CARES Act: Unemployment Benefits

Due to the economic shutdown from the Coronavirus many Americans have been laid off, furloughed, or had their hours cut dramatically.

Typically between 200,000 – 300,000 new people file for unemployment benefits each week, while a record-breaking 3.2 million filed for benefits with the week ending March 21, and that number will continue to go up as more and more companies are laying off or furloughing employees.

The passage of the CARES Act is opening up unemployment benefits for more people, increasing the length time they can get unemployment, and increasing the amount they can get each week.

Who qualifies for unemployment benefits?

The CARES Act makes more people eligible for unemployment, including self-employed, gig workers (such as Uber or Lyft drivers), part-time employees, independent contractors, freelancers, and others. In many cases even workers who have had their hours cut, but they are not totally unemployed, will qualify for partial benefits.

Career One Stop, which is an unemployment site sponsored by the U.S. Department of Labor, states that under the new law, states can pay benefits where, “An employer temporarily ceases operations due to COVID-19, preventing employees from coming to work; An individual is quarantined with the expectation of returning to work after the quarantine is over; and An individual leaves employment due to a risk of exposure or infection or to care for a family member. In addition, federal law does not require an employee to quit in order to receive benefits due to the impact of COVID-19.”

How much can I get in unemployment benefits?

The benefit level is determined by the state, with the lowest being Mississippi at $235 per week, and the highest being Illinois at $1,495 per week, with most states paying between $300-$500 per week.

Most states have a similar calculation – they take the worker’s highest earning quarter over the last year and divide that by 26, capped at a maximum amount. For example, if a worker earned $12,000 in their highest quarter they would get $461 per week ($12,000/26 = $461). If their state caps benefits at $420, they would get $420 per week.

Under the CARES Act all those who are unemployed will get an additional $600 per week, which will last up to four months through July 31. In the previous example where an unemployed person was receiving $420 per week they will now get $1,020 per week.

How long can I get unemployment benefits for?

Each state provides benefits for different lengths of time, but the average (before the CARES Act) was 26. Some states, such as Florida and North Carolina, only provided benefits for 12 weeks, while Massachusetts provided benefits for 30 weeks. The CARES Act extends unemployment benefits by an additional 13 weeks (making the maximum length in most states 39 weeks). The extended benefits will last through December 31, 2020.

The CARES Act also eliminates the one-week waiting period, which means you can get a check starting on the first week instead of the second week.

How do I apply for benefits?

Each state has a different process to apply. You can learn about unemployment benefits here and find a list of state offices here.

Looking for a job

While many employers have had to lay off employees, others are hiring part and full-time workers, including Amazon, Costco, CVS, pizza chains, Dollar General, Walmart and more. USA Today has an article that links to many of the major employer’s websites who are hiring. Be sure to check in your local community and state as well. Many communities have Facebook pages where employers looking for help post the job.

Small business forgivable loans

If you own a small business (from one employee up to 500 employees) you can apply for a loan through the Small Business Administration, and, if certain stipulations are met, that loan can be forgivable. The loans can be used to pay payroll, payroll expenses (such as health insurance), interest on mortgage loans, rent, and a few other expenses. Small business owners can learn more and apply for a loan here.

This article will be updated as more information becomes available.

CARES Act: Stimulus Checks

As a result of the CARES Act, which became law on March 27, 2020, most Americans will receive stimulus checks.

Single taxpayers will get $1,200; married taxpayers will get $2,400; and for each child under the age of 17 parents will get $500.

Of course, there are some stipulations.

  • College students who are claimed as dependents on their parents tax return will not get a check.
  •  

  • College students who live on their own and are NOT claimed as dependents will get a check.
  •  

  • Even though the checks are being sent now, they are treated like a tax refund for 2020. More on this provision below.
  •  

  • President Trump wants payments issued by April 6, but the IRS and Treasury Department are estimating that it will take until May.
  •  

  • Money will be direct deposited based on most recent filing direct deposit number, or mailed to the most recent address the IRS has on file.
  •  

  • There will be systems set up to get checks to those who earn under the amount required to file a tax return, but these checks will likely take much longer to get to them due to logistical issues.
  •  

  • You must have a Social Security Number to qualify, not a Taxpayer Identification Number (TIN).
  •  

  • There are income phase-outs. More information below.

Income-Phase Outs

Single filers who earn between $75,000 – $99,000 will get a reduced amount. For every $100 earned over $75,000 their check will be reduced by $5. Here are some numbers for :

YOUR INCOMEYOUR CHECK
$75,000$1,200
$80,000$950
$85,000$750
$90,000$450
$95,000$200
$99,000+$0

Married filers who earn between $150,000 – $198,000 will get a reduced amount. For every $100 earned over $150,000 their check will be reduced by $5. Here are numbers for married filers:

YOUR INCOMEYOUR CHECK
$150,000$2,400
$160,000$1,900
$170,000$1,400
$180,000$900
$190,000$400
$198,000+$0

Payments will be increased by $500 multiplied by the number of children in the home.

