Category: National Economic issues

Summary of President Trump’s August 8 Economic Executive Orders

On August 8, 2020 President Trump issued four Executive Orders (technically three memorandums and one order), that offer possible additional eviction and foreclosure assistance, a payroll tax holiday, student loan payment and interest deferral, and unemployment pay.

There is a question of the legality, as federal spending is a power reserved for Congress, and they could be stopped by a court order, but so far Democrats have not proposed that, as negotiations for another stimulus package have stalled, and they are unlikely to stop the additional unemployment amount given under the orders.  

This article will be updated as more information becomes available.

Memorandum: Student Loan Payment Deferral

The CARES Act deferred payments and interest on Federal Direct student loans until September 30, 2020. This memorandum offers further deferral until December 31, 2020. The memorandum specifies that those who want to can continue to make payments.

We don’t know yet if this continued deferral will be automatic (it most likely will be), and whether the skipped payments will count towards forgiveness programs, such as Public Service Loan Forgiveness (PSLF).

Memorandum: Unemployment Pay

Under the CARES Act those who are unemployed received their state benefit plus $600 a week, fully funded by the federal government. However, that $600 extra per week ended in late July. This memorandum provides $400 extra per week, ending no later than December 27, 2020.

Of that $400 extra, states have to pay $100 of it.

What we don’t know is what will happen if the states don’t have the funds, as many states have already said they don’t. Will the unemployed get an extra $300? We also don’t know when the extra $400 per week will start.

Memorandum: Payroll Tax Deferral

This memorandum defers payment of payroll tax from September 1 through December 31, 2020. This only applies to those with bi-weekly pay less than $4,000, calculated on a pre-tax bases (or $104,000).

This is a deferral only, and the tax will be due in the future, most likely with April 2021 taxes.

The major criticisms of this memorandum is that is does not help the unemployed, and that it will have to be paid back. It is also extremely unpopular among both Republicans and Democrats. If Congress decides to extend it, they will have to decide how much to reduce it and how long it will last.

If the deferral is the full employee portion of the payroll tax (7.65%) someone earning $40,000 year will get approximately $255 extra on their monthly paycheck, while someone earning $100,000 will get approximately $637 extra per month. Again, though, this is simply a delayed tax, not a cancellation. My concern is that people will spend that money and not be able to pay it back when it becomes due.

Chances are, if Congress chooses to include this in their bill, that they will cancel the collection of the tax, but nothing is sure yet.

President Trump has tied this directly to his re-election, stating that if he is re-elected he will make the deferral permanent and that it will not have to be paid back. Presidents, however, do not have this authority, so it would take an act of Congress to enact this.

If this is upheld, we don’t know whether that $104,000 is for single or married borrowers, and there is no word on whether or not there will be a deferral of the employer portion (it is unlikely that there would be a deferral of that portion).

Executive Order: Assistance to Renters and Homeowners

The CARES Act moratorium on certain evictions and foreclosures expired on July 31, which could start a wave of people losing their homes or rental. With unemployment still high the concern is that a loss of housing will spread the Coronavirus faster if people end up in homeless shelters or in a crowded multi-family home.

This Executive Order, however, does not really stop either evictions or foreclosures. It simply directs the Secretary of the Treasury and the Secretary of Housing and Urban Development to identify Federal funds to provide temporary financial assistance to renters and homeowners who are struggling to meet their monthly or mortgage obligations.

Basically this order says these groups need to look into it and try to figure out how to help. Measures mentioned in the order may include, “encouraging and providing assistance to public housing authorities, affordable housing owners, landlords, and recipients of Federal grant funds in minimizing evictions and foreclosures.”

We don’t know what will come of this – it could be a full moratorium, or a partial one. If there is direct money we don’t know if funds may be provided directly to landlords or to tenants to pay their landlords.

CARES Act: Stimulus Checks

NOTE: Updated April 16, 2020 as a result of new information available.

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.
  • 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.
  • You must have a Social Security Number to qualify, not a Taxpayer Identification Number (TIN).
  • There are income phase-outs. More information below.

Direct deposit started to go out April 11, and checks will start near the end of April. It is estimated that the checks could take until September to all be sent.

If you are not required to file and you do not want to wait for a check, you can fill out a form on the IRS website to give them direct deposit information. You can also check on the status of your check on the IRS Get My Payment page.

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.

Debt Collection Issues

If you owe back taxes or student loans you will still get a check. If you owe back child support you will not get a check.

