New Consumer Protections for Weary Airline Passengers
Banks, hospitals, retailers, and airlines are still dealing with the fallout from the massive CrowdStrike IT outage in July. The tech meltdown impacted businesses across the globe, and airlines were hit particularly hard. This was not good news for the airline industry, which just last year had the highest number of flight delays ever recorded.1
The U.S. Department of Transportation determined that the delays and cancellations resulting from the CrowdStrike outage were “controllable,” or caused by the airline. As a result, most airlines were obligated to provide some sort of compensation and assistance to stranded travelers.2
Fortunately, there could be much-needed relief for airline passengers on the horizon, thanks to a new federal law and rules issued by the U.S. Department of Transportation.
Hassle-free refunds
In the past, airline passengers were forced to figure out how to obtain a refund by researching an airline’s website or waiting for hours on the phone with an airline’s customer service department. Airline passengers will be entitled to an automatic refund for:
- Cancelled or significantly delayed flights (e.g., departure or arrival times delayed by three hours or more for domestic flights and by six hours or more for international flights), regardless of the reason
- Significantly delayed baggage return
- Extra services (e.g., Wi-Fi, seat selection, or inflight entertainment) that were paid for but not provided
Airlines must issue refunds of the full amount of the ticket purchased within seven business days of refunds becoming due for credit card purchases and 20 days for other payment methods. Passengers who accept a ticket for a significantly delayed flight or are rebooked on a different flight to their destination will not receive refunds. The refunds must be in the form of cash or whatever original payment method was used to make the purchase (e.g., credit card or airline miles). Finally, airlines are not allowed to substitute for other forms of compensation (e.g., vouchers or travel credits) unless a passenger affirmatively chooses to accept an alternate form of compensation.
Protection against surprise fees
Many airlines advertise cheap “teaser” fares that don’t take into account additional fees — all of which can significantly increase the cost of a ticket. Airlines will be required to disclose various ancillary fees up front, such as charges for checked bags, carry-on bags, and changing or cancelling a reservation. They must also provide a detailed explanation of each fee before a ticket can be purchased. In addition, under a proposed rule airlines will be prohibited from charging families an extra fee to guarantee a child will sit next to a parent or adult travel companion.
When are these protections scheduled to take effect?
These consumer protections are scheduled to have different implementation periods over the next year. In addition, the rule on surprise fee disclosures was temporarily blocked by a U.S. Appeals Court last week. Visit the U.S. Department of Transportation’s website at transportation.gov/airconsumer for more information.
1-2) U.S. Department of Transportation, 2024
Tax Treatment of Work-Life Referral Services
The IRS has provided informal guidance on the federal income tax treatment to an employee of certain work-life referral services offered as an employee benefit.
What is a work-life referral program?
Employers often provide eligible employees with a work-life referral service as an employee benefit. Work-life referral services assist employees with identifying, contacting, and negotiating with life-management resources for solutions to a personal, work, or family challenge.
Work-life referral services might be offered in connection with, for example, the following:
- Identifying appropriate education, care, and medical service providers
- Choosing a child or dependent care program
- Navigating eligibility for government benefits, including Veterans Administration benefits
- Evaluating and using paid leave programs offered through an employer or a state or locality
- Locating home services professionals who specialize in adapting a home for a family member with special care needs
- Navigating the medical system, including private insurance and public programs, and utilizing available medical travel benefits
- Connecting the employee with local retirement and financial planning professionals
How are work-life referral services taxed?
A fringe benefit provided by an employer to an employee is presumed to be income to the employee unless specifically excluded from gross income under the Internal Revenue Code. One exception is for de minimis fringe benefits: a fringe benefit which, considering its value and the frequency with which it is provided, is so small that accounting for it would be unreasonable or administratively impracticable.
The IRS guidance notes that work-life referral programs may be available to a significant portion of an employer’s employees, but they are used infrequently by employees and only when an employee faces one of the challenges the programs are designed to address.
Accordingly, the IRS concluded that work-life referral services are excluded from gross income as a de minimis fringe benefit. Furthermore, these services are excluded from federal employment taxes, including FICA (Social Security and Medicare taxes), FUTA (federal unemployment tax), and federal income tax withholding.
Work-life referral services are often included in an employee assistance program (EAP) or otherwise bundled with other types of services offered by an employer. The IRS guidance provided here applies only to the work-life referral program itself; it does not address the tax treatment of direct or indirect payment for the life-management resources offered through an EAP or that may be bundled with a work-life referral program. Under the general rule, those other services would be presumed to be income to the employee unless specifically excluded from gross income under the Internal Revenue Code.