Examples:

  • A married couple earns $125,000 and has 4 children ages 18, 15, 7, and 4. This couple will get:
    • $2,400
    • $500 x 3 (one child does not qualify because they are too old): $1,500
    • Total: $3,900
    • NOTE: The 18-year old is most likely claimed as a dependent on the couple’s tax return, which means that neither the child nor the parents get a check.
  • A single filer earns $40,000 and has one child. He or she will get:
    • $1,200
    • $500
    • Total: $1,700

Tax Return for 2020

The money will be paid out based on 2019 taxes, or if 2019 taxes have not been filed yet, on 2018 taxes. This will have an adverse effect on taxpayers who earned high incomes in 2018 or 2019, but are no longer earning as much because they have been laid off or had hours reduced due to the Coronavirus shutdown. Let’s say that a single taxpayer earned $85,000 in 2019. They will get a check for $700 now. If they lost their job in 2020 and earned $40,000 in 2020, they will get the other $500 when they file their 2020 taxes (which will be due April of 2021).

There are also going to be many children that will be born during 2020, but the parents will not get the $500 until they will their 2020 taxes.

What about the taxpayer who qualifies now for a larger check, but they have a child that turns 17 in 2020, or they get divorced, or they are earning more in 2020? They will get to keep the extra amount and not have to pay it back when they file their 2020 taxes.

Here’s an example:

Martha has one child, Missy, who turned 17 on January 1, 2020. Martha will get a check for $1,200 for herself and $500 for Missy, for a total of $1,700. Technically she should only get $1,200 since Missy turned 17 on January 1. Martha will not have to pay the $500 back when she files her 2020 taxes.

Do you have any questions about the stimulus checks? If so, post them below.

This post will be updated as more information becomes available.

CARES Act: Changes to Student Loans

NOTE: This article will be updated as new guidelines or laws are passed about economic support during the Coronavirus pandemic.

NOTE: Updated 3/27/2020 due to the passage of the CARES Act.

There have been some significant developments to the federal student loan program during the pandemic and as a result of the CARES Act, which was signed into law on 3/27/2020. I will continue to update this post as new information is announced.

Here are all of the current changes:

  • Student loan payments are automatically suspended until September 30, 2020. Only Direct or FFEL loans that are owned by the Department of Education are included in this, which means that payments for FFEL owned by lenders, Perkins loans, and private student loans are not included.
     
    NOTE: There has been some confusion about whether or not the payments are automatic or if the borrower needs to apply for it. This article from the Consumer Financial Protection Bureau clears it up and states that the payment suspension is automatic.
  •  

  • Involuntary payments, such as wage garnishments and tax refund seizures, will stop until September 30, 2020.
  •  

  • Interest is set to 0% during the payment suspension so included loans will not accrue interest.
  •  

  • Borrowers can make voluntary principal payments during the payment suspension. The bill did not clarify whether or not accrued interest needs to be paid off before payments reduce the principal balance. More clarification will come from the Department of Education, and this post will be updated as information is released.
  •  

  • Suspended payments are considered payments for loan forgiveness programs, such as Public Service Loan Forgiveness (PSLF). Borrowers in this circumstance should NOT pay extra during the payment suspension.
  •  

  • Suspended payments will be reported as full payments to credit bureaus, which will be helpful to some borrower’s credit reports.
  •  

  • Rates on private loans are low right now as well, so a number of borrowers are asking if this is a good time to refinance their loans. Refinancing loans only makes sense if borrowers have a high federal rate and they know for sure they won’t be using any of the federal benefits, such as forgiveness, deferment, or forbearance. With 0% interest and no payments for now, though, I would just focus on paying the principal balance down.

If you want help navigating these changes and setting up a student loan plan visit my website https://studentloanplanning.com/.

What to do if you lost your job or income

NOTE: This article will be updated as new guidelines or laws are passed about economic support during the Coronavirus pandemic.

NOTE: Updated 3/27/2020 due to the passage of the CARES Act.

I had to pick up some things at my office recently and as I walked the halls, generally full of students heading to classes, studying, eating, and just hanging out, I was struck by the quietness. I walked by the empty food court and locked computer labs. This is a familiar scene all over the world right now – businesses closed and many people working from home. Unfortunately, this is not the case for many workers. If their workplace is closed, they are not working from home. They are simply not getting paid.

If you are facing the loss of income because of the Coronavirus you are not alone. CNN reported that half of American workers are at risk of layoffs, furloughs, fewer hours or wage cuts, with about 20% of all jobs in America at high-risk.

Employees in the transportation, travel and tourism, hospitality, temporary help, and restaurant workers are going to be the hardest hit. While many employees are able to work from home, workers in these industries generally do not have that option. After all, if no one is getting their hair cut, or staying in hotels, or flying, or eating in restaurants, these service workers don’t have a job.

