Coping with Market Volatility: Continuing to Invest May Help You Stay on Course
In the current market environment, the value of your holdings may be fluctuating widely — and it’s natural to feel tentative about further investment. But regularly adding to an account that’s designed for a long-term goal may cushion the emotional impact of market swings. If losses are offset even in part by new savings, the bottom-line number on your statement might not be quite so discouraging. And a basic principle of investing is that buying during a down market may help your portfolio grow when the market turns upward again.
If you are investing a specific amount regularly regardless of fluctuating price levels (as in a typical workplace retirement plan), you are practicing dollar-cost averaging. Using this approach, you may be getting a bargain by continuing to buy when prices are down. However, you should consider your financial and psychological ability to continue purchases through periods of fluctuating price levels or economic distress; dollar-cost averaging loses much of its benefit if you stop just when prices are reduced. And it can’t guarantee a profit or protect against a loss.
If you can’t bring yourself to invest during this period of uncertainty, try not to let the volatility derail your savings program completely. If necessary, to help address your concerns, you could continue to save, but direct new savings into a cash-alternative investment until your comfort level rises. Though you might not be buying at a discount, you could be accumulating cash reserves that could be invested when you’re ready. The key is not to let short-term anxiety make you forget your long-term plan. I am here to help and to answer any questions you may have.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
Stay Safe,
Joseph A. Smith, CPA/PFS, J.D., AEP®
Member
CARES Act Provides Relief to Individuals and Businesses
On Friday, March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. This $2 trillion emergency relief package is intended to assist individuals and businesses during the ongoing coronavirus pandemic and accompanying economic crisis. Major relief provisions are summarized here.
Unemployment provisions
The legislation provides for:
- An additional $600 weekly benefit to those collecting unemployment benefits, through July 31, 2020
- An additional 13 weeks of federally funded unemployment benefits, through the end of 2020, for individuals who exhaust their state unemployment benefits
- Targeted federal reimbursement of state unemployment compensation designed to eliminate state one-week delays in providing benefits
- Unemployment benefits through 2020 for many who would not otherwise qualify, including independent contractors and part-time workers
Recovery rebates
Most individuals will receive a direct payment from the federal government. Technically a 2020 refundable income tax credit, the rebate amount will be calculated based on 2019 tax returns filed (2018 returns in cases where a 2019 return hasn’t been filed) and sent automatically via check or direct deposit to qualifying individuals. To qualify for a payment, individuals generally must have a Social Security number and must not qualify as the dependent of another individual.
The amount of the recovery rebate is $1,200 ($2,400 if married filing a joint return) plus $500 for each qualifying child under age 17. Recovery rebates are phased out for those with adjusted gross income (AGI) exceeding $75,000 ($150,000 if married filing a joint return, $112,500 for those filing as head of household). For those with AGI exceeding the threshold amount, the allowable rebate is reduced by $5 for every $100 in income over the threshold.
While details are still being worked out, the IRS will be coordinating with other federal agencies to facilitate payment determination and distribution. For example, eligible individuals collecting Social Security benefits may not need to file a tax return in order to receive a payment.