A big concern is for the 1/3 of Americans that are in collections for credit card, medical, or private student loan debts. The law does not shield the payments from private debt collectors. While I am strongly in favor of paying off your debts, this is not the time to be taking the stimulus money from those who are most in need of it. 25 state attorneys general have sent a letter to Secretary Mnuchin asking for the money to be protected from seizure, but no action has been taken by the Treasury department yet. Individual states can also protect the checks, but only a few have taken that step so far.

The National Consumer Law Center has recommended the checks be protected, and are recommending those who are at risk to move the money out of the account as soon as it arrives, or create a new account at a small bank or credit union, or wait to get a paper check and cash it. If you are at risk of having your check seized, read the National Consumer Law Center article.

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 4/9/2020 due to the passage of the CARES Act and updated guidelines from the U.S. Department of Education.

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.

The CARES Act temporarily suspends payments on the following student loans that are owned by the Department of Education (ED):

  • Defaulted and non-defaulted Direct loans
  • Defaulted and non-defaulted FFEL loans
  • Federal Perkins loans

The automatic suspension does NOT apply to any other student loans, including:

  • FFEL loans held by commercial lenders
  • Perkins loans held by a school
  • Private student loans

The payment suspension lasts from March 13, 2020 until September 30, 2020. In addition to the payment suspension, all covered loans have their interest-rate set to 0% during that same time period.

Questions and Answers about the Payment and Interest Suspension

How can I find out if my loan is owned by ED?

To find out who owns your loans check the website of your servicer or go to StudentAid.gov/login. Either one will list the current owner – if it lists ED or Dept of Education the loan is covered under the payment suspension. In addition, most servicers got their websites updated by early April to reflect a new payment of $0. If you are unsure whether or not your loans qualify, check with your servicer.

Is interest suspended for students in school now as well?

If you have an unsubsidized Direct loan interest will not accrue from March 13 until September 30, 2020.

My loans are in default and my wages are being garnished or my federal tax refunds have been seized. Will my loans qualify for the payment and interest suspension?

Yes, involuntary collection is suspended from March 13 until September 30, 2020 as well. In addition, you can request a refund of any amount that was garnished or taken from your tax refund after March 13. The same is true of any Social Security or Disability payments withheld after March 13. You can check with your servicer or call the ED’s Default Resolution Group at 1-800-621-3115.

Can I continue to make payments during the payment suspension?

Yes, borrowers can make voluntary principal payments during the payment suspension. However, all accrued interest needs to be paid off before payments reduce the principal balance.

I have heard that suspended payments count as payments for forgiveness programs. Is that true and which forgiveness programs are included?

Suspended payments are considered payments for loan forgiveness programs, such as Public Service Loan Forgiveness (PSLF). In addition, payments count towards forgiveness on income-driven repayment plans (IDR).

My loans are in default and I am in the process of rehabilitating them. Should I continue to make payments during the payment suspension?

ED has recently confirmed that the suspended payments will count as on-time payments during the payment suspension period, so there is no need to continue making payments.

Rates on private student loans are low – should I refinance my loans?

Refinancing loans only makes sense if borrowers have a high federal rate and they know for sure they will no 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.

My loans don’t qualify for the automatic suspension. Is there anything I can do?

You can always check with your loan servicer and see if they have a payment suspension option for the pandemic. Most likely any payment suspension will not include an interest suspension.

Can I consolidate my FFEL loans and take advantage of the payment and interest suspension?

You can, but consolidating can take 45-60 days, and any accrued interest capitalizes, which means it is added to the principal balance. In addition, it can have an effect on loan forgiveness as well, so you want to make sure you do not consolidate them with Direct loans that are in a forgiveness plan.

 

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

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.

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.

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

How to protect yourself after the Equifax data breach

equifax data breachFollowing the news of the hurricanes, news of the Equifax security breach has been all over the news. Financial data of 143 million Americans has been stolen, and in many cases it means that the victims are at-risk of becoming victims of identity theft for the remainder of their lives. That’s right, you, and if you have them, your children, could be at risk for the rest of your life. The hackers got names, Social Security numbers, birth dates, addresses, credit card numbers, and some driver’s license numbers.

