What Do Rising Interest Rates Mean for You?
On March 16, 2022, the Federal Open Market Committee (FOMC) of the Federal Reserve raised the benchmark federal funds rate by 0.25% to a target range of 0.25% to 0.50%. This is the beginning of a series of increases that the FOMC expects to conduct over the next two years to combat high inflation.1
The FOMC released economic projections that suggest the equivalent of six additional 0.25% increases in 2022, followed by three or four more increases in 2023 when it announced the current increase, 2 These are only projections, based on current conditions, and may not happen. However, they provide a helpful picture of the potential direction of U.S. interest rates.
What is the federal funds rate?
The federal funds rate is the interest rate at which banks lend funds to each other overnight to maintain legally required reserves within the Federal Reserve System. The FOMC sets a target range, usually a 0.25% spread, and then sets two specific rates that function as a floor and a ceiling to push the funds rate into that target range. The rate may vary slightly from day to day, but it generally stays within the target range.
Although the federal funds rate is an internal rate within the Federal Reserve System, it serves as a benchmark for many short-term rates set by banks and can influence longer-term rates as well.
Why does the Fed adjust the federal funds rate?
The Federal Reserve and the FOMC operate under a dual mandate to conduct monetary policies that foster maximum employment and price stability. Adjusting the federal funds rate is the Fed’s primary tool to influence economic growth and inflation.
The FOMC lowers the federal funds rate to stimulate the economy by making it easier for businesses and consumers to borrow, and raises the rate to combat inflation by making borrowing more expensive. In March 2020, when the U.S. economy was devastated by the pandemic, the Committee quickly dropped the rate to its rock-bottom level of 0.00%–0.25% and has kept it there for two years as the economy recovered.
The FOMC has set a 2% annual inflation goal as consistent with healthy economic growth. The Committee considered it appropriate for inflation to run above 2% for some time to balance the extended period when it ran below 2% and give the economy more time to grow in a low-rate environment. However, the steadily increasing inflation levels over the last year — with no sign of easing — have forced the Fed to change course and tighten monetary policy.
How will consumer interest rates be affected?
The prime rate, which commercial banks charge their best customers, is tied directly to the federal funds rate, and generally runs about 3% above it. Though actual rates can vary widely, small-business loans, adjustable-rate mortgages, home-equity lines of credit, auto loans, credit cards, and other forms of consumer credit are often linked to the prime rate, so the rates on these types of loans typically increase with the federal funds rate. Fixed-rate home mortgages are not tied directly to the federal funds rate or the prime rate. Although Fed rate hikes may put upward pressure on new mortgage rates.
Rising interest rates make it more expensive for consumers and businesses to borrow. Although, retirees and others who seek income could eventually benefit from higher yields on savings accounts and certificates of deposit (CDs). Banks typically raise rates charged on loans more quickly than they raise rates paid on deposits, but an extended series of rate increases should filter down to savers over time.
What about bond investments?
Interest-rate changes can have a broad effect on investments, but the impact tends to be more pronounced in the short term as markets adjust to the new level.
When interest rates rise, the value of existing bonds typically falls. Put simply, investors would prefer a newer bond paying a higher interest rate than an existing bond paying a lower rate. Longer-term bonds tend to fluctuate more than those with shorter maturities because investors may be reluctant to tie up their money for an extended period if they anticipate higher yields in the future.
Bonds redeemed prior to maturity may be worth more or less than their original value, but when a bond is held to maturity, the bond owner would receive the face value and interest, unless the issuer defaults. Thus, rising interest rates should not affect the return on a bond you hold to maturity, but may affect the price of a bond you want to sell on the secondary market before it reaches maturity.
Although the rising-rate environment may have a negative impact on bonds you currently hold and want to sell, it might also offer more appealing rates for future bond purchases.
Bond funds are subject to the same inflation, interest rate, and credit risks associated with their underlying bonds. Thus, falling bond values due to rising rates can adversely affect a bond fund’s performance. However, as underlying bonds mature and are replaced by higher-yielding bonds within a rising interest-rate environment, the fund’s yield and/or share value could potentially increase over the long term.
