debt or plan a budget that includes a set amount of savings these issues can easily be figured out before they become your undoing.

Starting and regularly having these money discussions can be difficult but money is a part of life – and maintaining openness around it with your partner is key to prevent it from becoming an issue.  Like most aspects of a relationship, communication is everything.  Sharing priorities and agreeing on common goals together will allow you to more easily create a path forward. Focus on each other’s strengths, always keep each other in the loop and your money conversations can become a part of your relationship that serve to reinforce your shared visions and dreams and further strengthen your partnership.

For the past 20 years Lighthouse Financial Advisors has been committed to reducing stress and keeping couples happy by coaching them through financial matters.