See FS-2024-13, April 2024
Real Estate Commission Changes August 17, 2024
In March 2024, the National Association of Realtors (NAR) reached a landmark $418 million settlement after losing an antitrust lawsuit filed by a group of home sellers. As many as 50 million people who paid commissions on homes sold in recent years could receive a small amount from the class-action settlement. The powerful industry group also agreed to change long-standing practices related to sales commissions.1
Background
For decades, many real estate agents have had little choice but to join NAR and follow its rules regarding local Multiple Listing Services (MLS) — the databases used by most brokers to list information about properties for sale. Listing brokers typically cooperated with buyer’s agents and split the commission paid by the seller, with the amounts communicated via the MLS in fields that were only visible to agents.
Plaintiffs claimed that NAR (and brokers that require agents to be NAR members) conspired to artificially inflate commissions through an industry-wide practice requiring the seller to pay commissions to brokers on both sides of the transaction. They believed this helped to uphold a nationwide standard of five to six percent of the sales price, which is significantly higher than the commissions paid in many other countries.2
Practice changes
Effective August 17, 2024, NAR will implement the following new policies related to how real estate brokers are compensated to handle transactions.3
- Commission offers for buyer’s agents can no longer be required or appear in the MLS, though they are still permitted. Listing agents can advertise specific commission offers on brokerage websites and over the phone, text message, or email. Home sellers and their agents will negotiate directly with buyers and their agents regarding compensation.
- Prior to touring homes, buyers will have to discuss and set compensation directly with their own agents, as sellers do with listing agents. They will be asked to sign written representation agreements that outline the agents’ services (e.g., showing property, negotiating offers, transaction management) and how much they charge. This is to help ensure that buyers are fully aware of the costs they could be responsible for paying.
Implications for buyers and sellers
These changes are intended to allow more room for negotiation and spur competition, which could conceivably help lower costs for sellers. Commissions have always been baked into transaction prices, so in markets where sellers’ costs fall, home prices would likely be reduced as well.
Some economists believe commissions could drop as much as 30% if buyer’s agents face pressure from potential clients to discount their fees, but savings of this magnitude aren’t guaranteed.4 The impact on real estate commissions will ultimately depend on market conditions, which can vary greatly by location, and how sellers, buyers, and agents respond to the new practices.
Like other businesses, brokerages have overhead that includes rent, liability insurance, marketing, and other operating costs. Most individual agents must split sales commissions with their brokers (from about 60/40 up to 80/20 for the most productive agents), or they pay fees to the company.
A buyer’s agent sometimes shows property to clients over a period of days to months and may write numerous offers for deals that never come together. Many experienced buyer’s agents — long accustomed to receiving the same commission as the listing agent — may be reluctant to work for less, even if they must justify their value more regularly.
Buyers will determine the commission for their own agents, but the money may or may not come out of their own pockets. For example, it’s possible that an offer could be made contingent on the seller paying the buyer’s share of the commission or include a request for a general credit toward closing costs in the amount needed to pay the buyer’s agent. Current lending guidelines and regulations would prevent most buyers from adding commission costs to their mortgages. A rule pertaining to VA loans, which specifically prohibited borrowers from paying agent commissions, has been temporarily suspended.5
In some cases, sellers might agree to cover buyers’ commissions, as it has long been customary and could still be in their best interests. Nationwide home prices have risen more than 50% since 2019, and high interest rates have made mortgage payments much less affordable.6 This means sellers with equity tend to be in a better position to pay commissions than potential buyers, many of whom may struggle to produce enough cash for the down payment. For these reasons, a seller who’s willing to pay all or some of the buyer’s commission may receive more offers, and a higher purchase price, than one who refuses to do so.
Online sites have made it easier to shop for a home without using an agent, so more buyers might brave the market on their own if they think they can pocket the savings. Yet buying a home is the biggest financial transaction many people will make in their lifetimes, and the issues that come up during the process can be unexpected. There are many situations in which buyers could benefit from having their own representation, especially if they are inexperienced or unfamiliar with the local market.
First-time buyers in particular — who were responsible for 31% of existing home sales in May 2024 — may have more confidence and make more informed decisions if they work with a trusted professional.7 But many will need help from sellers to pay their agents’ fees, putting them at a bigger disadvantage than ever against buyers with more access to cash in competitive markets.
Negotiating commissions among all parties is likely to make it harder to strike deals in general, so buyers may have to search longer and write more offers before they are successful. It’s also possible that sellers will see slight change in commission costs in the coming months, while the market is in flux. But in time, the new rules could spark innovation that creates new business models and expands lower-cost options.