What should you do if you find yourself in a situation where your paycheck is affected?

Emotional support

If you are in this situation you are likely feeling a lot of emotions. Overwhelmed, panic, anger, sadness, and hopeless are the terms I most often hear. Allow yourself to feel those emotions, but if they start to become overwhelming reach out to someone for help. Don’t go through this alone – talk to a therapist, a religious leader, or a friend. If you or a loved one is having suicidal thoughts, contact the National Suicide Prevention Lifeline at 1-800-273-8255.

Assess where you are now

Take some time and start to make a list of resources that you have available, including food, medicine, and other supplies. Do you have friends or family that you could stay with if needed? Do you know how to make low-cost meals? What about intangible resources such as a skill you could use to make some additional money?

The list below will have many additional resources that you may be able to utilize.

File for unemployment

The CARES Act expands unemployment insurance for four months and increases the benefit amount by $600 per week. It also eliminates the one-week waiting period, and it includes many workers who typically may not qualify, such as furloughed employees, freelancers, and gig economy workers.

It can take some time to work through the unemployment process, so if you are in this situation get your request in right away. You can find information about unemployment benefits here with a list of state offices here.

Temporary work

While many employers have had to lay off employees, others are hiring part and full-time workers, including Amazon, Costco, CVS, pizza chains, Dollar General, Walmart and more. USA Today has an article that links to many of the employer’s websites who are hiring.

Tax return

While the deadline to file taxes has been moved to July 15, if you are expecting a refund get your taxes filed right away. If you owe money you may want to consider waiting to file. If you need help filing your tax return, there are some Volunteer Income Tax Assistance sites open (they are all practicing social distancing and limiting the number of people that can come in) or you can use IRS Free File. Information about both resources can be found here.

Student loan payments

Student loan payments are automatically suspended until September 30, 2020, and no interest will accrue during that time. Only certain loan qualify. More information about student loans can be found in my article Changes to Student Loans During the Coronavirus Pandemic.

Mortgage or rent payment

The CARES Act allows borrowers with loans owned by Fannie Mae, Freddie Mac, FHA, VA, and RHS to suspend payments for 180 days, with a second 180 day extension available. During that time only regularly scheduled interest can accrue.

The CARES Act places a moratorium on certain eviction as well.

More information to follow about this topic.

Refinance

If your credit is good and your mortgage rate is at about 3.75% or above, contact several mortgage lenders to see if you can qualify for a lower rate with minimal out-of-pocket costs. If you have some equity in your home you may even be able to take some cash out to pay off some debt. Rates vary from day-to-day (or in some cases, hour-to-hour), but it is likely worth your time to contact some lenders. In addition, if you do refinance, you generally skip a payment in the process.

Utilities

While there are no specific federal guidelines regarding payment or shut-off of utilities, many states and companies have agreed to a moratorium on phone and utility terminations. Companies include Ameren, Dominion Energy, PG&E, Xcel Energy and many others. Contact your service providers if you are having trouble making your payments.

Food Stamps or SNAP

If you need help with food, file for Food Stamps, or SNAP (Supplemental Nutrition Assistance Program) right away. The CARES Act provided additional money to the SNAP program to ensure the program can provide for those who need Food Stamps. You can find information here.

Government checks

Under the CARES Act many individuals and families will be getting checks. Individuals will receive $1,200 checks, married couples will receive $2,400, and families will receive $500 checks for each child under the age of 17. These amounts are phased-out for individuals who earn between $75,000 – $99,000, while married couples will be phased-out for those who earn between $150,000 – $198,000.

As an example, a family with a married couple and two children who earn $75,000 per year will get $3,400.

Income phase-outs will be determined by 2019 tax returns if they are filed, and 2018 taxes if not. If you do not file taxes there will be alternate methods to determine how to get checks.

While these checks will be helpful for many in making some payments or stimulating the economy, the IRS is saying it will likely take until at least May to get checks out.

I would urge consumers to consider using these checks to 1. get caught up on bills; 2. pay off debt; 3. establish an emergency fund; and 4. build up your food supply.

Plan for the future

As this pandemic passes and the economy starts to return to normal I would encourage you to start to make preparations for the future. We may or may not face something like this again, but many of us will face periods of economic uncertainty.

It makes sense for everyone to do a few things to prepare:

  • Get high interest debt paid off.
  • Build up an emergency fund with 3-6 months worth of expenses.
  • Build up a supply of food and other supplies you will actually use (dry beans, canned goods, etc.). Don’t panic buy – but build this up over time.

Conclusion

Hopefully this article has given you some resources/support that you can utilize to help you or a loved one get through this crisis.

If you have questions or comments, let’s start a conversation in the comments below.

I will update this article as more updates are released.