How will the stock market react?
Equities may also be affected by rising rates, though not as directly as bonds. Stock prices are closely tied to earnings growth, so many corporations stand to benefit from a more robust economy, even with higher interest rates. On the other hand, companies that rely on heavy borrowing will likely face higher costs going forward, which could affect their bottom lines.
The stock market reacted positively to the initial rate hike and the projected path forward, but investors will be watching closely to see how the economy performs as interest rates adjust — and whether the increases are working to tame inflation.3
The market may continue to react, positively or negatively, to the government’s inflation reports or the Fed’s interest-rate decisions, but any reaction is typically temporary. As always, it’s important to maintain a long-term perspective and make sound investment decisions based on your own financial goals, time horizon, and risk tolerance.
The FDIC insures CDs and bank savings accounts, which generally provide a fixed rate of return, up to $250,000 per depositor, per insured institution. The return and principal value of stocks and investment funds fluctuate with market conditions. Shares, when sold, may be worth more or less than their original cost. Investments offering the potential for higher rates of return also involve higher risk.
Investment funds are sold by prospectus. Please consider the fund’s objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
1–2) Federal Reserve, March 16, 2022
3) The Wall Street Journal, March 17, 2022
Telephone Scam Tips (1)
People lose a significant amount of money to phone scams. In some scams, the callers act friendly and helpful. In others they may threaten or try to scare you. The scammer will always try to get your money or personal information to later commit identity theft crimes.
Common phone scams include:
1. Prize and lottery scam.
2. Loved one in trouble and needs money for bail / medical expenses.
3. Past due tax scam.
4. Overdue bill such as electric or water bill.
5. Computer is allegedly broken and needs repair.
6. Loan or improved credit card interest rate scam.
7. Charity scams.
How to recognize a scam:
1. There is no prize – if you have to pay money for a prize or lottery you were selected for, it is a scam. If it is too good to be true, it is.
2. You won’t be arrested – scammers pretend to be law enforcement and threaten to arrest or fine you if you don’t agree to pay back taxes or some other debt right away.
3. There is NEVER a good reason to send cash or pay with a gift card – scammers will often ask you to wire money, pay through a money transfer app, or through a gift card (Target card, Apple iTunes gift card, etc.)
4. Scammers want you to feel pressured to make a decision right away. They do not want to give you time to verify the information they are telling you is inaccurate.
5. Government agencies, utility companies, or banks will not call to confirm your sensitive information such as your social security number.
What to do if you receive a call:
1. HANG UP.
2. Consider blocking the phone number.
3. Don’t trust your caller ID – scammers can make any name or number show up on your caller ID.
4. If in doubt, call 911 to have an officer respond to your location. The officer can assist you in verifying if the call is a scam.
(1) Wilmette Police Department March 9, 2022
Common Tax Scams to Watch For
Internal Revenue Service has issued numerous Tax Sam/Consumer Alerts (1). According to the Internal Revenue Service (IRS), tax scams tend to increase during tax season and/or times of crisis.(2). Following
are some of the scams to watch out for.
Phishing and text message scams
Phishing and text message scams usually involve unsolicited emails or text messages that seem to come from legitimate IRS sites to convince you to provide personal or financial information. Once scam artists obtain this information, they use it to commit identity or financial theft. The IRS does not initiate contact with taxpayers by email, text message, or any social media platform to request personal or financial information. The IRS initiates most contacts through regular mail delivered by the United States Postal Service.
Phone scams
Phone scams typically involve a phone call from someone claiming that you owe money to the IRS, or you’re entitled to a large refund. The calls may show up as coming from the IRS on your Caller ID, be accompanied by fake emails that appear to be from the IRS, or involve follow-up calls from individuals saying they are from law enforcement. These scams often target more vulnerable populations, such as immigrants and senior citizens, and will use scare tactics such as threatening arrest, license revocation, or deportation.
