Budget and Debt Ceiling Vagueness
On September 30, 2021, Congress averted a potential federal government shutdown by passing a last-minute bill to fund government operations through December 3, 2021.1 Two weeks later, another measure raised the debt ceiling by just enough to sustain federal borrowing until about the same date.2 Although these bills provided temporary relief, they did not resolve the fundamental issues, and Congress will have to act again by December 3.
Spending vs. Borrowing
The budget and the debt ceiling are often considered together by Congress, but they are separate fiscal issues. The budget authorizes future spending, while the debt ceiling is a statutory limit on federal borrowing necessary to fund already authorized spending. Thus, increasing the debt ceiling does not increase government spending. But it does allow borrowing to meet increased spending authorized by Congress.
The underlying fact in this relationship between the budget and the debt ceiling is that the U.S. government runs on a deficit and has done so every year since 2002.3 The U.S. Treasury funds the deficit by borrowing through securities such as Treasury notes, bills, and bonds. When the debt ceiling is reached, the Treasury can no longer issue securities that would put the government above the limit.
Twelve Appropriations Bills
The federal fiscal year begins on October 1, and 12 appropriations bills for various government sectors should be passed by that date to fund activities ranging from defense and national park operations to food safety and salaries for federal employees.4 These appropriations for discretionary spending account for about one-third of federal spending, with the other two-thirds, including Social Security and Medicare, prescribed by law.5
Though it would be better for federal agencies to know their operating budgets at the beginning of the fiscal year, the deadline to pass all 12 bills has not been met since FY 1997.6 This year, none of the bills had passed as of late October.7
To delay for further budget negotiations, Congress typically passes a continuing resolution, which extends federal spending to a specific date based on a fixed formula. The September 30 resolution extended spending to December 3 at FY 2021 levels.8 Adding to the stakes of this year’s budget negotiations, spending caps on discretionary spending that were enacted in 2011 expired on September 30, 2021, so FY 2022 budget levels may become the baseline for future spending.9
Raising the Ceiling
A debt limit was first established in 1917 to facilitate government borrowing during World War I. Since then, the limit has been raised or suspended almost 100 times, often with little or no conflict.10 However, in recent years, it has become more contentious. In 2011, negotiations came so close to the edge that Standard & Poor’s downgraded the U.S. government credit rating.11
A two-year suspension expired on August 1 of this year. At that time, the federal debt was about $28.4 trillion, with large recent increases due to the $3 trillion pandemic stimulus passed with bipartisan support in 2020, as well as the 2021 American Rescue Plan and continuing effects of the Tax Cuts and Jobs Act of 2017.12-13 The Treasury funded operations after August 1 by employing certain “extraordinary measures” to maintain cash flow. Treasury Secretary Janet Yellen projected that these measures would be exhausted by October 18.14
The bill signed on October 14 increased the debt ceiling by $480 billion, the amount the Treasury estimated would be necessary to pay government obligations through December 3, again using extraordinary measures. Unlike the budget extension, which is a hard deadline, the debt ceiling date is an estimate, and the Treasury may have a little breathing room.15–16
Potential Consequences
If the budget appropriations bills — or another continuing resolution — are not passed by December 3, the government will be forced to shut down unfunded operations, except for some essential services. This occurred in fiscal years 2013, 2018, and 2019, with shutdowns lasting 16 days, 3 days, and 35 days, respectively.
Although the consequences of a government shutdown would be serious, the economy has bounced back from previous shutdowns. By contrast, a U.S. government default would be unprecedented and could result in unpaid bills, higher interest rates, and a loss of faith in U.S. Treasury securities that would reverberate throughout the global economy. The Federal Reserve has a contingency plan that might mitigate the effects of a short-term default, but Fed Chair Jerome Powell has emphasized that the Fed could not “shield the financial markets, and the economy, and the American people from the consequences of default.”17
Given the stakes, it is unlikely that Congress will allow the government to default, but the road to raising the debt ceiling is unclear. The temporary measure was passed through a bipartisan agreement to suspend the Senate filibuster rule, which effectively requires 60 votes to move most legislation forward. However, this was a one-time exception and may not be available again. Another possibility may be to attach a provision to the education, healthcare, and climate package slated to move through a complex budget reconciliation process that allows a bill to bypass the Senate filibuster. However, the reconciliation process is time-consuming, and it is not clear whether the debt ceiling would meet parliamentary requirements.18
The budget and the debt ceiling are serious issues, but Congress has always found a way to resolve them in the past. It’s generally wise to maintain a long-term investment strategy based on your goals, time frame, and risk tolerance, rather than overreacting to political conflict and any resulting market volatility.