1) The Wall Street Journal, March 15, 2024
2, 4) The New York Times, May 10, 2024
3, 5, 7) National Association of Realtors, 2024
6) The Wall Street Journal, June 27, 2024
The Economic Impact of an Aging World
During the week of June 10, 2024, French markets were rocked by a government bond sell-off after a strong showing by the far-right National Rally party in the European Union election. With polls suggesting the party might win a plurality of seats in the upcoming French parliamentary election, investors feared a promised social spending program, including a reduction of the minimum retirement age from 64 to 60, would further strain the already struggling French economy.1
As it turned out, the left-wing New Popular Front coalition, which also promised expensive social spending and a reduction in the pension age, won the most seats on election day. The initial reaction in the government bond market was muted, but analysts predicted further turmoil to come.2 By contrast, when France raised the retirement age from 62 to 64 in 2023, aiming to strengthen the economy, workers took to the streets in protest.3
Supporting senior programs
The French conflict over the retirement age reflects a fundamental social and economic issue throughout the developed world. Put simply, the world population is getting older, which means the percentage of workers in the population who can drive the economy and support old age pension and health-care programs is gradually diminishing.
The U.S. Social Security program is a prime example. In 1960, there were 5.1 workers paying into the program for each beneficiary. In 2024, there are 2.7, projected to drop to 2.3 by 2040. Because of this demographic shift, Social Security no longer pays for itself and has been partially supported by trust fund reserves built up when there were more workers per beneficiary. The reserves for the Old-Age and Survivors Insurance Trust Fund, which helps support retirement benefits, are projected to run out in 2033, at which time program income would cover only 79% of scheduled benefits unless Congress takes action to increase funding.4
Medicare faces a similar challenge. The Hospital Insurance Trust Fund reserves, which help pay for Medicare Part A inpatient and hospital care benefits, are projected to be depleted in 2036, at which time payroll taxes and other revenue will pay only 89% of costs. Part B medical benefits and Part D prescription drug coverage are automatically balanced through premiums and revenue from the federal government’s general fund, but they will require an increasingly larger share of the federal budget unless economic growth outpaces spending.5
Longer lives, fewer children
The shift to an older population is driven by two demographic trends: people are living longer and having fewer children. One in six people in the world will be age 65 or older by 2050.6 The United States is already at that level, with more than 17% of the population age 65 or older in 2022, projected to reach almost 23% by 2050.7 Many other developed nations are even older. In 2022, the median age in the United States (the age at which half the population is older and half younger) was 38.9, the highest on record.8 In 2021 (most recent data), it was 48.4 in Japan, 46.8 in Italy, 44.9 in Germany, and 41.6 in France.9
The fertility rate, the average number of children born to each woman, has dropped throughout the world, due to a variety of factors including education, access to birth control, employment opportunities, and lifestyle choices. In the developed world, a fertility rate of about 2.1 is considered the replacement rate at which a country’s population remains stable. It is slightly higher in developing nations with higher mortality. Most developed countries have been below replacement since the 1970s, so they have depended on immigration to maintain or grow population.10 The U.S. fertility rate was 1.62 in 2023.11 Although fertility is higher in developing countries, it is dropping. Based on preliminary data, one academic study suggests that the global fertility rate may be near or below replacement for the first time in human history.12
Challenges and solutions
Spending on programs for an aging population is already straining economies throughout the world, and the economic pressure will increase as populations continue to age. The burden is not only the cost of the programs, but also the potential for lower production and tax revenue from a workforce that is smaller in proportion to the total population. This is likely to drive up government debt, and increased government borrowing, along with competition for a smaller pool of workers, may lead to higher inflation.13
So far, government programs to encourage couples to have more children have not had a significant impact, and there is no clear correlation between the fertility rate and child-care and housing costs, student debt, employment, religious beliefs, or local laws governing contraception and abortion. This suggests that the decision to have fewer children is more deeply ingrained in fundamental lifestyle choices. For developed countries, immigration may continue to provide a larger workforce, but recent immigration to developed nations has tended to be unskilled workers.14
The funding gap for government pension programs such as Social Security can be addressed by a combination of solutions that may be politically unpopular but are unlikely to derail the broader economy: higher retirement ages, increased payroll taxes, and means testing for wealthier beneficiaries.15 The larger question is how to keep growing the global economy. This may require increased worker productivity driven by recent technologies and greater integration of older workers into the workforce.