Tax-related identity theft
Tax-related identity theft occurs when someone uses your Social Security number to claim a fraudulent tax refund. You may not even realize you’ve been the victim of identity theft until you file your tax return and discover that a return has already been filed using your Social Security number. Or the IRS may send you a letter indicating it has identified a suspicious return using your Social Security number. To help prevent tax-related identity theft, the IRS now offers the Identity Protection PIN Opt-In Program. The Identity Protection PIN is a six-digit code that is known only to you and the IRS, and it helps the IRS verify your identity when you file your tax return.
Tax preparer fraud
Scam artists will sometimes pose as legitimate tax preparers and try to take advantage of unsuspecting taxpayers by committing refund fraud or identity theft. Be wary of any tax preparer who won’t sign your tax return (sometimes referred to as a “ghost preparer”), requires a cash-only payment, claims fake deductions/tax credits, directs refunds into his or her own account, or promises an unreasonably large or inflated refund. A legitimate tax preparer will generally ask for proof of your income and eligibility for credits and deductions, sign the return as the preparer, enter a valid preparer tax identification number, and provide you with a copy of your return. It’s important to choose a tax preparer carefully because you are legally responsible for what’s on your return, even if it’s prepared by someone else.
False offer in compromise
An offer in compromise (OIC) is an agreement between a taxpayer and the IRS that can help the taxpayer settle tax debt for less than the full amount that is owed. Unfortunately, some companies charge excessive fees and falsely advertise that they can help taxpayers obtain larger OIC settlements with the IRS. Taxpayers can contact the IRS directly or use the IRS Offer in Compromise Pre-Qualifier tool at https://irs.treasury.gov/oic_pre_qualifier/ to see if they qualify for an OIC.
Unemployment insurance fraud
Typically, this scheme is perpetrated by scam artists who try to use your personal information to claim unemployment benefits. If you receive an unexpected prepaid card for unemployment benefits, see an unexpected deposit from your state in your bank account, or receive IRS Form 1099-G for unemployment compensation that you did not apply for, report it to your state unemployment insurance office as soon as possible.
Fake charities
Charity scammers pose as legitimate charitable organizations to solicit donations from unsuspecting donors. These scam artists often take advantage of ongoing tragedies and/or disasters, such as a devastating tornado or the COVID-19 pandemic. Be wary of charities with names that are like more familiar or nationally known organizations. Before donating to a charity, make sure it is legitimate and never donate cash, gift cards, or funds by wire transfer. The IRS website has a tool to assist you in checking out the status of a charitable organization at https://www.irs.gov/charities-and-nonprofits.
Protecting yourself from scams
Fortunately, there are some things you can do to help protect yourself from scams, including those that target taxpayers:
- Don’t click on suspicious or unfamiliar links in emails, text messages, or instant messaging services — visit government websites directly for valuable information
- Don’t answer a phone call if you don’t recognize the phone number — instead, let it go to voicemail and check later to verify the caller
- Never download email attachments unless you can verify that the sender is legitimate
- Keep device and security software up to date, maintain strong passwords, and use multi-factor authentication
- Never share personal or financial information via email, text message, or over the phone
1) https://www.irs.gov/newsroom/tax-scams-consumer-alerts
2) Internal Revenue Service, 2022
Global Finance: Kicking Russia Out of SWIFT
Over the past days, the United States and other countries have imposed various sanctions on Russia for its invasion of Ukraine. One sanction that was discussed initially but not implemented immediately was blocking Russia from the SWIFT global banking network. However, the United States and European allies eventually agreed to remove selected Russian banks from SWIFT. What does this mean?
What is the SWIFT financial system?
SWIFT, which stands for the Society for Worldwide Interbank Financial Telecommunication, is a cooperative of financial institutions formed in 1973. Headquartered in Belgium, SWIFT is overseen by the National Bank of Belgium along with other major central banks, including the U.S. Federal Reserve System, the Bank of England, and the European Central Bank.1
SWIFT isn’t a traditional bank and doesn’t move money like a traditional bank. Rather, it moves information about money, acting as a secure global messaging system that connects more than 11,000 financial institutions in over 200 countries and territories around the world, alerting banks when transactions are about to take place and facilitating cross-border financial activity.2
SWIFT communications are important to the global banking system. In 2021, SWIFT recorded an average of 42 million messages per day, an 11.4% increase over 2020.3
Blocking selected Russian banks from SWIFT is a drastic measure that could potentially result in significant economic pain for Russia, both immediately and over the long term. It essentially cuts Russia off from the global financial system.4
What was behind the initial delay in expelling Russia from SWIFT?