U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid. All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost.
Planning is further complicated by the uncertainty as to what changes, if any, will be made relating to income, estate and gift tax provisions and their effective dates. Individual circumstances will differ. Review your situation and planning to determine what if any actions is required. Pay close attention to your current and expected future tax brackets when you consider the timing of deductions and income.
1, 8) The Washington Post, September 30, 2021
2, 16, 18) Barron’s, October 15, 2021
3) U.S. Office of Management and Budget, 2021
4, 7, 9) Committee for a Responsible Federal Budget, June 25, 2021; October 18, 2021
5, 11, 14, 17) The Wall Street Journal, September 28, 2021
6) Peter G. Peterson Foundation, October 1, 2021
10) NPR, September 28, 2021
12, 15) U.S. Treasury, 2021
13) Moody’s Analytics, September 21, 2021
Employer Open Enrollment: Make Benefit Choices That Work for You
Open enrollment is the time when employers may change their benefit offerings for the upcoming plan year. If you’re employed, this is your once-a-year chance to make important decisions that will affect your health-care choices and your finances.
Even if you are satisfied with your current health plan, it may no longer be the most cost-effective option. Before you make any benefit elections, take plenty of time to review the information provided by your employer. You should also consider how your life has changed over the last year and any plans or potential developments for 2022.
Decipher Your Health Plan Options
The details matter when it comes to selecting a suitable health plan. One of your options could be a better fit for you (or your family) and might even help reduce your overall health-care costs. But you will have to look beyond the monthly premiums. Policies with lower premiums tend to have more restrictions or higher out-of-pocket costs (such as copays, coinsurance, and deductibles) when you do seek care for a health issue.
To help you weigh the tradeoffs, here is a comparison of the five main types of health plans. It should also help demystify some of the terminology and acronyms used so often across the health insurance landscape.
Health maintenance organization (HMO). Coverage is limited to care from physicians, other medical providers, and facilities within the HMO network (except in an emergency). You choose a primary-care physician (PCP) who will decide whether to approve or deny any request for a referral to a specialist.
Point of service (POS) plan. Out-of-network care is available, but you will pay more than you would for in-network services. As with an HMO, you must have a referral from a PCP to see a specialist. POS premiums tend to be a little bit higher than HMO premiums.
Exclusive provider organization (EPO). Services are covered only if you use medical providers and facilities in the plan’s network, but you do not need a referral to see a specialist. Premiums are typically higher than an HMO, but lower than a PPO.
Preferred provider organization (PPO). You have the freedom to see any health providers you choose without a referral, but there are financial incentives to seek care from PPO physicians and hospitals (a larger percentage of the cost will be covered by the plan). A PPO usually has a higher premium than an HMO, EPO, or POS plan and often has a deductible.
A deductible is the amount you must pay before insurance payments kick in. Preventive care (such as annual visits and recommended screenings) is typically covered free of charge, regardless of whether the deductible has been met.
High-deductible health plan (HDHP). In return for significantly lower premiums, you’ll pay more out-of-pocket for medical services until you reach the annual deductible. HDHP deductibles start at $1,400 for an individual and $2,800 for family coverage in 2022 and can be much higher. Care will be less expensive if you use providers in the plan’s network, and your upfront cost could be reduced through the insurer’s negotiated rate.
An HDHP is designed to be paired with a health savings account (HSA), to which your employer may contribute funds toward the deductible. You can also elect to contribute to your HSA through pre-tax payroll deductions or make tax-deductible contributions directly to the HSA provider, up to the annual limit ($3,650 for an individual or $7,300 for family coverage in 2022, plus $1,000 for those 55+).
HSA funds, including any earnings if the account has an investment option, can be withdrawn free of federal income tax and penalties if the money is spent on qualified health-care expenses. (Some states do not follow federal tax rules on HSAs.) Unspent balances can be retained in the account indefinitely and used to pay future medical expenses, whether you are enrolled in an HDHP or not. Be sure to save receipts if you decide to delay using the funds in the HAS in the future. Delaying using the funds allow the earnings and growth of the funds invested free of income tax. If you change employers or retire, the funds can be rolled over to a new HSA.
Three Steps to a Sound Decision
Start by adding up your total expenses (premiums, copays, coinsurance, deductibles) under each plan offered by your employer, based on last year’s usage. Your employer’s benefit materials may include an online calculator to help you compare plans by taking factors such as your chronic health conditions and regular medications into account.