The Stock Market Rollercoaster

These graphs show the S&P 500 and DOW Jones averages since the beginning of 2020 through the close of the market on March 20, 2020:

Some “experts” are predicting it could go down another 20% before this is over. Maybe they are right. Maybe they are wrong. Maybe it will start going back up tomorrow, maybe it will drop another 30% or more. No one knows for sure. My crystal ball is out of order, so I certainly don’t know.

Investors are panicking and pulling money out of the market. I hear people use words like “stressful” “scared” and “worried” with only the occasional investor using the word “opportunity.”

Let’s address the stressed, scared, worried, panicking investors first.

If you have a financial advisor, this would be the time to call them. Actually, if they are a good financial advisor, they should have contacted you already. If they are avoiding you, it’s time to find a new advisor.

I could give you all the statistics about not missing the up days in the market, or not buying high and selling low, but stress and worry and being scared are emotions, not logic. Our brains have been wired to “fight, flee, faint, or freeze” when we deal with stressful situations, including stressful financial situations. Getting out of the market is our way of fleeing as we see our balances going down.

I would encourage you to pause. What are you investing for? Most people would say retirement or college or some other goal. What values are those goals based on?

Our behavior should be framed by our goals, which should be framed by our values. If your financial planner hasn’t done this with you, or if you don’t have a financial planner, here is an important question for you:

  • Why is money important to me?

Write down whatever answer comes to mind first. Let’s say you thought “security.” Write down security then ask:

  • Why is security important to me?

Keep this process going until you dig down to the deepest reason money is important to you. Don’t dismiss this as simplistic and unimportant! Pause the panic and do this exercise.

For me, money is important because it represents security, freedom, time, and the ability to support and spend time with my family. Money is simply a tool to help me live these values, and I invest in the market to help it grow. That is true in up markets, and honestly it is even more true in down markets.

For the average 40-year old they have years until they will need the money invested in the market, and years in retirement.

What about someone who is 60 and planning to retire in the next few years? First of all, you should probably be moving towards a more conservative portfolio if you don’t have time to weather the ups and downs of  the market. If that describes you, it is time to talk to a financial planner. Remember, however, that you likely have 20 or more years in retirement. Don’t panic and sell now or you lock in the losses that are just on paper now.

Many people can’t understand how some investors see this as an opportunity. How is it an opportunity? The stock market is on sale! You can buy additional shares of stock or mutual funds right now at a steep discount. America and the world will recover from this, and the market will go back up. Maybe not tomorrow, maybe not next month, and maybe not this year, but it will recover.

Let’s say the stock of a company was trading at $30 a share and it is down to $15 right now. Instead of buying one share at $30 you can now buy two shares for that same $30. When the market recovers to $30 you now have two shares worth a total of $60. You can make much more money during a down market because of the discounts.

Can I share a few good investing principles with you to think about during the down times?

  • Only look at your balance once a quarter, at the most. How is my portfolio doing? I have no idea. I haven’t looked at it. Not because I am worried or scared, but because I don’t care. I’m not investing for the short term.
  • If you can put any extra money in the market right now, go for it!
  • If your financial advisor is avoiding you or not dealing with the emotions of investing, it is time to start looking for a new advisor. Ask any potential advisor lots of questions and make sure you feel comfortable with them.

If you have questions or want to talk more, let’s have a conversation. Contact me or leave a comment below.

Money and Marriage

Since 2007 money has topped the list of sources of stress for Americans, with almost two-thirds reporting that money caused them very significant or somewhat significant stress.

Money is also the leading cause of stress in relationships, with 70% of married couples arguing about money. According to research arguments about money are by far the top predictor of divorce, and fights around money take longer to recover from than any other type of argument.

Reading all of that might make everything seem hopeless. After all, don’t all married couples fight about money? No! My wife and I have been married for almost 20 years and we have never had a fight about money. We had a lot to learn about money together, but we have never fought about money.

In addition, I have been counseling individuals and couples about money for close to 20 years and have learned a lot about what works and what doesn’t work. Through personal experience, counseling experience, and research, I have discovered many things that financially healthy couples do with money.

Here are my top ten tips for couples:

1. Find a financial counselor that can help you walk through everything. A trained financial counselor understands the financial side of money and the emotional side of money. I strongly suggest couples work with an Accredited Financial Counselor, which can be found at http://afcpe.org/find-an-afc. If you are not married yet, see a Financial Counselor as part of your pre-marital counseling.

2. Meet as a couple on a regular basis and discuss (discuss – not fight) your budget, goals, dreams, and creative solutions to your financial challenges.

3. Each partner in the couple should take the online Money Habitudes assessment. This tool will help you understand your money habits and attitudes, and will give you important tools and knowledge to discuss with each other and your financial counselor. You can learn more here: https://online.moneyhabitudes.com/

4. Set financial goals together and work towards achieving those goals.

5. Make sure each partner has money they can spend on whatever they want.

6. Set some money aside for each partner to be able to grow and develop their talents. For example, if your spouse wants to learn to play tennis, they could sign up for lessons. If you want to learn how to cook healthy meals, you could take a class. Even better, see if there is a class you both would enjoy.