The United States favored blocking Russia from SWIFT at the outset, but couldn’t do so unilaterally. Such a move required the support of other European nations, and some of the 27-member nations in the European Union (EU) were initially hesitant. Because Russia is a key energy supplier to Europe, some European nations worried that expelling Russia from SWIFT could potentially disrupt natural gas supplies and make it more costly and complicated to send payments for energy and other goods.5 Another reason for hesitancy was the fear of jeopardizing a fragile post-COVID economic recovery in Europe.6
Additionally, there were concerns that blocking Russia from SWIFT would cause it to find alternative ways to participate in the global economy by forging stronger ties with China, developing its own financial messaging system, and/or creating its own digital currency. There was also the risk that Russia could attempt to disrupt the global economy through ransomware attacks.7
While the United States waited for buy-in from all 27-member EU nations to block Russia from SWIFT, it focused on targeting Russian banks directly to limit their ability to raise capital and access U.S. dollars. Russia’s financial services sector is heavily dominated by state-owned entities that rely on the U.S. financial system to conduct their business activities, both within Russia and internationally. By targeting Russian banks directly with sanctions, the United States attempted to isolate Russia from international finance and commerce.8
Treasury Secretary Janet Yellen stated, “Treasury is taking serious and unprecedented action to deliver swift and severe consequences to the Kremlin and significantly impair their ability to use the Russian economy and financial system to further their malign activity.”9
The road to SWIFT sanctions
Then on February 26, 2022, after intense international diplomacy and an impassioned plea by Ukraine President Volodymyr Zelensky that by all accounts moved world leaders to act, the United States, Canada, the European Union, and the United Kingdom agreed to kick selected Russian banks off the SWIFT financial network.10In making the announcement, European Commission President Ursula von der Leyen stated, “This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally.”11
Not all Russian banks were cut off from SWIFT, though. As a compromise, some smaller banks were allowed to remain to allow European nations to pay for natural gas (the EU imports 40% of its natural gas from Russia) and to allow the United States to pay for oil.12
Along with blocking certain Russian banks from SWIFT, the United States, Canada, the European Union, and the United Kingdom also announced that they would take additional actions against Russia’s central bank to prevent it from deploying its more than $600 billion in reserves in attempt to “sanction-proof” Russia’s economy. Ms. von der Leyen stated, “We will paralyze the assets of Russia’s central bank.”13
This is a fluid situation, and ongoing diplomacy around sanctions is likely in the days and weeks ahead.
1-2, 4) nbcnews.com, February 24, 2022
3) SWIFT FIN Traffic & Figures, 2022
5) The New York Times, February 24, 2022
6) The New York Times, February 25, 2022
7) The New York Times, February 23, 2022
8-9) U.S. Department of the Treasury, February 24, 2022
10) The Washington Post, February 27, 2022
11-13) The Wall Street Journal, February 26, 2022
Federal Income Tax Filing Season Has Begun for 2021 Returns
The IRS announced that the starting date for when it would accept and process 2021 tax-year returns was Monday, January 24, 2022.
Tips for making filing easier
To speed refunds and help with tax filing, the IRS suggests the following:
• Make sure you have received Form W-2 and other earnings information, such as Form 1099, from employers and payers. The dates for furnishing such information to recipients vary by form, but they are generally not required before February 1, 2022. You may need to allow additional time for mail delivery.
• Go to irs.gov to find the federal individual income tax returns, Form 1040, and Form 1040-SR (available for seniors born before January 2, 1957), and their instructions.
• File electronically and use direct deposit.
• Check irs.gov for the latest tax information, including how to reconcile advance payments of the child tax credit or claim a recovery rebate credit for missing stimulus payments. Also, watch for letters from the IRS with essential information about those payments that may help you file an accurate return.