The breach ticks me off – this never should have happened. Clearly Equifax has some major vulnerability in their system which they should have known about and protected. A credit bureau should be utilizing the highest level of security at every level. Your information with them should be as secure as a vault. On top of that, to add insult to injury, three of Equifax’s executives (including the CFO) sold nearly $2 million worth of stock after the breach, but before they told the public about it. That’s right – here’s a timeline for you:

  • Between mid-May and July, 2017 – breach happens
  • July 29, 2017 – the hack was discovered
  • Aug 1-2, 2017 – executives sell almost $2 million worth of stock
  • Sept 7, 2017 – the public is informed of the breach (thank you, Equifax, for waiting more than a month before letting us know)
  • Sept 8, 2017 – Equifax stock drops by double-digits

Equifax cliams that these executives had no knowledge of the hack when they sold their shares, but I don’t buy it. You’re telling me the CFO didn’t know about this? If he didn’t know, then who did? I’m sure that the timing of the sale will be part of any investigation.

The breach has happened, though, and you need to take specific steps to be sure you protect yourself. Let me warn you now, the few hours you spend on this are not going to be the most fun, but it is critical you take care of it now. It will be much, much worse if you wait and are a victim of identity theft.

I’ll try to make it as easy as possible for you with links and instructions.

  • First, don’t sign up for the protection that Equifax is offering. It only lasts a year, and, unless you opt-out of it, means you can’t be part of suing Equifax later on. I also don’t trust the company that just had the biggest data breach in history to be able to protect my data. Pass. Due to the severity of the breach, they should offer identity theft protection for life.
  • Sign up for Credit Karma (https://www.creditkarma.com/). You will get free credit scores and free monitoring of your credit reports. If anything unusual happens, they will contact you. It’s a free service and you should sign up for all adult members of your family.
  • Credit Karma logo

  • Place a credit freeze on all three of your credit bureau files. A credit freeze is THE SINGLE MOST IMPORTANT THING YOU CAN DO TO PROTECT YOURSELF. 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. They will eventually move on. Depending on the state you live in, there will be a $0-$15 fee to set this up, and you need to do this for each adult member of your family.Here are the links:
    https://www.freeze.equifax.com/Freeze/jsp/SFF_PersonalIDInfo.jsp
    https://www.transunion.com/credit-freeze/place-credit-freeze
    https://www.experian.com/freeze/center.html

    Because millions of people are setting these up the systems are not all working. I was able to set up Equifax and Experian, but not TransUnion. I will keep trying throughout the next day or so, and if it doesn’t work I will take care of it via mail.If you need to apply for credit later, you can un-freeze your reports for a limited period of time, after which it will re-freeze.

  • Place a fraud alert on your accounts. This is simply an extra step that puts an alert on your credit report that you might be a victim of identity theft, and that creditors need to call you before any credit application can be approved. It only lasts 90 days, but you can put the alert on there repeatedly. I already have a note on my calendar 90 days from today to renew the alert. You only need to place the alert with one company then they will place the alert with the other two. I recommend you use TransUnions fraud alert system – I found it to be the easiest one: https://www.transunion.com/fraud-victim-resource/place-fraud-alert
  • fraud alert

  • Sign up for Zander Insurance identity theft insurance. For $145 a year it protects your entire family, including your children. They have a 100% recovery success rate and protect you against all types of ID theft, including tax fraud, medical ID theft, and, of course, financial fraud. If your identity is stolen as a result of the Equifax, or any other breach or identity theft, they will take over and fix everything. It is well worth every penny. You can sign up for that here: https://www.zanderins.com/idtheft2
  • logo_zander

  • Speaking of children, does it make sense to freeze their reports? The credit bureaus don’t want you to be able to do that, but some states have made it mandatory. All three bureaus are falling in line, but none will allow you to do it online. TransUnion will do a search, for free, to see if your children have credit reports. You can find that here: https://www.transunion.com/credit-disputes/child-identity-theft-inquiry-form.
  • Utah is taking things one step further – they have set up a Child Identity Protection Program through the Attorney General’s office that registers your children’s Social Security numbers as a number belonging to a minor, which will help protect their data. You can find that program here: https://cip.utah.gov/cip/SessionInit.action. If you live in a different state encourage your attorney general to create a similar program. Because I live in Utah and have this option, along with the Zander protection, I don’t feel that I need to freeze their credit, but if I lived outside of Utah I would absolutely take that step.
  • utah cip

  • Because credit card numbers were stolen, I recommend calling the toll-free number on the back of each credit card you have and requesting a new number. It’s a pro-active step you can take to prevent unauthorized charges in the future.

Again, I realize this isn’t fun – it’s a lot of work to set these things up, but I wouldn’t delay. Take a couple of hours today and get all of this done. Taking these steps is like building a brick wall between you and identity thieves.

What’s up with the economy?

Are you tired of watching your savings earn .02% per year and seeing your investments lose money each year? You’re not alone.

You probably feel a lot like this guy – you just want someone to “FIX IT!”