7. Spend money on experiences, not things.

8. Be sure there is absolutely NO financial infidelity in your marriage (financial lies). Few things will destroy trust in a marriage faster than lying about money.

9. Review both partners credit reports on a regular basis (at least once a year).

10. Learn about money together – listen to podcasts and read books together. A few suggestions for podcasts include Stacking Benjamins, You Need a Budget, The Ric Edelman Show, and Money Tree Investing. A few books I recommend are You Need a Budget, The Difference, and How Rich People Think.

What other tips do you have for making money work in your marriage or relationship? Please share in the comments below or on Facebook at https://www.facebook.com/RyanHLawBlog/

 

Sources:

American Psychological Association (2017, November 1). APA Stress in America survey. Retrieved from http://www.apa.org/news/press/releases/2017/11/lowest-point.aspx

Jacques, S. (2013, July 12). Researcher find correlation between financial arguments, decreased relationship satisfaction. Retrieved from https://www.k-state.edu/media/newsreleases/jul13/predictingdivorce71113.html

MagnifyMoney (2017, February 13). 21% of divorcees cite money as the cause of their divorce, MagnifyMoney survey shows. Retrieved from https://www.magnifymoney.com/blog/featured/money-causes-21-percent-divorces925885150/

Money (2014, June 1). Poll: How husbands and wives really feel about their finances. Retrieved from http://time.com/money/2800576/love-money-by-the-numbers/.

Vincent, S., (2015, February 4). Love and money: People say they save, partner spends, according to SunTrust survey. Retrieved from http://investors.suntrust.com/news/news-details/2015/Love-and-Money-People-Say-They-Save-Partner-Spends-According-to-SunTrust-Survey/default.aspx

Freeze Your Credit for Free

You can now freeze your credit (which is the number one step you can take to protect your identity) for free.

A credit freeze is the single most important step you can take to protect yourself from identity theft. It literally locks your credit bureau files so NO ONE, including you, will be approved for new credit. A thief could have your information and they will apply rapidly for credit, all of which will be denied, which will make them move on.

After the massive Equifax data breach last year (https://ryanhlaw.com/equifax-data-breach/) a new federal law allows all consumers to freeze their credit for free.

Which makes sense, if you think about it. Equifax essentially said, “we’re sorry your data got stolen because we were negligent, you can protect yourself by putting a credit freeze on your report and paying us $5-$10.” Thankfully Congress didn’t like that, and they passed a law that made it free.

Let’s keep it simple – here are the websites:

You’ll need your Social Security number, two years of address history, and some other basic personal information. You will be asked some questions about information in your credit file.

Take ten minutes and freeze your credit right now. Freeze your spouse’s and children’s credit as well.

Good job, Congress, for doing the right thing and making this important service free.

Beanie Babies, Baseball Cards & Bitcoin

What do Beanie Babies, Baseball Cards and Bitcoin have in common?

None of them are a good investment.

For those unfamiliar with Beanie Babies, they are a stuffed animal that became a fad in the mid-90’s. Ty Warner, Inc. created the toys but strategically only produced a limited amount of each new stuffed animal and retired them regularly. People would wait for hours and hours for the chance to buy one of the limited ones, then they would sell them for as much as ten times the price, mainly on Ebay. At one point Beanie Babies made up 10% of Ebay’s sales!1 People spent fortunes buying and carefully storing them. The bubble, of course, burst, and now those bins of Beanie Babies are essentially worthless. There are stories of people going bankrupt after spending over $100,000 on the toys2 or carefully sorting their Beanie Babies in a divorce.3

 

And how about baseball cards? This was a fad of the late 80’s and early 90’s. Topps, Score, Donruss and Upper Deck were among the companies that printed millions of cards and were religiously collected by almost every boy in America (myself included). Baseball card shops opened up all over the nation, and a price guide printed monthly by Beckett detailed how much each card was worth, often driving the market by setting prices. While a Mickey Mantle or Honus Wagner card might be worth a lot, the remainder are essentially worthless. It was a bubble that was bound to burst.4

Both Beanie Babies and baseball cards produced no real value – they were hyped up by the market and the prices were artificially inflated. Again – these items held no intrinsic value – they did not produce any further value. If you like Beanie Babies or baseball cards because you enjoy them, great, but if you bought them as an investment it was a bad gamble.

Enter Bitcoin.

Without getting technical, Bitcoin is a form of currency (called cryptocurrency). It is “mined” by massive computers running complex algorithms. According to a Bitcoin forum5 someone trying to mine bitcoins on a home computer will mine about 0.00001406 bitcoins per week, which means it will take well over 1,000 years to mine 1 Bitcoin.