Key filing dates
Here are several important dates to keep in mind.
• January 14. IRS Free File opened. Free File allows you to file your federal income tax return for free [if your adjusted gross income (AGI) is $73,000 or less] using tax preparation and filing software. You can use Free File Fillable Forms even if your AGI exceeds $73,000 (these forms were not available until January 24). You could file with an IRS Free File partner (tax returns could not be transmitted to the IRS before January 24). Tax software companies may have accepted tax filings in advance.
• January 24. IRS began accepting and processing individual tax returns.
• April 18. Deadline for filing 2021 tax returns (or requesting an extension) for most taxpayers.
• April 19. Deadline for filing 2021 tax returns (or requesting an extension) for taxpayers who live in Maine or Massachusetts.
• October 17. Deadline to file for those who requested an extension on their 2021 tax returns.
Awaiting processing of previous tax return?
The IRS is attempting to reduce the inventory of prior-year income tax returns that have not been fully processed due to pandemic-related delays. Taxpayers do not need to wait for their 2020 return to be fully processed to file their 2021 return.
Tax refunds
The IRS encourages taxpayers seeking a tax refund to file their tax return as soon as possible. The IRS anticipates most tax refunds being issued within 21 days of the IRS receiving a tax return if the return is filed electronically, any tax refund is delivered through direct deposit, and there are no issues with the tax return. To avoid delays in processing, the IRS encourages people to avoid paper tax returns whenever possible.
Investments in our Infrastructure is expected to have an impact on our economy.
A bipartisan congress passed the Infrastructure Investment and Jobs Act. The act provides roughly $1 trillion for infrastructure. Funds are provided for existing programs and provided more than $550 billion in new funding over the next five years. The expenditures will go toward upgrading aging U.S. transportation, water, power generation, and communication systems.1 The American Society of Civil Engineers called the legislation a significant down payment on the $2.5 trillion in deficiencies identified in the industry group’s 2021 Report Card for America’s Infrastructure.2
The objective is to improve public safety and grease the wheels of commerce by making a historic federal investment in physical infrastructure. This large injection of funds is likely to affect how many Americans commute, travel, transport goods, access the Internet, power homes and buildings, and more, with implications for communities, businesses, industries, and the economy.
How the funds will be used
The new spending is a combination of targeted funds for overdue repair projects and forward-looking programs intended to make the nation’s critical infrastructure assets more resilient to climate risks.3 Here’s an overview of the Act’s allocated funds:
• $110 billion to fix deteriorating roads and bridges, and other major surface-transportation projects
• $66 billion to pay for passenger and freight railway maintenance, modernization, and expansion, primarily to overhaul Amtrak and make rail travel a reliable alternative to driving or flying between more U.S. cities
• $65 billion to build out broadband Internet in underserved areas and subsidies to help lower-income households pay for high-speed Internet access
• $65 billion to update the electric grid and help protect it from severe weather and cybersecurity threats
• $55 billion to help ensure access to clean drinking water, remove lead service lines, and upgrade wastewater systems (another $8 billion goes toward addressing dwindling water supplies in the West)
• $47 billion to help states and cities prepare for and defend against more frequent and destructive storms, droughts, wildfires, and other climate impacts
• $42 billion to expand and upgrade airports, ports, and border-crossing stations, measures that are sorely needed to shore up supply-chain weaknesses
• $39 billion to repair and revamp public transit and make it more accessible to the elderly and disabled
• $21 billion to enhance public health and create jobs by cleaning up abandoned mines and oil and gas wells, polluted waterways, and contaminated superfund sites
• $11 billion to improve highway and pedestrian safety and support research
• $7.5 billion to build out a network of electric vehicle charging stations plus $7.5 billion for low-emission school buses and ferries
• $1 billion to reconnect communities negatively affected by past infrastructure projects
Benefits
Transportation funds are normally allocated to states according to a formula based on population, gas-tax revenue, and other factors, and each state typically decides how to spend the money. Most of the new funding will be distributed under this traditional formula, but $120 billion will be awarded through dozens of new competitive grant programs.4 The Transportation Department will select recipients from applications submitted by state and local governments, and Congress will have direct oversight, so lawmakers can monitor projects and call hearings to assess the results. It’s likely to take at least six months to pass out the money, finalize plans, and kick off projects — and timelines could run longer for grant programs.