If you are married, you may need to coordinate two sets of workplace benefits. Many companies apply a surcharge to encourage a worker’s spouse to use other available coverage, so look at the costs and benefits of having both of you on the same plan versus individual coverage from each employer. If you have children, compare what it would cost to cover them under each spouse’s plan.
Before enrolling in a plan, check to see if your preferred health-care providers are included in the network.
Tame Taxes with a Flexible Spending Account
If you elect to open an employer-provided health and/or dependent-care flexible spending account (FSA), the money you contribute via payroll deduction is not subject to federal income and Social Security taxes (nor generally to state and local income taxes). Using these tax-free dollars to pay for health-care costs not covered by insurance or for dependent-care expenses could save you about 30% or more, depending on your tax bracket.
The federal limit for contributions to a health FSA was $2,750 in 2021 and should be similar for 2022. Some employers set lower limits. (The official limit has not been announced by the IRS). You can use the funds for a broad range of qualified medical, dental, and vision expenses.
With a dependent-care FSA, you can set aside up to $5,000 a year (per household) to cover eligible child-care costs for qualifying children aged 12 or younger. The tax savings could help offset some of the costs paid for a nanny, babysitter, day care, preschool, or day camp, but only if the services are used so you (or a spouse) can work.
One drawback of health and dependent-care FSAs is that they are typically subject to the use-it-or-lose-it rule, which requires you to spend everything in your account by the end of the calendar year or risk losing the money. Some employers allow certain amounts (up to $550) to be carried over to the following plan year or offer a grace period up to 2½ months. Still, you must estimate your expenses in advance, and your predictions could turn out to be way off base.
Legislation passed during the pandemic allows workers to carry over any unused FSA funds from 2021 into 2022, if the employer opts into this temporary change. If you have leftover money in an FSA, you should consider your account balance and your employer’s carryover policies when deciding on your contribution election for 2022.
Take Advantage of Valuable Perks
A change in the tax code enacted at the end of 2020 made it possible for employers to offer student debt assistance as a tax-free employee benefit through 2025, spurring more companies to add it to their menu of benefit options. A 2021 survey found that 17% of employers now offer student debt assistance, and 31% are planning to do so in the future. Many employers target a student debt assistance benefit of $100 per month, which doesn’t sound like much, but it adds up.1 For example, an employee with $31,000 in student loans who is paying them off over 10 years at a 6% interest rate would save about $3,000 in interest and get out of debt 2½ years faster.
Many employers provide access to voluntary benefits such as dental coverage, vision coverage, disability insurance, life insurance, and long-term care insurance. Even if your employer doesn’t contribute toward the premium cost, you may be able to pay premiums conveniently through payroll deduction. Your employer may also offer discounts on health-related products and services, such as fitness equipment or gym memberships, and other wellness incentives, like a monetary reward for completing a health assessment.
1) CNBC, September 28, 2021
Medicare Open Enrollment for 2022 Starts October 15
Medicare beneficiaries can make new choices and pick plans that work best for them during the annual Medicare Open Enrollment Period. Costs and coverage typically change annually. Changes in your healthcare needs over the past year also may have changed. The Open Enrollment Period — which begins on October 15 and runs through December 7 — is your opportunity to switch your current Medicare health and prescription drug plans to ones that better suit your needs.
During this period, you can:
- Switch from Original Medicare to a Medicare Advantage Plan
- Switch from a Medicare Advantage Plan to Original Medicare
- Change from one Medicare Advantage Plan to a different Medicare Advantage Plan
- Change from a Medicare Advantage Plan that offers prescription drug coverage to a Medicare Advantage Plan that doesn’t offer prescription drug coverage
- Switch from a Medicare Advantage Plan that doesn’t offer prescription drug coverage to a Medicare Advantage Plan that does offer prescription drug coverage
- Join a Medicare prescription drug plan (Part D)
- Switch from one Part D plan to another Part D plan
- Drop your Part D coverage altogether
Any changes made during Open Enrollment are effective as of January 1, 2022.
Review plan options
Now is a good time to review your current Medicare benefits to see if they’re still right for you. Are you satisfied with the coverage and level of care you’re receiving with your current plan? Are your premium costs or out-of-pocket expenses too high? Has your health changed? Do you anticipate needing medical care or treatment, or new or pricier prescription drugs?
If your current plan doesn’t meet your healthcare needs or fit your budget, you can switch to a new plan. If you find that you’re satisfied with your current Medicare plan and it’s still being offered, you don’t have to do anything. The coverage you have will continue.