Clearly mining isn’t the way to make money.

The basic idea behind cryptocurrencies like Bitcoin is that there is no bank or government or currency backing it up. If you own a Bitcoin you own an electronic coin that you can (hypothetically) use to purchase items (although the documentary Life on Bitcoin6 shows how hard that can be).

The basic idea would be that if a Bitcoin was worth $1, you could buy a $1 drink for 1 Bitcoin. You transfer ownership of that Bitcoin to the company selling you the drink. If a Bitcoin is worth $2 you would transfer ½ a Bitcoin to buy that drink. The new owner can either spend it or save it.

People buy Bitcoins in hopes that they will go up.

For early adopters, it went well. In 2010 the highest price was 39 cents. Bitcoin hit its high price on December 17, 2017 at $19,843.11.7 If you bought 100 Bitcoins at 39 cents each and sold them on December 17, 2017 you would have made $1,984,272 ($1,984,311 minus $39 initial investment). Not bad, right?

Wait – you didn’t buy any when it was 39 cents?!? Too bad. I didn’t either.

Let’s say you wanted to buy Bitcoin starting in 2018. On January 1 it closed at $13,500. It reached a high on January 6 at $17,152. On January 22 it closed at $10,823. Will it go back above $13,500? It’s hard to say. It might, but it might drop back down to $100.

By the way, let’s say you owned one Bitcoin when it was worth $10,289.26. To buy that same $1 drink with Bitcoin you would transfer 0.000097 Bitcoins. There’s some fun math for you!

However, people aren’t buying Bitcoin to buy a $1 drink (there are few places in the world where one can do that). They are buying Bitcoins in hopes that someone else will buy them for more. It is a purely speculative investment, with far more risk than most people should take on.

Maybe I’m wrong.

Maybe you can buy one Bitcoin today at $10,832 and it will be worth $100,000 next year.

Maybe it will be worth 39 cents.

That’s what speculative investments do.

Yes, there are cryptocurrency millionaires. There are also others who have lost far more than they could afford to. When people realize that there is no intrinsic value in Bitcoins they will have nothing.

Hopefully they can find comfort in their Maple Bear Beanie Baby while holding their Daryl Strawberry rookie card.

I recommend that you stick to real investments where real value is being created. Slow and steady wins the race. If you really, really want to buy Bitcoin never invest more than you can afford to lose, and speculative investments should never make up more than about 5% of your total portfolio.

Analysis of the Revised Tax Cuts & Jobs Act

I don’t know how they did it. The House passed a terrible tax bill. The Senate passed one that was almost as bad. To reconcile the two bills a House and Senate Conference Committee was created. I had extremely low expectations. What they came out with was the revised Tax Cuts & Jobs Act (TCJA), and it is, quite frankly, a great bill for almost everyone.

If you want to read the full bill, you can do so here: http://www.cnn.com/2017/12/15/politics/text-read-tax-plan-republicans/index.html?iid=EL

Before I jump into the highlights, I want to make a few important points:

  • As of this writing, it is not a law yet, so no changes have actually been made. It will likely become law before the end of the year, though, but current tax laws will be in place for your 2017 return that you will be working on in a few months.
  • I am not a CPA or tax attorney, so nothing in this article should be construed as tax advice. This article is for informational purposes only. For information about your own taxes you should consult a tax professional.
  • Page numbers refer to the page in the bill where you can find the information.

Let’s run through some highlights for individuals and families:

  • Reduces all but two tax brackets (page 12):
    Current Law10%15%25%28%33%35%39.6%
    TCJA10%12%22%24%32%35%37%
  • Increases the standard deduction to $12,000 for singles and $24,000 for married filing joint (MFJ) (page 17):
    • With the increase in the standard deduction, personal exemptions are going away. Under current law you get a personal exemption of $4,050 per individual (which would lower your taxable income).
  • If you choose to itemize, you can still deduct sales, income and property taxes up to $10,000 (page 81).
  • If you choose to itemize you can still deduct mortgage interest for home values up to $750,000 (page 78).
    • Deductions for the interest on a home equity lines of credit, however, will no longer be deductible.
  • Increases the Child Tax Credit to $2,000 per child, with $1,400 of that being refundable for most taxpayers (page 43).
  • College savings plans (529 plans) may now be used for elementary, secondary, homeschool and higher education (page 63).
  • Qualified moving expenses are no longer deductible unless you are part of the Armed Forces (pages 102, 110).
  • Alimony is no longer deductible to the payor (page 100).
  • Eliminates most personal casualty and theft losses from itemized deductions (page 81).
  • Because taxes will be easier to file for many (most will take the standard deduction) you can no longer deduct the cost of paying someone to prepare your taxes (page 99).
  • Simplifies the rules for the Alternative Minimum Tax and essentially doubles the amount you can pass to your heirs income tax-free (Estate or Death Tax).
  • If you have a pass-through business (S corp, LLC, Partnership, or Sole Proprietorship) all gains made in the business currently pass through to your individual tax form where you pay taxes on the gain as though it were income. Under the TCJA you can reduce the amount that flows through by 20% (1). For example, if you have a home-based business and you make $20,000, only $16,000 of that will flow through to your personal taxes. Because of this and other tax-friendly portions of the law, the National Federation of Independent Business, who initially opposed the House and Senate bills, is in full support of the revised bill and is encouraging both Chambers to pass the bill quickly (2).
  • The tax rate for corporations is reduced from 35% to 21%.