Retirement plan provisions
- Required minimum distributions (RMDs) from employer-sponsored retirement plans and IRAs will not apply for the 2020 calendar year; this includes any 2019 RMDs that would otherwise have to be taken in 2020
- The 10% early-distribution penalty tax that would normally apply to distributions made prior to age 59½ (unless an exception applies) is waived for retirement plan distributions of up to $100,000 relating to the coronavirus; special re-contribution rules and income inclusion rules for tax purposes apply as well
- Limits on loans from employer-sponsored retirement plans are expanded, with repayment delays provided
Student loans
- The legislation provides a six-month automatic payment suspension for any student loan held by the federal government; this six-month period ends on September 30, 2020
- Under already existing rules, up to $5,250 in payments made by an employer under an education assistance program could be excluded from an employee’s taxable income; this exclusion is expanded to include eligible student loan repayments an employer makes on an employee’s behalf before January 1, 2021
Business relief
- An employee retention tax credit is now available to employers significantly impacted by the crisis and is applied to offset Social Security payroll taxes; the credit is equal to 50% of qualified wages up to a certain maximum
- Employers may defer paying the employer portion of Social Security payroll taxes through the end of 2020 and may pay the deferred taxes over a two-year period of time; self-employed individuals are able to do the same
- Net operating loss rules expanded
- Deductibility of business interest expanded
- Provisions relating to specified Small Business Administration (SBA) loans increase the federal government guarantee to 100% and allow small businesses to borrow up to $10 million and defer payments for six months to one year; self-employed individuals, independent contractors, and sole proprietors may qualify for loans
Prior legislative relief provisions
Signed into law roughly two weeks prior to the CARES Act, the Families First Coronavirus Response Act (FFCRA) also included relief provisions worth noting:
- Requirement that health plans cover COVID-19 testing at no cost to the patient
- Requirement that employers with fewer than 500 employees generally must provide paid sick leave to employees affected by COVID-19 who meet certain criteria, and paid emergency family and medical leave in other circumstances
- Payroll tax credits allowed for required sick leave as well as family and medical leave paid
There is likely to be a steady stream of guidance forthcoming with details relating to many of these provisions, so stay tuned for more information. We’re here to help and to answer any questions you may have.
Due Date for Federal Income Tax Returns and Payments Postponed to July 15
Due to the coronavirus pandemic, the due date for filing federal income tax returns and making tax payments has been postponed by the IRS from Wednesday, April 15, 2020, to Wednesday, July 15, 2020. No interest, penalties, or additions to tax will be incurred by taxpayers during this 90-day relief period for any return or payment postponed under this relief provision.
The relief applies automatically to all taxpayers, and they do not need to file any additional forms to qualify for the relief. The relief applies to federal income tax payments (for taxable year 2019) and estimated tax payments (for taxable year 2020) due on April 15, 2020, including payments of tax on self-employment income. There is no limit on the amount of tax that can be deferred.
Note: Under this relief provision, no extension is provided for the payment or deposit of any other type of federal tax, or for the filing of any federal information return.
Need more time?
If you’re not able to file your federal income tax return by the July due date, you can file for an extension by the July due date using IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Filing this extension gives you an additional three months (until October 15, 2020) to file your federal income tax return. You can also file for an automatic three-month extension electronically (details on how to do so can be found in the Form 4868 instructions). There may be penalties for failing to file or for filing late.
Filing for an extension using Form 4868 does not provide any additional time to pay your tax. When you file for an extension, you have to estimate the amount of tax you will owe and pay this amount by the July filing due date. If you don’t pay the amount you’ve estimated, you may owe interest and penalties. In fact, if the IRS believes that your estimate was not reasonable, it may void your extension.
Tax refunds
The IRS encourages taxpayers seeking a tax refund to file their tax return as soon as possible. Apparently, most tax refunds are still being issued within 21 days of the IRS receiving a tax return.
Bear Markets Come and Go
The longest bull market in history lasted almost 11 years before coronavirus fears and the realities of a seriously disrupted U.S. economy brought it to an end.
If you are losing sleep over volatility driven by a cascade of disheartening news, it may help to remember that the stock market is historically cyclical. There have been 10 bear markets (prior to this one) since 1950, and the market has recovered eventually every time.
Bear markets are typically defined as declines of 20% or more from the most recent high, and bull markets are increases of 20% or more from the bear market low. But there is no official declaration, so in some cases there are different interpretations regarding when these cycles begin and end.
On average, bull markets lasted longer (1,955 days) than bear markets (431 days) over this period, and the average bull market advance (172.0%) was greater than the average bear market decline (-34.2%).
| Bear Markets Since 1950 | Calendar Days to Bottom | U.S. Stock Market Decline (S&P 500 Index) |
| August 1956 to October 1957 | 446 | -21.5% |
| December 1961 to June 1962 | 196 | -28.0% |
| February 1966 to October 1966 | 240 | -22.2% |
| November 1968 to May 1970 | 543 | -36.1% |
| January 1973 to October 1974 | 630 | -48.2% |
| November 1980 to August 1982 | 622 | -27.1% |
| August 1987 to December 1987 | 101 | -33.5% |
| July 1990 to October 1990 | 87 | -19.9%* |
| March 2000 to October 2002 | 929 | -49.1% |
| October 2007 to March 2009 | 517 | -56.8% |
*The intraday low marked a decline of -20.2%, so this cycle is often considered a bear market.