U.S. worker productivity increased at an annual rate of 2.9% in the first quarter of 2024, well above the annual average since the end of World War II. If this trend continues, it could help balance some productivity loss as older people exit the workforce. Americans are already working longer, about one out of five of those age 65 and older was employed in 2024, almost double the number in 1985.16 The long-term solution may require rethinking the traditional model of a career, with more opportunity for lifelong learning and late-life career development. Studies indicate that working longer may help prevent cognitive decline, but it also could help balance the macroeconomic effects of global aging.17
Projections are based on current conditions, subject to change, and may not happen.
1) Bloomberg, June 16, 2024
2) CNBC, July 8, 2024
3, 17) The New York Times, January 21, 2023
4) 2024 Social Security Trustees Report
5) 2024 Medicare Trustees Report
6, 9–10) United Nations World Population Prospects 2022
7–8) U.S. Census Bureau, 2023
11) National Center for Health Statistics, April 2024
12, 14) The Wall Street Journal, May 13, 2024
13) Bloomberg, May 21, 2024
15) Social Security Administration, September 27, 2023
16) U.S. Bureau of Labor Statistics, 2024
Real Estate Roundup: Feeling the Impact of Higher Rates
U.S. commercial real estate prices fell more than 11% between March 2022, when the Federal Reserve started hiking interest rates, and January 2024. The potential for steeper losses has chilled the market and still poses significant risks to some property owners and lenders.1
On the residential side of the market, the national median price of an existing home rose 5.7% over the year that ended in April 2024 to reach $407,600, a record high for April.2 Despite sky-high borrowing costs, buyer demand (driven up by younger generations forming new households) has exceeded the supply of homes for sale.
Here are some of the factors affecting these distinct markets and the broader economy.
Slow-motion commercial meltdown
The expansion of remote work and e-commerce (two byproducts of the pandemic) drastically reduced demand for office and retail space, especially in major metros. An estimated $1.2 trillion in commercial loans are maturing in 2024 and 2025, but depressed property values combined with high financing costs and vacancy rates could make it difficult for owners to clear their debt.3 In April 2024, an estimated $38 billion of office buildings were threatened by default, foreclosure, or distress, the highest amount since 2012.4
In a televised interview on 60 Minutes in February, Fed Chair Jerome Powell said the mounting losses in commercial real estate are a “sizable problem” that could take years to resolve, but the risks to the financial system appear to be manageable.5
Locked-up housing market
The average rate for a 30-year fixed mortgage climbed from around 3.2% in the beginning of 2022 to a 23-year high of nearly 8% in October 2023. Mortgage rates have ticked down since then but not as much as many people hoped. In May 2024, the average rate hovered around 7%.6
The inventory of homes for sale has been extremely low since the pandemic, but a nationwide housing shortage has been in the works for decades. The housing crash devastated the construction industry, and labor shortages, limited land, higher material costs, and local building restrictions have all been blamed for a long-term decline of new single-family home construction. Freddie Mac estimated the housing shortfall was 3.8 million units in 2021 (most recent data).7
Many homeowners have mortgages with ultra-low rates, making them reluctant to sell because they would have to finance their next homes at much higher rates. This “lock-in effect” has worsened the inventory shortage and cut deeply into home sales. At the same time, the combination of higher mortgage rates and home prices has taken a serious toll on affordability and locked many aspiring first-time buyers out of homeownership.
In April 2024, inventories were up 16% over the previous year, but there was still just a 3.5-month supply at the current sales pace. (A market with a six-month supply is viewed as balanced between buyers and sellers.) The supply of homes priced at more than $1 million was up 34% over the previous year, which may help affluent buyers, but won’t do much to improve the affordability of entry-level homes.8
New construction kicking in
Newly built homes accounted for 33.4% of homes for sale in Q1 2024, down from a peak of 34.5% in 2022, but still about double the pre-pandemic share. The growth in market share for new homes was mostly due to the lack of existing homes for sale.9
April 2024 was the second highest month for total housing completions in 15 years, with 1.62 million units (measured on an annualized basis), including single-family and multi-family homes.10 This may cause apartment vacancies to trend higher, help slow rent growth, and allow more families to purchase brand new homes in the next few months.
Renters are seeing relief thanks to a glut of multi-family apartment projects that were started in 2021 and 2022 — back when interest rates were low — and are gradually becoming available. In Q1 2024, the average apartment rent fell to $1,731, 1.8% below the peak in summer 2023.11
Effects weave through the economy
By one estimate, the construction and management of commercial buildings contributed $2.5 trillion to U.S. gross domestic product (GDP), generated $881.4 billion in personal earnings, and supported 15 million jobs in 2023.12 And according to the National Association of Realtors, residential real estate contributed an estimated $4.9 trillion (or 18%) to U.S. GDP in 2023, with each median-priced home sale generating about $125,000. When a home is purchased (new or existing), it tends to increase housing-related expenditures such as appliances, furniture, home improvement, and landscaping.13
Both real estate industries employ many types of professionals, and the development of new homes and buildings stimulates local economies by creating well-paying construction jobs and boosting property tax receipts. Development benefits other types of businesses (locally and nationally) by increasing production and employment in industries that provide raw materials like lumber or that manufacture or sell building tools, equipment, and components.