There are several provisions which were in either the House or Senate bill that did not make it into the final bill. These include:

  • Modification of the exclusion of the gain or sale of a principal residence (Sec 121 of the tax bill):
    • Currently if you live in your home for 2 out of the last 5 years you can exclude the gain up to $250K (single) or $500K (MFJ).
    • Both the House and Senate planned to increase this to 5 out of the last 8 years.
    • The joint bill contains no provision for this, so it will stay at 2 out of 5 years (page 109).
  • Qualified tuition reduction for graduate students continues to be excluded from income (page 68).
  • Up to $5,250 of employer provided education assistance continues to be excluded from income (page 70).
  • The Adoption Assistance Credit is retained (page 112).
  • Continues to allow taxpayers to deduct student loan interest and tuition and fees, and the American Opportunity Credit is retained.

It is important to note that all individual provisions expire after 2025. The plan is that the next President and Congress will extend these provisions for all individuals and families. It is a bit of a gamble, but it is the only way, under current rules, to pass the bill with a simple majority.

What you probably want to know is, what will this bill do to your taxes? People much smarter than me in taxation will figure that out, but in the meantime, there are several calculators you can use to estimate your tax burden. Again, this is an estimate, not a guarantee. I used two calculators to run several scenarios:

Here is what I found for five scenarios. I ran all with the standard deduction (3):

Scenario 1: Married Filing Jointly (MFJ) with four children; $85,000 in ordinary income.

  • Current tax liability: $2,288
  • TCJA tax liability: $0
  • Savings of $2,288 under TCJA

Scenario 2: MFJ with 2 children; $75,000 in ordinary income; $200 in investment income.

  • Current: $3,982
  • TCJA: $1,739
  • Savings: $2,243

Scenario 3: Single; $75,000 income; $200 investment income.

  • Current: $11,889
  • TCJA: $9,800
  • Savings: $2,089

Scenario 4: Single, $55,000 ordinary income; $20,000 home-business income; $200 investment income.

  • Current: $11,889
  • TCJA: $8,920
  • Savings: $2,969

Scenario 5: MFJ with 5 children, $100,000 ordinary income; $20,000 home-business income; $200 investment income.

  • Current: $6,715
  • TCJA: $2,119
  • Savings: $4,596

As more information is released I will continue to update this article and post updates on my Facebook page at https://www.facebook.com/RyanHLawBlog/.

 


(1)  This provision is eliminated for higher-income individuals and certain service businesses.

(2) https://www.nfib.com/content/press-release/national/small-business-supports-conference-tax-bill/

(3) These calculators get updated as more information becomes available. If you run these same scenarios at a different times you might get slightly different results. If the numbers change dramatically I will update the article. The numbers are correct as on December 17, 2017.

The Republican tax bill – a burden to families, homeowners, and students

DECEMBER 18, 2017 UPDATE: This bill, and therefore this article, are now irrelevant as the Senate also passed a bill, then a committee was formed to reconcile the two bills. For an analysis of the revised bill, read https://ryanhlaw.com/revised-tax-cuts-jobs-act/.

Important note: I am not a CPA or tax attorney and I don’t play one on TV. My explanations and descriptions of the proposed changes to the tax code are simplified (which is the goal of this blog). Nothing contained here should be construed as tax advice. I also want to note that I am a Conservative, and I am firmly against this bill.

In early November, 2017, the Republican party released their version of tax reform. You can find the full text of the tax code here: https://waysandmeansforms.house.gov/uploadedfiles/bill_text.pdf. Most people agree that the tax code needs some simplification and that some loopholes need to be closed. While there are a few positive aspects of the bill, the bill, as a whole, is a disaster and should not be passed.  Let’s start with the positive aspects of the proposed bill:

  • Tax brackets are reduced from seven to four, which could lower taxes for some.
  • The standard deduction is doubled, which will make taxes easier for many individuals and families.
  • Repeal of the Alternative Minimum Tax (AMT).
  • Repeal of the estate tax.
  • An increase in the child tax credit from $1,000 to $1,600.
  • Corporate tax rate lowered from 35% to 20%.