The bottom line is that neither the ups nor the downs last forever, even if they feel as though they will. During the worst downturns, there were short-term rallies and buying opportunities. And in some cases, people have profited over time by investing carefully just when things seemed bleakest.
If you’re reconsidering your current investment strategy, a volatile market is probably the worst time to turn your portfolio inside out. Dramatic price swings can magnify the impact of a wholesale restructuring if the timing of that move is a little off. A well-thought-out asset allocation and diversification strategy is still the fundamental basis of good investment planning. Changes in your portfolio don’t necessarily need to happen all at once. Try not to let fear derail your long-term goals.
The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss.
The S&P 500 is an unmanaged group of securities that is considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results. Actual results will vary.
Source: Yahoo! Finance, 2020 (data for the period 6/13/1949 to 3/12/2020)
If you are losing sleep over volatility driven by a cascade of disheartening news, it may help to remember that the stock market is historically cyclical.
The Coronavirus and the Global Economy
As of February 26, 2020, the death toll from COVID-19 — the official name of the coronavirus first reported in Wuhan, China — passed 2,700, while the number of confirmed cases exceeded 80,000. Almost all were in China, most of them in Wuhan and the surrounding Hubei province. But more than 2,500 cases, including 46 deaths, had been reported in almost 40 other countries. A surge of cases and deaths in South Korea, Italy, and Iran caused new concern that the virus may be difficult to contain.1
Cities under lockdown
By mid-February, at least 150 million people in China were under restrictions affecting when they could leave their homes, and more than 760 million — about 10% of the world’s population — lived in communities under some form of travel restriction.2 Most global airlines cancelled service to and from China, disrupting tourism and business travel.3
The Chinese government enacted restrictions around the time of the Lunar New Year celebration, during which many businesses were closed, lessening the immediate impact. However, as factories and other businesses remained closed after the holiday, the loss of Chinese production and consumer spending began to take a toll on global businesses.4
Lost supply and demand
Many U.S. technology companies have manufacturing operations in China while also selling to Chinese businesses and/or consumers. Companies with substantial exposure to the slowdown in China include big tech brands such as Apple, Dell, Hewlett Packard, Intel, and Qualcomm, as well as many smaller tech businesses.5-6
Vehicle manufacturers throughout the world rely on Chinese-made parts, and many have plants in China. General Motors (which sells more cars in China than in the United States), Ford, Toyota, BMW, Honda, Nissan, Tesla, and Volkswagen all suspended operations in China, while Hyundai and Renault closed plants in South Korea, and Fiat Chrysler closed a plant in Serbia, all due to parts issues.7-9
Global retailers including Apple, Ikea, Levi Strauss, McDonald’s, KFC, and Starbucks temporarily closed stores in China.10-11
In addition to disruptions in the global supply chain and Chinese consumer market, the tourism industry in the United States, Europe, and other Asian countries may be hard hit by the absence of Chinese tourists. One estimate suggests a loss of almost $6 billion in U.S. airfares and tourist spending.12
Although it is too early to measure the full effect on global business, a private report released on February 21 indicated that U.S. business activity had slowed in February to the lowest level in six years, with the biggest hit to the service sector, where travel and tourism are major components. The report also indicated a sharp drop in Japanese business due to lost tourism and export orders. Exports were down in Germany, but the initial impact on the eurozone was minimal.13
Oil pressure
China is the world’s largest importer of crude oil, and Wuhan is a key center of its oil and gas industry. The prospect of lower demand drove oil prices into bear-market territory — defined as a drop of 20% from a recent high — in early February. Prices rose later in the month but dropped again with news that the virus may be spreading. Natural gas prices have also been hit by the prospect of lower growth in Asia. While lower prices may be good for U.S. consumers, oil-exporting nations, including the United States, will face lower revenues, and energy companies that are already on rocky ground may struggle.14-17
Market reaction
In late January, the Dow Jones Industrial Average lost 3.7%, due in large part to concerns about the virus, wiping out gains for the year.18 The market bounced back quickly and set new records in February, but weak business news and a rash of cases outside of China sent it plunging, with a loss of almost 8% from February 19 to 25.19-20 This suggests that the market may be volatile for some time and that future direction might depend on the progress of disease control and emerging information on the impact of the virus on U.S. and global businesses.