Shifts in real estate values, up or down, can influence consumer and business finances, confidence, and spending. And when buying a home seems unattainable, some younger consumers might give up on that goal and spend their money on other things.
If interest rates stay high for too long it could accelerate commercial loan defaults, losses, and bank failures, continue to constrain home sales, or eventually push down home values — and any of these outcomes would have the potential to cut into economic growth. When the Federal Reserve finally begins to cut interest rates, borrowing costs should follow, but that’s not likely to happen until inflation is no longer viewed as the larger threat.
1, 3) International Monetary Fund, January 18, 2024
2, 8, 10, 13) National Association of Realtors, 2024
4) The Wall Street Journal, April 30, 2024
5) CBS News, February 4, 2024
6–7) Freddie Mac, 2022–2024
9) Redfin, May 20, 2024
11) Moody’s, April 1, 2024
12) NAIOP Commercial Real Estate Development Association, 2024
Tax Treatment of Home Energy Rebates
The IRS has provided guidance on the federal income tax treatment of certain home energy rebates offered by states, with funds provided by the U.S. Department of Energy (DOE).
Background
The Inflation Reduction Act of 2022 included two provisions allowing rebates for home energy efficiency retrofit projects and home electrification and appliance projects. These home energy rebate programs are to be administered by state energy offices, with the DOE providing guidance and oversight.
For a home energy efficiency retrofit project with at least 20% predicted energy savings, a rebate may be available per household for 80% of project costs, up to $4,000 (reduced to 50% of project costs, up to $2,000, if household income is above 80% of area median income (AMI)). For a home energy efficiency retrofit project with at least 35% predicted energy savings, a rebate may be available per household for 80% of project costs, up to $8,000 (reduced to 50% of project costs, up to $4,000, if household income is above 80% of AMI).
For a home electrification and appliance project, a rebate may be available per household for 100% of project costs, up to specific technology cost maximums, with a maximum total of $14,000. The 100% of project costs limit is reduced to 50% if household income is above 80% of AMI. This rebate is not available if household income is above 150% of AMI. The specific technology cost maximums range from $840 for an Energy Star electric stove to $8,000 for an Energy Star electric heat pump for space heating and cooling.
Treatment of DOE home energy rebates to purchasers
A rebate paid to or on behalf of a purchaser pursuant to either of the DOE home energy rebate programs is not includible in the purchaser’s gross income. However, it will be treated as a purchase price adjustment for the purchaser for federal income tax purposes.
To the extent the rebate is provided at the time of sale, the rebate is not included in the purchaser’s cost (or tax) basis in the property. To the extent the rebate is provided later, the tax basis is reduced.
Treatment of DOE home energy rebates to certain business taxpayers
Payments of rebate amounts made directly to a business taxpayer, such as a contractor, in connection with the business taxpayer’s sale of goods or provision of services to a purchaser are includable in the business taxpayer’s income.
Coordination of DOE home energy rebates with the energy efficient home improvement credit
In some cases, a taxpayer can receive an energy efficient home improvement credit for federal income tax purposes. The credit is for 30% of amounts paid for certain qualified expenditures, with limits on the allowable annual credit and on the amount of credit for certain types of qualified expenditures. The maximum annual credit amount may be up to $3,200.
If the taxpayer receives a DOE home energy rebate (whether at the time of sale or later), the amount of qualified expenditures used to calculate the energy efficient home improvement credit must be reduced by the amount of the rebate. If the taxpayer purchases items eligible for both the DOE home energy rebate and the energy efficient home improvement credit, the taxpayer can make a pro rata allocation of amounts received as rebates to the individually itemized expenditures as a share of total project cost in determining the amounts treated as paid or incurred for such items for purpose of the various limits on costs under the energy efficient home improvement credit.
Relief for Certain RMDs from Inherited Retirement Accounts for 2024
IRS issued in 2022, a proposed regulations regarding required minimum distributions (RMDs) to reflect changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The IRS has held off on releasing final regulations so that it can address additional changes to RMDs made by the SECURE 2.0 Act of 2022. In the meantime, the IRS has issued interim relief and guidance for certain RMDs from inherited retirement accounts for 2024. The IRS anticipates that final RMD regulations, when issued, will apply starting in 2025.