Moody’s Analytics projects that the law’s economic impact will peak in about five years and fade as spending tails off, creating an estimated 556,000 jobs and raising U.S. output by 0.5% by year-end 2026. Other projections vary, but economists tend to agree that greater infrastructure spending eases worker mobility and the transportation of goods, providing a boost to labor productivity, business efficiency, and economic growth.5
The additional infrastructure spending will be partially paid for by new revenue and unspent COVID-19 relief funds. However, the Congressional Budget Office found that the Act would add $256 billion to budget deficits over the next decade, so borrowing to cover the difference could offset some of the law’s economic benefits.6
1, 5) The Wall Street Journal, November 6, 2021
2) American Society of Civil Engineers, 2021
3) The New York Times, August 10, 2021; White House Fact Sheet, November 6, 2021
4) The Wall Street Journal, November 7, 2021
6) Congressional Budget Office, August 9, 2021
The Federal Reserve System Fights Inflation
The Federal Reserve System (Fed) adjusts its monetary policy in response to rising inflation. The Federal Open Market Committee (FOMC) quickened the reduction of its bond-buying program mid-December 2021. They projected three increases in the benchmark federal funds rate in 2022, followed by three more increases in 2023 and speedup its buying bonds. These steps were more aggressive than previous FOMC actions or projections.1
A closer look at the FOMC’s tools and strategy may help to appreciate the impact of how these steps may affect the U.S. economy, investors, and consumers.
Jobs vs. Prices
The Federal Reserve is our national bank. It has two mandates, maintain price stability and full employment. These mandates require some inflation. An economy without inflation is typically stagnant with weak employment. A strong economy with high employment is prone to high inflation.
The FOMC currently has set a 2% annual inflation target based on the personal consumption expenditures (PCE) price index to meet the Fed’s mandate. The PCE index represents a broad range of spending on goods and services and tends to run below the more widely publicized consumer price index (CPI). The Committee’s policy is to allow PCE inflation to run moderately above 2% for some time to balance the periods when it runs below 2%.
PCE inflation was generally well below the Fed’s 2% target from May 2012 to February 2021. But it has risen quickly since then, reaching 5.7% for the 12 months ending in November 2021 — the highest level since 1982. (By comparison, CPI inflation was 6.8%.)2-3
Fed officials, and many other economists and policy makers, originally believed that inflation was “transitory” due to supply-chain issues related to opening the economy. But the persistence and level of inflation over the last few months led them to take corrective action. They still believe inflation will drop significantly in 2022 as supply-chain problems are resolved, and project a PCE inflation rate of 2.6% by the end of the year.4
The Fed’s Toolbox
The FOMC uses two primary tools to meet an acceptable balance between employment and prices. The first is its power to set the federal funds rate, the interest rate that large banks use to lend each other money overnight to maintain required deposits with the Federal Reserve. This rate serves as a benchmark for many other rates, including the prime rate that commercial banks charge their best customers. The prime rate usually runs about 3% above the federal funds rate and acts as a benchmark for rates on consumer loans such as credit cards and auto loans. The FOMC lowers the funds rate to stimulate the economy to create jobs and raises it to slow the economy to fight inflation.
The second tool is purchasing Treasury bonds to increase the money supply or allowing bonds to mature without repurchasing to decrease the supply. The FOMC purchases Treasuries through banks within the Federal Reserve System. Rather than using funds it holds on to deposit, the Fed simply adds the appropriate amount to the bank’s balance, essentially creating money. This provides the bank with more money to lend to consumers, businesses, or the government (through purchasing more Treasuries).