Global growth outlook
Anything that affects China, the world’s second-largest economy, can have a powerful ripple effect around the globe. An early February report by Moody’s Analytics estimated that every 1 percentage point reduction in China’s real gross domestic product (GDP) will reduce global GDP outside China by 0.4%. The report projected that disruption caused by the virus would cut more than 2 percentage points off China’s GDP growth in the first quarter of 2020 and result in a loss of 0.8% growth for the year. This in turn would cause a loss of about 0.3% in annual global GDP growth outside China and about 0.15% in the United States. Moody’s lowered its projection for 2020 global growth from around 2.8% to 2.5%.21
In a February 16 forum, Kristalina Georgieva, managing director of the International Monetary Fund, was more optimistic, suggesting that the virus might shave 0.1% to 0.2% off the IMF’s 2020 global growth projection of 3.3%. Georgieva cautioned that there was still a “great deal of uncertainty” and emphasized that the economic damage depends on the length of the disruption. If the disease “is contained rapidly,” she said, “there can be a sharp drop and a very rapid rebound.”22
The immediate concerns are to combat the virus on a human level and normalize business activity, but the outbreak could accelerate the shift of U.S. and European manufacturing away from China, creating a more diversified global supply chain.23-24 The situation remains in flux, so you may want to keep an eye on further developments.
All investments are subject to market volatility and loss of principal. Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.
1) South China Morning Post, February 26, 2020
2) The New York Times, February 18, 2020
3-4, 21) Moody’s Analytics, February 2020
5, 23) The Wall Street Journal, February 18, 2020
6, 10) Los Angeles Times, February 4, 2020
7) Forbes, February 12, 2020
8) Car and Driver, February 4, 2020
9) The Wall Street Journal, February 14, 2020
11-12, 14-15, 18) The Wall Street Journal, February 3, 2020
13) The Wall Street Journal, February 21, 2020
16, 20) The Wall Street Journal, February 25, 2020
17) The Wall Street Journal, February 7, 2020
19) The New York Times, February 20, 2020
22) Bangkok Post, February 17, 2020
24) South China Morning Post, February 18, 2020
The SECURE Act and Your Retirement Savings
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted in December 2019 as part of a larger federal spending package. This long-awaited legislation expands savings opportunities for workers and includes new requirements and incentives for employers that provide retirement benefits. At the same time, it restricts a popular estate planning strategy for individuals with significant assets in IRAs and employer-sponsored retirement plans.
Here are some of the changes that may affect your retirement, tax, and estate planning strategies. All of these provisions were effective January 1, 2020, unless otherwise noted.
Benefits for retirement savers
Later RMDs. Individuals born on or after July 1, 1949, can wait until age 72 to take required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans instead of starting them at age 70½ as required under previous law. This is a boon for individuals who don’t need the withdrawals for living expenses, because it postpones payment of income taxes and gives the account a longer time to pursue tax-deferred growth. As under previous law, participants may be able to delay taking withdrawals from their current employer’s plan as long as they are still working.
No traditional IRA age limit. There is no longer a prohibition on contributing to a traditional IRA after age 70½ — taxpayers can make contributions at any age as long as they have earned income. This helps older workers who want to save while reducing their taxable income. But keep in mind that contributions to a traditional IRA only defer taxes. Withdrawals, including any earnings, are taxed as ordinary income, and a larger account balance will increase the RMDs that must start at age 72.
Tax breaks for special situations. For the 2019 and 2020 tax years, taxpayers may deduct unreimbursed medical expenses that exceed 7.5% of their adjusted gross income. In addition, withdrawals may be taken from tax-deferred accounts to cover medical expenses that exceed this threshold without owing the 10% penalty that normally applies before age 59½. (The threshold returns to 10% in 2021.) Penalty free early withdrawals of up to $5,000 are also allowed to pay for expenses related to the birth or adoption of a child. Regular income taxes apply in both situations.