RMD basics
Certain RMDs must be taken from individual retirement accounts (IRAs) and employer retirement accounts, or a penalty will apply. IRA owners and employees with employer retirement plans must generally take RMDs during their lifetime.
RMDs are generally required to begin by April 1 of the year after the individual reaches RMD age. RMD age is 70½ (if born before July 1, 1949), 72 (if born July 1, 1949, through 1950), 73 (if born in 1951 to 1959), or 75 (if born in 1960 or later). An employee still working for the employer maintaining an employer retirement account may be able to wait until April 1 of the year after the employee retires (if that is later and the plan allows it). The applicable April 1 date is often referred to as the required beginning date (RBD).
Lifetime distributions are not required from Roth accounts and, as a result, Roth account owners are always treated as dying before their RBD. Prior to 2024, these two special rules for Roth accounts applied to Roth IRAs, but not to Roth employer retirement plans.
Beneficiaries must also take RMDs from an inherited retirement account (including Roth accounts) after the death of an IRA owner or employee.
Inherited IRAs and retirement plans
RMDs for IRAs and retirement plans inherited before 2020 could generally be spread over the life expectancy of a designated beneficiary. The SECURE Act changed the RMD rules by requiring that in most cases the entire account must be distributed 10 years after the death of the IRA owner or employee if there is a designated beneficiary (and if death occurred after 2019). However, an exception allows an eligible designated beneficiary to take distributions over their life expectancy and the 10-year rule would not apply until after the death of the eligible designated beneficiary in that case.
Eligible designated beneficiaries include a spouse or minor child of the IRA owner or employee, a disabled or chronically ill individual, and an individual no more than 10 years younger than the IRA owner or employee. The entire account would also need to be distributed 10 years after a minor child reaches the age of majority (i.e., distributed at age 31).
The proposed regulations issued in early 2022 surprised many when they suggested that annual distributions are also required during the first nine years of such 10-year periods in most cases. Comments on the proposed regulations sent to the IRS asked for some relief because RMDs had already been missed and a 25% penalty tax (50% prior to 2023) is assessed when an individual fails to take an RMD.
The IRS announced that it will not assert the penalty tax in certain circumstances where individuals affected by the RMD changes failed to take annual distributions in 2024 during one of the 10-year periods. (Similar relief was previously provided for 2021, 2022, and 2023.) For example, relief may be available if the IRA owner or employee died in 2020, 2021, 2022, or 2023 and on or after their RBD (see “RMD basics” above) and the designated beneficiary who is not an eligible designated beneficiary did not take annual distributions for 2021, 2022, 2023, or 2024 as required (during the 10-year period following the IRA owner’s or employee’s death). Relief might also be available if an eligible designated beneficiary died in 2020, 2021, 2022, or 2023 and annual distributions were not taken in 2021, 2022, 2023, or 2024 as required (during the 10-year period following the eligible designated beneficiary’s death).
The rules relating to RMDs are complicated, and the consequences of making a mistake can be severe. Talk to a tax professional to understand how the rules apply to your individual situation.
What Stubborn Inflation Could Mean for the U.S. Economy
The U.S. Bureau of Labor Statistics April 10, 2024 released the Consumer Price Index (CPI) for March, and the increase in CPI — the most cited measure of inflation — was higher than expected. The rate for all items (headline inflation) was 3.5% over the previous year, while the “core CPI” rate, which strips out volatile food and energy prices, was even higher at 3.8%. The month-over-month change was also higher than anticipated at 0.4%.1
The stock market dropped sharply on this news and continued to slide over the following days, while economists engaged in public handwringing over why their projections had been wrong and what the higher numbers might mean for the future path of interest rates. In fact, most projections were off by just 0.1% — core CPI was expected to increase by 3.7% instead of 3.8% — which hardly seems earth-shattering to the casual observer. But this small difference suggested that inflation was proving more resistant to the Federal Reserve’s high interest-rate regimen.2
It’s important to keep in mind that the most dangerous battle against inflation seems to have been won. CPI inflation peaked at 9.1% in June 2022, and there were fears of runaway inflation like the 1980s. That did not happen, and inflation declined steadily through the end of 2023. The issue now is that there has been upward movement during the first three months of 2024.3 This is best seen by looking at the monthly rates, which capture the current situation better than the 12-month rates. March 2024 was the third month in a row of increases that point to higher inflation.