Shifting from Extreme Stimulus
When the economy shut down in March 2020 in response to the COVID pandemic, the FOMC took extraordinary stimulus measures to avoid a deep recession. The Committee dropped the federal funds rate to its rock-bottom range of 0% to 0.25% and began a bond-buying program that reached an unprecedented level of $75 billion per day in Treasury bonds. By June 2020, this was reduced to $80 billion per month and remained at that level until November 2021, when the FOMC decided to wind down the program at a rate that would have ended it by June 2022.5-6
The December decision accelerated the wind down, so the bond-buying program will end in March 2022, at which point the FOMC will likely consider raising the federal funds rate. Although it’s not certain when an increase will occur, the December projection is that the rate will be in the 0.75% to 1.00% range by the end of 2022 and the 1.50% to 1.75% range by the end of 2023.7
Rising Interest Rates
Currently the Fed’s plan is to slow inflation by returning to a more neutral monetary policy; this represents confidence that the economy is strong enough to grow without extreme stimulus. If these are the only actions required, the impact may be relatively mild. The first increase in rates will likely occur in the spring.
Rising interest rates make it more expensive for businesses and consumers to borrow, which could impact corporate earnings and consumer spending. Rates have an inverse relationship with bond prices. When interest rates rise, prices on existing bonds fall (and vice versa), because investors can buy new bonds paying higher interest.
Conversely, higher rates on bonds, certificates of deposit (CDs), savings accounts, and other fixed-income vehicles could help investors, especially retirees, who rely on fixed-income investments. Brick-and-mortar banks typically react slowly to changes in the federal funds rate, but online banks may offer higher rates.8
Many believe Inflation is a far greater concern other than rising interest rates, and it remains to be seen whether the Fed’s projected rate increases will be enough to tame prices. There are other moving parts, such as the movement of wages and prices. Generally, it is best not to overreact to policy changes. Often the best approach is to maintain an investment portfolio appropriate for your situation and long-term goals.
U.S. Treasury securities are guaranteed by the federal government as to timely payment of principal and interest. The principal value of all bonds fluctuates with market conditions. Bonds not held to maturity could be worth more or less than the original amount paid. The FDIC insures CDs and bank savings accounts, which generally provide a fixed rate of return, up to $250,000 per depositor, per insured institution. Forecasts are based on current conditions, subject to change, and may not happen.
1, 4, 6–7) Federal Reserve, 2021
2) U.S. Bureau of Economic Analysis, 2021
3) U.S. Bureau of Labor Statistics, 2021
5) Federal Reserve Bank of New York, 2021
8) Forbes Advisor, December 14, 2021
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.
Social Security Offices will not reopen for in-person meetings as originally planned January 3, 2022.
December 22, 2021, SSA announced they would not re-open as many expected.
The public is encouraged to use their online services. https://www.ssa.gov/onlineservices/
Their online services can be accessed by activating your Social Security account. Create an account if you do not have an account.
https://secure.ssa.gov/RIL/SiView.action
https://www.ssa.gov/myaccount/
The phone numbers for the local offices can be found using their “Field Office Locator”
https://secure.ssa.gov/ICON/main.jsp
Their COVID-19 web page provides mor information to learn more.
https://www.ssa.gov/coronavirus/
The Retirement Benefit portal has been updated.
https://www.ssa.gov/benefits/retirement/
2022 Mileage Rates 1)
The optional standard mileage standard mileage rates for the use of a cars (also vans, pickups or panel trucks) for business, charitable, medical, or moving purposes beginning January 1, 2022, have been issued.
Cars (also vans, pickups or panel trucks) 58.5 cents per mile for business use.
Medical, or Moving expenses for qualified active-duty members of the Armed Forces is 18 cents per mile.
Miles driven in service of charitable organization is 14 cents per mile.
Keep in mind that unreimbursed employee travel expenses miscellaneous cannot be deducted as itemized deductions. Moving expenses are not deductible, unless they are members of the Armed Forces on active duty moving under orders to a permanent change of station.
Medical, or Moving expenses for qualified active-duty members of the Armed Forces is 18 cents per mile.
Use of the standard mileage rates are optional. The alternative is to claim actual expenses.
The optional standard rates must be used in the first year the vehicle is used in business.
Election of the standard mileage rate for lease vehicles must be used for the entire lease period including renewals.