Tweaks to promote saving. To help workers track their retirement savings progress, employers must provide participants in defined contribution plans with annual statements that illustrate the value of their current retirement plan assets, expressed as monthly income received over a lifetime. Some plans with auto-enrollment may now automatically increase participant contributions until they reach 15% of salary, although employees can opt out. (The previous ceiling was 10%.)
More part-timers gain access to retirement plans. For plan years beginning on or after January 1, 2021, part-time workers age 21 and older who log at least 500 hours annually for three consecutive years generally must be allowed to contribute to qualified retirement plans. (The previous requirement was 1,000 hours and one year of service.) However, employers will not be required to make matching or nonelective contributions on their behalf.
Benefits for small businesses
In 2019, only about half of people who worked for small businesses with fewer than 50 employees had access to retirement benefits.1 The SECURE Act includes provisions intended to make it easier and more affordable for small businesses to provide qualified retirement plans.
The tax credit that small businesses can take for starting a new retirement plan has increased. The new rule allows a credit equal to the greater of (1) $500 or (2) $250 times the number of non-highly compensated eligible employees or $5,000, whichever is less. The previous credit amount allowed was 50% of startup costs up to $1,000 ($500 maximum credit). There is also a new tax credit of up to $500 for employers that launch a SIMPLE IRA or 401(k) plan with automatic enrollment. Both credits are available for three years.
Effective January 1, 2021, employers will be permitted to join multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation. “Open MEPs,” as they have become known, enable small employers to band together to provide a retirement plan with access to lower prices and other benefits typically reserved for large organizations. (Previously, groups of small businesses had to be related somehow in order to join an MEP.) The legislation also eliminates the “one bad apple” rule, so the failure of one employer in an MEP to meet plan requirements will no longer cause others to be disqualified.
Goodbye stretch IRA
Under previous law, nonspouse beneficiaries who inherited assets in employer plans and IRAs could “stretch” RMDs — and the tax obligations associated with them — over their lifetimes. The new law generally requires a beneficiary who is more than 10 years younger than the original account owner to liquidate the inherited account within 10 years. Exceptions include a spouse, a disabled or chronically ill individual, and a minor child. The 10-year “clock” will begin when a child reaches the age of majority (18 in most states).
This shorter distribution period could result in bigger tax bills for children and grandchildren who inherit accounts. The 10-year liquidation rule also applies to IRA trust beneficiaries, which may conflict with the reasons a trust was originally created.
In addition to revisiting beneficiary designations, you might consider how IRA dollars fit into your overall estate plan. For example, it might make sense to convert traditional IRA funds to a Roth IRA, which can be inherited tax-free (if the five-year holding period has been met). Roth IRA conversions are taxable events, but if converted amounts are spread over the next several tax years, you may benefit from lower income tax rates, which are set to expire in 2026.
If you have questions about how the SECURE Act may impact your finances, this may be a good time to consult your financial, tax, and/or legal professionals.
1) U.S. Bureau of Labor Statistics, 2019
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent individual professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources. This legislation maybe revised to correct errors and/or clarified.
IRS Announces 2020 Standard Mileage Rates
The IRS has announced the 2020 optional standard mileage rates for computing the deductible costs of operating a passenger automobile for business, charitable, medical, or moving expense purposes.
Effective January 1, 2020, the standard mileage rates are as follows:
• Business use of auto: 57.5 cents per mile may be deducted if an auto is used for business purposes (unreimbursed employee travel expenses are not currently deductible as miscellaneous itemised deductions)
Charitable use of auto: 14 cents per mile may be deducted if an auto is used to provide services to a charitable organisation
• Medical use of auto: 17 cents per mile may be deducted if an auto is used to obtain medical care (or for other deductible medical reasons)
• Moving expense: 17 cents per mile may be deducted if an auto is used by a member of the Armed Forces on active duty to move pursuant to a military order to a permanent change of station (the deduction for moving expenses is not currently available for other taxpayers)
You can read IRS Notice 2020-05 here.