High for longer
While price increases hit consumers directly in the pocketbook, the stock market reacted primarily to what stubborn inflation might mean for the benchmark federal funds rate and U.S. businesses. From March 2022 to July 2023, the Federal Open Market Committee (FOMC) raised the funds rate from near-zero to the current range of 5.25%–5.5%, to slow the economy and hold back inflation. At the end of 2023, with inflation apparently moving firmly toward the Fed’s target of 2%, the FOMC projected three quarter-percentage point decreases in 2024, and some observers expected the first decrease might be this spring. Now it’s clear that the Fed will have to wait to reduce rates.4–5
Higher interest rates make it more expensive for businesses and consumers to borrow. For businesses, this can hold back expansion and cut into profits when revenue is used to service debt. This is especially difficult for smaller companies, which often depend on debt to grow and sustain operations. Tech companies and banks are also sensitive to high rates.6
In theory, high interest rates should hold back consumer spending and help bring prices down by suppressing demand. So far, however, consumer spending has remained strong. In March 2024, personal consumption expenditures — the standard measure of consumer spending — rose at an unusually strong monthly rate of 0.8% in current dollars or 0.5% when adjusted for inflation.7 The job market has also stayed strong, with unemployment below 4% for 26 consecutive months and wages rising steadily.8 The fear of keeping interest rates high for too long is that it could slow the economy too much, but that is clearly not the case, making it difficult for the Fed to justify rate cuts.
What’s driving inflation?
The Consumer Price Index measures price changes in a fixed market basket of goods and services, and some inputs are weighted more heavily than others. The cost of shelter is the largest single category, accounting for about 36% of the index and almost 38% of the March increase in CPI.9 The good news is that measurements of shelter costs — primarily actual rent and estimated rent that homeowners might receive if they rented their homes — tend to lag current price changes, and other measures suggest that rents are leveling or going down.10
Two lesser components contributed well above their weight. Gas prices, which are always volatile, made up only 3.3% of the index but accounted for 15% of the overall increase in CPI. Motor vehicle insurance prices made up just 2.5% of the index but accounted for more than 18% of the increase. Together, shelter, gasoline, and motor vehicle insurance drove 70% of March CPI inflation. On the positive side, food prices made up 13.5% of the index and rose by only 0.1%, effectively reducing inflation.11
While the Fed pays close attention to the CPI, its preferred inflation measure is the personal consumption expenditures (PCE) price index, which places less emphasis on shelter costs, includes a broader range of inputs, and accounts for changes in consumer behavior. Due to these factors, PCE inflation tends to run lower than CPI. The annual increase in March was 2.7% for all items and 2.8% for core PCE, excluding food and energy. The monthly increase was 0.3% for both measures.12
Although these figures are closer to the Fed’s 2% target, they are not low enough in the face of strong employment and consumer spending to suggest the Fed will reduce interest rates anytime soon. It’s also unlikely that the Fed will raise rates. For now, the central bank seems poised to give current interest rates more time to push inflation down to a healthy level, ideally without significant slowing of economic activity.13
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful. Projections are based on current conditions, subject to change, and may not happen.
1, 3, 8–9, 11) U.S. Bureau of Labor Statistics, 2024
2)The New York Times, April 10, 2024
4) Federal Reserve, 2023
5) Forbes, December 5, 2023
6) The Wall Street Journal, April 15, 2024
7, 12) U.S. Bureau of Economic Analysis, 2024
10) NPR, April 18, 2024
13) Bloomberg, April 19, 2024
What to Know About T Plus 1 Trade Settlement
On May 28, 2024, settlement cycles on U.S. stocks and other securities will shift from two business days to one. For most investors, this shift will have little or no impact. But it will affect some investors and certain types of transactions. It may be helpful to understand the basics of this important change.
T+1 vs. T+2
The trade date (T) is the day your order to buy or sell a security is executed. The settlement date is the day your order is finalized, and when the funds used to purchase the security and any sold securities must be delivered. Put simply, T+1 means most transactions will settle on the next business day after the trade.
For example, under the current T+2 protocol, if you sell shares of a stock on a Monday, the transaction will settle in two business days on Wednesday. Beginning on May 28, 2024, if you sell shares of a stock on a Monday, the transaction will settle in one business day on Tuesday.
Who will T+1 affect?
T+1 will have minimal or no impact on most investors because most brokerage firms require cash or sufficient margin in an account prior to the investor entering any orders to purchase securities in the account. However, if your brokerage firm allows you to make a purchase without sufficient funds in the account, under T+1 you will need to deliver a check or initiate a funds transfer so that the funds are deposited in your brokerage account no later than the next business day.