Information on costs and benefits
The Centers for Medicare & Medicaid Services (CMS) has announced that the average monthly premium for Medicare Advantage plans will be $19, and the average monthly premium for Part D prescription drug coverage will be $33. CMS will announce 2022 premiums, deductibles, and coinsurance amounts for the Medicare Part A and Part B programs soon.
You can find more information on Medicare benefits in the Medicare & You 2022 Handbook on medicare.gov.
Social Security’s Uncertain Future: What You Should Know
Social Security is a pay-as-you-go system, which means today’s workers are paying taxes for the benefits received by today’s retirees. There are many factors that are causing long-run fiscal challenges. Factors causing long-run fiscal challenges, including demographic trends such as lower birth rates, higher retirement rates, and longer life spans. There are simply not enough U.S. workers to support the growing number of beneficiaries. See the discussion under “Pandemic Impact” below. Social Security is not in danger of collapsing, but the clock is ticking on the program’s ability to pay full benefits.
Annually, the Trustees of the Social Security Trust Funds provide a detailed report to Congress that tracks the program’s current financial condition and projected financial outlook. In the latest report, released in August 2021, the Trustees estimate that the retirement program will have funds to pay full benefits only until 2033, unless Congress acts to shore up the program. This day of reckoning is expected to come one year sooner than previously projected because of the economic fallout from the COVID-19 pandemic.
Report Highlights
Social Security consists of two programs, each with its own financial account (trust fund) that holds the payroll taxes that are collected to pay benefits. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. The combined programs are referred to as OASDI.
Combined OASDI costs are projected to exceed total income (including interest) in 2021, and the Treasury will withdraw reserves to help pay benefits. The Trustees project that the combined reserves will be depleted in 2034. After that, payroll tax revenue alone should be sufficient to pay about 78% of scheduled benefits. OASDI projections are hypothetical, because the OASI and DI Trusts are separate, and generally one program’s taxes and reserves cannot be used to fund the other program.
The OASI Trust Fund, considered separately, is projected to be depleted in 2033. Payroll tax revenue alone would then be sufficient to pay 76% of scheduled OASI benefits.
The DI Trust Fund is projected to be depleted in 2057, eight years sooner than estimated in last year’s report. Once the trust fund is depleted, payroll tax revenue alone would be sufficient to pay 91% of scheduled benefits.
All projections are based on current conditions, subject to change, and may not happen.
Proposed Fixes
The Trustees continue to urge Congress to address the financial challenges facing these programs soon, so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. Combining some of the following solutions may also help soften the impact of any one solution.
- Raising the current Social Security payroll tax rate (currently 12.4%). Half is paid by the employee and half by the employer (self-employed individuals pay the full 12.4%). An immediate and permanent payroll tax increase of 3.36 percentage points to 15.76% would be needed to cover the long-range revenue shortfall (4.20 percentage points to 16.60% if the increase started in 2034).
- Raising or eliminating the ceiling on wages subject to Social Security payroll taxes ($142,800 in 2021).
- Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later).
- Reducing future benefits. To address the long-term revenue shortfall, scheduled benefits would have to be immediately and permanently reduced by about 21% for all current and future beneficiaries, or by about 25% if reductions were applied only to those who initially become eligible for benefits in 2021 or later.
- Changing the benefit formula that is used to calculate benefits.
- Calculating the annual cost-of-living adjustment for benefits differently.
Pandemic Impact
The 2021 Trustees Report states that Social Security’s short-term finances were “significantly affected” by the pandemic and the severe but short-lived recession in 2020. “Employment, earnings, interest rates, and GDP [gross domestic product] dropped substantially in the second calendar quarter of 2020 and are assumed to rise gradually thereafter toward recovery by 2023, with the level of worker productivity and thus GDP assumed to be permanently lowered by 1%.” The projections also accounted for elevated mortality rates over the period 2020 through 2023 and delays in births and immigration. Because payroll tax revenues are rebounding quickly, the damage to the program was not as great as many feared.
Sharp increases in consumer prices in July and August suggest that beneficiaries might receive the highest annual benefit increase since 1983 starting in January 2022. The Social Security Administration’s chief actuary has estimated that the 2022 cost-of-living adjustment (COLA) will be close to 6.0%.1(The official COLA had not been announced at the time of this writing.)
What’s at Stake for You?
The Census Bureau has estimated that 2.8 million Americans ages 55 and older filed for Social Security benefits earlier than they had anticipated because of COVID-19.2 Many older workers may have been pushed into retirement after losing their jobs or because they had health concerns.