Let’s establish a few things up front:

  • The economy moves in cycles:

economy

We go through times of high unemployment, low savings rates, negative stock market growth, etc. and we go through times of low unemployment, great stock market growth, etc.

It’s all part of a cycle.

There are times, of course, when the recessions and troughs last longer than others, but overall that is how the economy works. No one knows how long or short any part of the cycle is going to be.

  • The “stock market” is made up of a lot of different components.
    There are individual company stocks, company and government bonds and money market savings. It also includes things like commodities (gold and silver), oil and real estate. You can invest in all of these.

  • Most people invest in the stock market through their employer (401(k)) or through another retirement account such as an IRA. Typically this is in the form of mutual funds, which is a collection of corporate and government stocks and bonds. Throughout the article when I refer to investing in stocks I am talking about stock mutual funds. Most people shouldn’t be purchasing individual stocks.

  • Past performance in the stock market doesn’t predict what it will do in the future, but it can give you an idea of trends.

So how do you make or lose money in the stock market? When the market is down in a recession or trough stocks generally lose money. This can be caused by many things. Most recently the drop in the market has been caused by economic issues in China and the low price of oil, along with a continuing sluggish economy in the U.S.

In the first two weeks of 2016 the stock market has lost about 8% of its value. 8% in two weeks! Everyone’s invested assets are taking quite a hit right now.

Let’s take a look at some historical data.

Dow Yearly Return Histogram

The graph above shows the Dow yearly return frequency. You can see that there are years that the return on your investments would have returned more than 70%, and years it would have lost more than 20%. About 25% of the time the market has lost money.

This next graph shows the range of returns for a portfolio of 100% stocks, 100% bonds and 50% stocks and 50% bonds between 1950-2013.

In a single year the stock portfolio returned between -37% and +51%.

If you invested for 5-years that range narrows to -2% and +28%

If you go out to 20 years, the range narrows even more to +6% and +18%.

range of returns

The average annualized returns for stocks during those 20-year periods is 11.1%.

You have to decide if you are willing to ride out the negative years in hopes of gaining in the good years, and how long your time horizon is.

Here are some things to keep in mind:

  • The further out your time horizon is the better chance you have of getting a positive return, with the stock market returning the most. If you don’t have at least 5 years, or even better 10 years, you shouldn’t be invested in stocks.

  • The shorter your time horizon is the more you should be invested in conservative assets such as bonds. That means that you can be invested in stocks the younger you are, and move your money to bonds the closer you get to retirement.

  • A good rule of thumb is that you should take 100 minus your age and that’s how much you should invest in stocks. If you are 40 years old you should invest about 60% in stocks (100 – 40 = 60%). If you are 55 years old you should invest about 45% of your money in stocks. Your risk tolerance level might be higher or lower than that, though. Here is a good free online tool that will help you determine your risk tolerance level: http://njaes.rutgers.edu:8080/money/riskquiz/. Because I have a higher risk tolerance I have more of my assets invested in stock mutual funds.

  • Remember that there are additional ways to invest your money. While most of our retirement money is in the stock market, we are saving up money to invest in some real estate as well. A diversified portfolio is best.

  • What you don’t want to do is invest in stocks, panic when it goes down and pull all your money out, then when the market goes back up move your money back in to stocks. That’s a losing game, and you will never get ahead that way. You are buying high and selling low, which is the opposite of what you should do. A lot of people do this, however, which is why there is a big difference between investment returns and investor returns. Investment returns assume you leave the money in the market, while investors move their money around when things get bad.This chart helps me to remember that I need to stay invested:

    missed opportunity

    This chart assumes you invested $10,000 between Dec 31, 1993 and Dec 31, 2013. During that time the stock market had some great years and rough years.If you kept it fully invested you would have ended up with just over $58,000. If you missed the 10 best days (which often come right after the worst days) your return drops to $29,000. If you missed the 40 best days your return is actually negative – your $10,000 drops to $8,147.

    People miss the best days all the time though because they switch from stocks to cash when the market goes down, miss the up-side, and invest when stocks are back at their most expensive.

I realize that all these charts and statistics don’t make you say, “Well, I’m sure glad my portfolio is losing money!” No one likes to see their portfolio drop for even a day, let alone for a few years in a row.

Every time it feels different, like we aren’t going to recover this time. I understand it. I get it. If you need help, find a financial planner who can help you set goals and stick to the strategy you outline together. Make sure it is someone you trust and has your best interests at heart. Someone who will teach you and encourage you and cheer you on.

As always, feel free to leave comments or ask questions below, on Facebook or in an e-mail.