Another potential effect of T+1 on some investors may be the tighter timeframe to deliver paper certificates for securities that are sold. This is rare today, because investors typically hold securities in their accounts electronically, and the shorter timeframe should not affect electronic transfers. However, if you do wish to sell a security for which you hold a paper certificate, you should be prepared to deliver it to the brokerage firm no later than the next business day after the trade is executed.
Securities affected include stocks, bonds, exchange-traded funds, certain mutual funds, municipal securities, real estate investment trusts, and master limited partnerships traded on U.S. exchanges. This change will not affect government bonds and options as their settlement is already set at T+1.
Establishing accurate cost basis
When selling a security, any capital gains taxes are calculated using the security’s cost basis, which is the initial amount invested plus any commissions or fees and reinvested dividends and distributions. Under most circumstances, the change to T+1 will have no effect on figuring cost basis. However, if you purchased a security through more than one brokerage firm, you would have one less day to provide information on the previous purchase(s) to your current firm. Once settlement is complete, your cost basis is established for tax purposes. The best practice is to make sure your current brokerage has full cost-basis information on any securities purchased at previous brokerages.
For more information, see IRS Publication 550, which offers detailed guidance on how to calculate cost basis under different circumstances.
Convenience and close attention
For some investors, one-day settlement may mean greater convenience. In effect, an investor will fully own a security one day sooner than under the current system. This could be helpful for an investor who wants to trade the security quickly or wants to participate in a proxy vote. However, T+1 will also require some investors to pay closer attention to how the shorter settlement time could affect investment, trading, or tax decisions.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
FAFSA Glitches Delay College Financial Aid Awards for 2024-25
It’s been a tough financial aid season for college students and their families. The FAFSA (Free Application for Federal Student Aid) was redesigned and simplified for the 2024-25 school year, in what was supposed to benefit families completing the application. But a late rollout and the subsequent discovery of form calculation errors have led to processing delays and, by extension, delays for colleges sending out student financial aid packages for the 2024-25 school year.
Both new and returning college students are affected because students must submit the FAFSA each year to be eligible for federal financial aid. But the series of delays may be particularly painful for new students who are waiting to review and compare financial aid packages from multiple colleges before making a final decision by the general May 1 college admissions deadline.
A slow rollout for the new, simplified FAFSA
The FAFSA Simplification Act (part of the Consolidated Appropriations Act of 2021) gave the go-ahead for a shorter, more streamlined FAFSA. The new, simplified form was heralded as a bipartisan breakthrough and a win for families trying to navigate and complete the application. The full redesign was scheduled to take effect with the 2023-24 FAFSA but was delayed a year due to the pandemic.
The new 2024-25 FAFSA arrived with almost two-thirds fewer questions and a mandatory IRS direct data exchange tool to import income information from tax returns, two changes intended to make the form easier to complete. But the public rollout of the 2024-25 FAFSA was delayed three months, from the usual October 1 open date to December 31, 2023. This extra time was due to several new calculations and adjustments to the aid formula and the technical integration needed to embed them into the form. Along with a new aid formula, the terminology changed too: a new “student aid index” (SAI) replaced the well-known “expected family contribution” (EFC) as the yardstick for measuring a student’s aid eligibility.
Subsequent calculation errors
Once the 2024-25 FAFSA opened in late December, various online glitches disrupted public access to the form during the month of January. Then on January 30, the Department of Education announced that inflation adjustments were being made to the aid calculation, which opened a potential additional $1.8 billion in aid but would delay processing of the form until March, leading to delays in families receiving aid awards from colleges. (In a typical year when the FAFSA is available in October, students can start receiving college aid awards by the end of the calendar year, though timelines vary by college.)
Then on March 22, the Department of Education announced another form error that affected the student aid index calculation for dependent students who reported assets, requiring another round of reprocessing for all affected applications. The Department continues to provide information and tools for families on studentaid.gov about completing the 2024-25 FAFSA.
Colleges and students left scrambling
In the meantime, colleges need time to review incoming FAFSAs, model student aid eligibility, and package and communicate financial aid offers to students. The result is that high school seniors may not receive their financial aid packages from colleges until April, May, or even June, which means they might have to commit to a college by the May 1 deadline without fully knowing how much it will cost them out-of-pocket.
Families with high school seniors may want to contact individual colleges to see when aid packages might be expected and/or whether the college plans to extend its decision deadline beyond May 1. Returning students may also want to contact their college about their aid package. Due to the new FAFSA formula for calculating aid, returning students may discover that their aid eligibility (in the form of their student aid index) is higher or lower now, which could affect their aid package.
Source) U.S. Department of Education, 2024