If you regret starting your Social Security benefits earlier than planned, you can withdraw your application within 12 months of your original claim and reapply later. But you can do this only once, and you must repay all the benefits you received. Otherwise, if you’ve reached full retirement age, you may voluntarily suspend benefits and restart them later. Either of these moves would result in a higher future benefit.
Even if you won’t depend on Social Security to survive, the benefits could amount to a meaningful portion of your retirement income. An estimate of your monthly retirement benefit can be found on your Social Security Statement, which can be accessed when you sign up for my Social Security account on SSA.gov. If you aren’t receiving benefits and haven’t registered for an online account, you should receive an annual statement in the mail starting at age 60.
No matter what the future holds for Social Security, your retirement destiny is still in your hands. But it may be more important than ever to save as much as possible for retirement while you are working. Don’t wait until you have one foot out the door to consider your retirement income strategy.
All information is from the 2021 Social Security Trustees Report, except for:
1) AARP, September 15, 2021
2) U.S. Census Bureau, 2021
Advancing Tax Proposals Put Corporations and High-Income Individuals in Spotlight
The House Budget Committee voted Saturday, September 25, 2021, to advance a $3.5 trillion spending package to the House floor for debate. Summaries of proposed tax changes intended to help fund the spending package was previously released by The House Ways and Means Committee and the Joint Committee on Taxation. Many of these provisions focus specifically on businesses and high-income households. There is a high probability that changes will be made as the process continues.
Below are some highlights from the proposed provisions.
Corporate Income Tax Rate Increase
Corporations would be subject to a graduated tax rate structure, with a higher top rate.
Currently, a flat 21% rate applies to corporate taxable income. The proposed legislation would impose a top tax rate of 26.5% on corporate taxable income above $5 million. Specifically:
- A 16% rate would apply to the first $400,000 of corporate taxable income
- A 21% rate on remaining taxable income up to $5 million
- The 26.5% rate would apply to taxable income over $5 million, and corporations making more than $10 million in taxable income would have the benefit of the lower tax rates phased out.
Personal service corporations would pay tax on their entire taxable income at 26.5%.
Tax Increases for High-Income Individuals
Top individual income tax rate. The proposed legislation would increase the existing top marginal income tax rate of 37% to 39.6% effective in tax years starting on or after January 1, 2022 and apply it to taxable income over $450,000 for married individuals filing jointly, $425,000 for heads of households, $400,000 for single taxpayers, and $225,000 for married individuals filing separate returns. (These income thresholds are lower than the current top rate thresholds.)
Top capital gains tax rate. The top long-term capital gains tax rate would be raised from 20% to 25% under the proposed legislation; this increased tax rate would generally be effective for sales after September 13, 2021. In addition, the taxable income thresholds for the 25% capital gains tax bracket would be made the same as for the 39.6% regular income tax bracket (see above) starting in 2022.
New 3% surtax on income. A new 3% surtax is proposed on modified adjusted gross income over $5 million ($2.5 million for a married individual filing separately).
3.8% net investment income tax expanded. Currently, there is a 3.8% net investment income tax on high-income individuals. This tax would be expanded to cover certain other income derived in the ordinary course of a trade or business for single taxpayers with taxable income greater than $400,000 ($500,000 for joint filers). This would generally affect certain income of S corporation shareholders, partners, and limited liability company (LLC) members that is currently not subject to the net investment income tax.
New qualified business income deduction limit. A deduction is currently available for up to 20% of qualified business income from a partnership, S corporation, or sole proprietorship, as well as 20% of aggregate qualified real estate investment trust dividends and qualified publicly traded partnership income. The proposed legislation would limit the maximum allowable deduction at $500,000 for a joint return, $400,000 for a single return, and $250,000 for a separate return.
Retirement Plans Provisions Affecting High-Income Individuals
New limit on contributions to Roth and traditional IRAs. The proposed legislation would prohibit those with total IRA and defined contribution retirement plan accounts exceeding $10 million from making any additional contributions to Roth and traditional IRAs. The limit would apply to single taxpayers and married taxpayers filing separately with taxable income over $400,000, $450,000 for married taxpayers filing jointly, and $425,000 for heads of household.
New required minimum distributions for large aggregate retirement accounts.
- These rules would apply to high-income individuals (same income limits as described above), regardless of age.