Now for the negatives:

  • Removal of the personal exemption (currently $4,050 per person). You can find this removal on page 33 of the tax bill. The doubling of the standard deduction is supposed to make up for the removal of the personal exemption, which you get for each dependent and taxpayer on a return. In my family, with five children, we get seven personal exemptions. In 2016 the personal exemption was $4,050, which equates to $28,350. We would get this on top of the standard deduction, which was $12,600, for a total of $40,950. Our deduction under the new bill will be $24,000. This bill penalizes anyone with children, and certainly penalizes large families. Even with the increased child tax credit we still come out behind. I thought Republicans were in favor of families.
  • Mortgage interest deduction would be capped on homes up to $500,000 (see page 100 of the tax bill). In many areas of the country $500,000 is an average home[i]. This only applies to new mortgages, so if you have a mortgage now and the value of your home is $1,000,000 or less, it won’t affect you. Republicans obviously don’t want you to buy a more expensive home.
  • Under current laws, as long as you are using your home as your primary residency, you can move every two years and not pay capital gains taxes on the increase in value on your home. The new tax plan increases that to five years (see page 137). This will be devastating to the starter home market, and challenging for many others. For most individuals that tax will be 15% of the gain. For some reason, Republicans don’t want you to move very often.
  • Graduate students often pay for their tuition by doing research and teaching undergraduate courses. In exchange, they are paid a wage (which average $20,000 – $30,000 a year) and receive a tuition waiver (which averages $12,000 – $50,000 a year). Under current law, the wages are taxed, while the tuition waiver is not. Under the proposed changes, both the wages and tuition waiver become taxable income (see page 98 in the tax bill). This will dis-incentivize students from going to graduate school, and raising their tax bill by a large amount, especially for those that go to more expensive schools.[ii] An analysis by Forbes shows that an in-state University of Florida grad student pays about $1,424 a year in taxes currently, but under the new plan they will pay $4,052 a year, which is 17.6% of their income. A Princeton grad student pays $2,849 (8.8% of their income) now, while under the GOP plan they will pay $13,499 (41.9% of their income)[iii]. That is a heavy, and unacceptable, tax burden on those trying to get an education. For an excellent analysis of how this would affect students, click here.  Why do Republicans not want individuals to go to grad school?
  • Elimination of state and local tax deduction (see page 105).
  • If your employer offers adoption assistance that is not currently reported as income. This bill repeals that and it will now be reported as income. NOTE: This was included in the original bill (see page 142), but has since been removed.
  • If your employer offers tuition assistance, it is currently not reported as income. That benefit will be repealed and it will now be reported as income (see page 96-98). Again, this will discourage individuals from going to school.
  • If you work at an educational institution you or your children may get reduced or free tuition. Currently this is not reported as income. Under the new bill it will be (see page 96). For example, as an employee benefit my children get free tuition at Utah Valley University. Their tuition would be reported as income.
  • The student loan interest deduction will be repealed (see page 96 – Section 221).
  • The itemized deduction for medical expenses will be repealed (see page 113).
  • The bill adds a “Chained CPI” to the tax code, which essentially means that Social Security income will grow at a slower rate than true inflation[iv].

This tax bill is terrible and should not be passed. However, remember that this bill is not a law yet! I encourage you to contact your elected officials and encourage them to scrap this bill entirely. You can find contact information here:

https://www.usa.gov/elected-officials

Call them, e-mail them, post on their social media pages. Let them know you don’t support this bill.

I conclude with two quotes:

“This is a Republican plan that targets people wanting to adopt children, homeowners, small businesses and people with high medical bills.” – Carol Markowitz[v]

“If the goal of the new tax plan is to shift the tax burden from wealthy, older Americans onto young, already-indebted students pursuing their higher education dreams, it’s poised to be a smashing success.” – Ethan Siegel[vi]

 

END NOTE: If you are looking for a comprehensive review of the GOP tax bill you can find that here: https://www.kitces.com/blog/tax-cuts-and-jobs-act-2018-house-gop-tax-reform-proposal/

 

[i] In Los Angeles county, for example, 23% of mortgages are over $500,000. In San Francisco that number jumps to 56.6%. http://www.latimes.com/visuals/graphics/la-na-g-mortgage-interest-deduction-tax-calculator-20171106-htmlstory.html

[ii] https://www.wired.com/story/grad-students-are-freaking-out-about-the-gops-tax-plan-they-should-be/

[iii] https://www.forbes.com/sites/startswithabang/2017/11/07/the-gop-tax-plan-will-destroy-graduate-education/#427787703d2f

[iv] https://newrepublic.com/article/145688/biggest-trojan-horse-republican-tax-plan

[v] http://www.foxnews.com/opinion/2017/11/07/im-conservative-and-hate-republican-tax-plan.html

[vi] https://www.forbes.com/sites/startswithabang/2017/11/07/the-gop-tax-plan-will-destroy-graduate-education/#7c929ce63d2f