A taxpayer using the standard mileage rates must comply with the requirements of Revenue Procedure 2019-46 2)
1) IR-2021-254, December 17, 2021
2) Notice 22-03
2021 Some Potential Year-end Tax Moves
Maybe possible before year-end
Accelerate or defer income
Depending on you anticipated tax position for this and next year you may have the opportunity to accelerate income into 2021 or defer some to 2022. Some possible sources of income are collection of compensation, sales of property, sale of investments, collection of rents, collection from an installment sale, receipt of required minimum distributions and conversion of any portion of your traditional IRAs to Roth IRAs.
Accelerate or defer deductions
If you itemize deductions, making payments for deductible expenses such as medical expenses, qualifying interest, and state taxes before the end of the year (instead of paying them in early 2022) could make a difference on your 2021 return. If you do not itemize you may be able to defer enough expenses to itemize in 2022.
Make deductible charitable contributions
If you itemize deductions on your federal income tax return, you can generally deduct charitable contributions, but the deduction is limited to 60%, 30%, or 20% of your adjusted gross income (AGI), depending on the type of property you give and the type of organization to which you contribute. (Excess amounts can be carried over for up to five years.)
For 2021 charitable gifts, the normal rules have been enhanced: The limit is increased to 100% of AGI for direct cash gifts to public charities. And even if you don’t itemize deductions, you can receive a $300 charitable deduction ($600 for joint returns) for direct cash gifts to public charities (in addition to the standard deduction).
Contribution of securities with long term gains can be advantageous. If you itemize deductions, you can deduct the value as of the date you made the contributions. Whether you itemize your deductions or not the gain is not taxable. Contact the charity for instructions. If you are transferring the securities from your financial institution to theirs you will need the name of their financial institution, account number and routing number.
Increase withheld tax
If your employer has the capacity to withhold tax before December 31, 2021, notify your employer. They may be able to increase the tax withholding by the amount you specify. Alternatively, you will need to submit a Form W-4 for the remainder of the year to cover the shortfall. There may not be enough time for employers to process a Form W-4 to change withholding before December 31, 2021. The biggest advantage in doing so is that withholding is considered as having been paid evenly throughout the year instead of when the dollars are taken from your paycheck. This strategy can be used to make up for low or missing quarterly estimated tax payments.
There are other alternatives that maybe available. Consider having tax withheld from a transfer of funds from your financial institution to another account or financial institution. You would not want to do this if would be subject to penalties if the funds are in retirement plans. This maybe applicable if you have not taken your 2021 Required Minimum Distributions.
Maximize retirement savings
Deductible contributions to a traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2021 taxable income. If you haven’t already contributed up to the maximum amount allowed, consider doing so. For 2021, you can contribute up to $19,500 to a 401(k) plan ($26,000 if you’re age 50 or older) and up to $6,000 to traditional and Roth IRAs combined ($7,000 if you’re age 50 or older). * The window to make 2021 contributions to an employer plan generally closes at the end of the year. The payment must generally be paid by April 15, 2022,
*Roth contributions are not deductible, but Roth qualified distributions are not taxable.
Take required minimum distributions
Required minimum distributions (RMDs) were waived for 2020. They are required for 2021. You must start withdrawing your RMD at age 701/2. If your 70th birthdate is July 1, 2019, or later you do not need to withdraw your first RMD until you are 72 years old. RMDs generally must be withdrawn from traditional IRAs and employer-sponsored retirement plans (special rules apply if you’re still working and participating in your employer’s retirement plan). You must make the withdrawals by the date required — the end of the year for most individuals. The penalty for failing to do so is substantial: 50% of the amount that wasn’t distributed on time.
Weigh year-end investment moves
Tax considerations should not drive your investment decisions. However, it’s worth considering the tax implications of any year-end investment moves. For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all those gains by selling losing positions. A loss will not be recognized if the security is purchased within 30 days before or after the sale. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or carried forward to reduce your taxes in future years.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment, or other professional advice. The above is not a complete discussion of the requirements, limitations, or applicability. 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.