New Spending Package Includes Sweeping Retirement Plan Changes
The $1.4 trillion spending package enacted on December 20, 2019, included the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which had overwhelmingly passed the House of Representatives in the spring of 2019, but then subsequently stalled in the Senate. The SECURE Act represents the most sweeping set of changes to retirement legislation in more than a decade.
While many of the provisions offer enhanced opportunities for individuals and small business owners, there is one notable drawback for investors with significant assets in traditional IRAs and retirement plans. These individuals will likely want to revisit their estate-planning strategies to prevent their heirs from potentially facing unexpectedly high tax bills.
All provisions take effect on or after January 1, 2020, unless otherwise noted.
Elimination of the “stretch IRA”
Perhaps the change requiring the most urgent attention is the elimination of longstanding provisions allowing non-spouse beneficiaries who inherit traditional IRA and retirement plan assets to spread distributions — and therefore the tax obligations associated with them — over their lifetimes. This ability to spread out taxable distributions after the death of an IRA owner or retirement plan participant, over what was potentially such a long period of time, was often referred to as the “stretch IRA” rule. The new law, however, generally requires any beneficiary who is more than 10 years younger than the account owner to liquidate the account within 10 years of the account owner’s death unless the beneficiary is a spouse, a disabled or chronically ill individual, or a minor child. This shorter maximum distribution period could result in unanticipated tax bills for beneficiaries who stand to inherit high-value traditional IRAs. This is also true for IRA trust beneficiaries, which may affect estate plans that intended to use trusts to manage inherited IRA assets.
In addition to possibly reevaluating beneficiary choices, traditional IRA owners may want to revisit how IRA dollars fit into their overall estate planning strategy. For example, it may make sense to consider the possible implications of converting traditional IRA funds to Roth IRAs, which can be inherited income tax free. Although Roth IRA conversions are taxable events, investors who spread out a series of conversions over the next several years may benefit from the lower income tax rates that are set to expire in 2026.
Benefits to individuals
On the plus side, the SECURE Act includes several provisions designed to benefit American workers and retirees.
- People who choose to work beyond traditional retirement age will be able to contribute to traditional IRAs beyond age 70½. Previous laws prevented such contributions.
- Retirees will no longer have to take required minimum distributions (RMDs) from traditional IRAs and retirement plans by April 1 following the year in which they turn 70½. The new law generally requires RMDs to begin by April 1 following the year in which they turn age 72.
- Part-time workers age 21 and older who log at least 500 hours in three consecutive years generally must be allowed to participate in company retirement plans offering a qualified cash or deferred arrangement. The previous requirement was 1,000 hours and one year of service. (The new rule applies to plan years beginning on or after January 1, 2021.)
- Workers will begin to receive annual statements from their employers estimating how much their retirement plan assets are worth, expressed as monthly income received over a lifetime. This should help workers better gauge progress toward meeting their retirement-income goals.
- New laws make it easier for employers to offer lifetime income annuities within retirement plans. Such products can help workers plan for a predictable stream of income in retirement. In addition, lifetime income investments or annuities held within a plan that discontinues such investments can be directly transferred to another retirement plan, avoiding potential surrender charges and fees that may otherwise apply.
- Individuals can now take penalty-free early withdrawals of up to $5,000 from their qualified plans and IRAs due to the birth or adoption of a child. (Regular income taxes will still apply, so new parents may want to proceed with caution.)
- Taxpayers with high medical bills may be able to deduct unreimbursed expenses that exceed 5% (in 2019 and 2020) of their adjusted gross income. In addition, individuals may withdraw money from their qualified retirement plans and IRAs penalty-free to cover expenses that exceed this threshold (although regular income taxes will apply). The threshold returns to 10% in 2021.
- 529 account assets can now be used to pay for student loan repayments ($10,000 lifetime maximum) and costs associated with registered apprenticeships.
Benefits to employers
The SECURE Act also provides assistance to employers striving to provide quality retirement savings opportunities to their workers. Among the changes are the following:
- The tax credit that small businesses can take for starting a new retirement plan has increased. The new rule allows employers to take a credit equal to the greater of (1) $500 or (2) the lesser of (a) $250 times the number of non-highly compensated eligible employees or (b) $5,000. The credit applies for up to three years. The previous maximum credit amount allowed was 50% of startup costs up to a maximum of $1,000 (i.e., a maximum credit of $500).
- A new tax credit of up to $500 is available for employers that launch a SIMPLE IRA or 401(k) plan with automatic enrollment. The credit applies for three years.
- With regards to the new mandate to permit certain part-timers to participate in retirement plans, employers may exclude such employees for nondiscrimination testing purposes.
- Employers now have easier access to join multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation. “Open MEPs,” as they have become known, offer economies of scale, allowing small employers access to the types of pricing models and other benefits typically reserved for large organizations. (Previously, groups of small businesses had to be affiliated somehow in order to join an MEP.) The legislation also provides that the failure of one employer in an MEP to meet plan requirements will not cause others to fail, and that plan assets in the failed plan will be transferred to another. (This rule is effective for plan years beginning on or after January 1, 2021.)
- Auto-enrollment safe harbor plans may automatically increase participant contributions until they reach 15% of salary. The previous ceiling was 10%.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent individual professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources. This legislation maybe revised to correct errors and/or clarified.
Year-end planning equals fewer surprises.
Year-end pla
As this year is ending, now is the time to take a closer look at your current tax strategies to make sure they are still meeting your needs and take any last-minute steps that could save you money come tax time. Now is also a good time to start planning for next year.
With all that in mind, please contact me at your earliest convenience to discuss your tax situation so I can develop a customized plan. In the meantime, here’s a look at some of the issues we’re recommending clients consider as they begin their end-of-year review.
Key tax considerations you should be aware of
The Tax Cuts and Jobs Act (TCJA) was signed into law at the end of 2017, with taxpayers seeing the real affects when they filed their returns in 2019. This legislation has made a profound impact on many taxpayers and has created new planning opportunities. Here are a few items to note:
- Deductions — Due to the increase in the standard deduction, many individuals did not itemize their deductions last year. While this may seem like a simplification for some, there are still strategies to consider. For example, we can help you navigate whether it makes sense to “bunch” deductions, such as charitable contributions.
- Withholdings — You may have experienced a surprise when you filed your tax return. This was likely because your withholding adjustment may not have reflected your actual tax situation. There still maybe time to look at your projected tax. Doing this will help avoid unwanted penalties/interest as well as help you plan for cashflow needs. There is time to adjust your withholding before the end of the year. If you have not paid your 2019 required minimum distribution you could have tax withheld from the payment.
- Qualified business income deduction — If you own a business or a rental property, you likely reviewed this deduction (a potential 20% deduction on business income) last year. There are several reasons why year-end planning is particularly important for this deduction. The deduction can be limited based on taxable income, which means that planning for minimizing income can be important. Also, for rental property owners, there are requirements that may need to be satisfied before the end of the year for you to take this deduction.
- Divorce settlements — If you had a divorce or separation that recently was finalized, any alimony paid or received will not be deducted or included in income.
- Kiddie tax — Based on changes in the tax law, the tax on children’s investment income (known as “kiddie tax”) is now calculated at the trust and estate tax rates. There can be alternatives to filing a separate tax return based on the amount and type of income.
Fraudulent activity remains a significant threat.
I take security very seriously and think you should as well. Fraudsters continue to refine their techniques and tax identity theft remains a significant concern. Beware if you:
- Receive a notice or letter from the Internal Revenue Service (IRS) regarding a tax return, tax bill or income that doesn’t apply to you. If there is any question go to IRS.gov .
- Get an unsolicited email or another form of communication asking for your bank account number or other financial details or personal information
- Receive a robocall insisting you must call back and settle your tax bill
Make sure you’re taking steps to keep your personal financial information safe.
The Affordable Care Act (ACA) and your taxes
Recent tax law changes repealed the penalty that the ACA imposes on individuals who do not have health insurance. However, other aspects of the ACA still are in place.
Be sure your retirement planning is up to date.
I recommend you review your retirement situation at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional IRAs, Roth IRAs and company retirement plans.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent individual professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources
College Cost Data for 2019-2020 School Year
Each year, the College Board releases its annual Trends in College Pricing report that highlights current college costs and trends. While costs can vary significantly depending on the region and college, the College Board publishes average cost figures, which are based on a survey of nearly 4,000 colleges across the country.
Following are cost highlights for the 2019-2020 academic year. 1) Note that “total cost of attendance” figures include direct billed costs for tuition, fees, room, and board, plus a sum for indirect costs that includes books, transportation, and personal expenses, which will vary by student.
Public college costs (in-state students)
- Tuition and fees increased 2.3% to $10,440
- Room and board increased 2.9% to $11,510
- Total cost of attendance: $26,590
Public college costs (out-of-state students)
- Tuition and fees increased 2.4% to $26,820
- Room and board increased 2.9% to $11,510 (same as in-state)
- Total cost of attendance: $42,970
Private college costs
- Tuition and fees increased 3.4% to $36,880
- Room and board increased 3.0% to $12,990
- Total cost of attendance: $53,980
Reminder on FAFSA timeline
Families were able to begin filing the 2020-2021 FAFSA (Free Application for Federal Student Aid) on October 1, 2019. The earlier timeline was instituted a few years ago to better align the financial aid process with the college admissions process and to give parents information about their child’s aid eligibility earlier in the process.
The 2020-2021 FAFSA relies on income information from your 2018 federal income tax return and current asset information. Your income is the biggest factor in determining financial aid eligibility. A detailed analysis of the federal aid formula is beyond the scope of this article, but generally here’s how it works: 2)
- Parent income is counted up to 47% (income equals adjusted gross income, plus untaxed income/benefits minus certain deductions)
- Student income is counted at 50% over a certain amount ($6,840 for the 2020-2021 academic year)
- Parent assets are counted at 5.64% (home equity, retirement accounts, cash value life insurance, and annuities are excluded)
- Student assets are counted at 20%
The result is a figure known as your expected family contribution, or EFC. Your EFC remains constant, no matter which college your child attends. Your EFC is not the same as your child’s financial need. To calculate financial need, subtract your EFC from the cost at a specific college. Because costs vary at each college, your child’s financial need will vary depending on the cost of a particular college.
One thing to keep in mind: Just because your child has financial need doesn’t automatically mean that colleges will meet 100% of that need. In fact, it’s not uncommon for colleges to meet only a portion of it. In this case, you’ll have to make up the gap, in addition to paying your EFC.
To get an estimate ahead of time of what your out-of-pocket costs might be at various colleges, run the net price calculator on each college’s website. A net price calculator asks for income, asset, and general family information and provides an estimate of grant aid at that particular college. The cost of the school minus this grant aid equals your estimated net price, hence the name “net price calculator.”
Reduced asset protection allowance
Behind the scenes, a stealth change in the FAFSA has been quietly and negatively impacting families. The asset protection allowance, which lets parents shield a certain amount of their assets from consideration (in addition to the assets listed above that are already shielded), has been steadily declining for years, resulting in higher EFCs. Fifteen years ago, the asset protection allowance for a 48-year-old married parent with a child about to enter college was $40,500. For 2020-2021, that same allowance is $6,000, resulting in a $1,946 decrease in a student’s aid eligibility ($40,500 – $6,000 x 5.64%). 3)
Higher student debt
Student loan debt continues to grow and student debt is now the second-highest consumer debt category, ahead of both credit cards and auto loans and behind only mortgage debt. 4) About 65% of U.S. college seniors who graduated in 2018 had student debt, owing an average of $29,200. 5) And it’s not just students who are borrowing. Parents are borrowing, too. There are approximately 15 million student loan borrowers age 40 and older, and this demographic accounts for almost 40% of all student loan debt. 6)
1) College Board, 2019
2-3) U.S. Department of Education, The EFC Formula, 2020-2021, 2005-2006
4) Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit, August 2018
5) Institute for College Access & Success, Student Debt and the Class of 2018, September 2019
6) Federal Reserve Bank of New York, Student Loan Data and Demographics, September 2018