- The proposed legislation would require that individuals with total retirement account balances (traditional IRAs, Roth IRAs, employer-sponsored retirement plans) exceeding $20 million distribute funds from Roth accounts (100% of Roth retirement funds or, if less, by the amount total retirement account balances exceed $20 million).
- To the extent that the combined balance in traditional IRAs, Roth IRAs, and defined contribution plans exceeds $10 million, distributions equal to 50% of the excess must be made.
- The 10% early-distribution penalty tax would not apply to distributions required because of the $10 million or $20 million limits.
Roth conversions limited. In general, taxpayers can currently convert all or a portion of a non-Roth IRA or defined contribution plan account into a Roth IRA or account without regard to the amount of their taxable income. The proposed legislation would prohibit Roth conversions for single taxpayers and married taxpayers filing separately with taxable income over $400,000, $450,000 for married taxpayers filing jointly, and $425,000 for heads of household. [It appears that this proposal would not be effective until 2032.]
Roth conversions not allowed for distributions that include nondeductible contributions. Taxpayers who are unable to make contributions to a Roth IRA can currently make “back-door” contributions by making nondeductible contributions to a traditional IRA and then shortly afterward convert the nondeductible contribution from the traditional IRA to a Roth IRA. It is proposed that amounts held in a non-Roth IRA or defined contribution account cannot be converted to a Roth IRA or designated Roth account if any portion of the distribution being converted consists of after-tax or nondeductible contributions.
Estates and Trusts
- For estate and gift taxes (and the generation-skipping transfer tax), the current basic exclusion amount (and GST tax exemption) of $11.7 million would be cut by about one-half under the proposal.
- The proposal would generally include grantor trusts in the grantor’s estate for estate tax purposes; tax rules relating to the sale of appreciated property to a grantor trust would also be modified to provide for taxation of gain.
- Current valuation rules that generally allow substantial discounts for transfer tax purposes for an interest in a closely held business entity, such as an interest in a family limited partnership, would be modified to disallow any such discount for transfers of nonbusiness assets.
Crisis Averted? Financial Help for Struggling Renters and Landlords
By one estimate, U.S. landlords were owed about $57 billion in unpaid back rent at the beginning of 2021. The average household that fell behind owed about four months of rent, or $5,600. Altogether, more than 10 million U.S. families were facing the possibility of eviction.1
Many landlords, including those who depend on rent payments for retirement income, have experienced financial difficulties in lockstep with their heavily impacted tenants. Although multi-family apartment complexes are often owned by large corporations, about 90% of single-family rentals are owned by small investors who are facing the risk of mortgage default, bankruptcy, or forced property sales.2
Fortunately, the March 2021 federal stimulus bill added almost $22 billion in housing assistance to the $25 billion previously allocated by Congress.3 In many cases, payments are being sent directly to landlords through new or existing local programs on behalf of renters who meet certain eligibility requirements.
Program parameters
Under the Emergency Rental Assistance Program (ERAP), the U.S. Treasury has distributed grants to states, cities, and counties with populations greater than 200,000 to be used for back-due rent and utility bills accrued after March 13, 2020. Eligibility is limited to households that earn less than 80% of the area’s median income, as defined by the Department of Housing and Urban Development.
Applicants must document their incomes, prove they qualified for unemployment benefits or suffered financial hardship due to COVID-19 that impacted their ability to pay rent, and submit unpaid bills or notices that demonstrate they are at risk of becoming homeless.
What can landlords do?
Tenants and landlords generally apply for the funds together, but the application process and guidelines differ from program to program. In some states, landlords may be asked to forgive a percentage of the rental arrears in exchange for larger rent payments.
If you are a landlord, you might reach out to tenants who are behind on rent and encourage them to explore any potential opportunities for financial assistance. Check the websites of your state and local housing agencies to find the status and requirements of various housing programs and how to apply. Of course, many higher-earning households won’t be eligible for help, and in areas with lots of lower-income renters, local programs could run dry quickly.
Evicting tenants can be a painful and expensive process. If you have tenants who fell behind but are trying to catch up, it may be advantageous to work out a payment program instead to help keep them in place.
1) Moody’s Analytics, 2021
2) RealtyTrac, 2021
3) The Wall Street Journal, March 11, 2021
American Families Plan Would Provide Benefits for Some, More Taxes for Others
On April 28, 2021, the White House released a fact sheet for President Biden’s American Families Plan (AFP), which proposes about $1 trillion in investments and $800 billion in tax cuts. There would also be tax increases for those making more than $400,000 per year. Major provisions proposed in the plan are summarized here, including some tax provisions.
Education
The AFP proposes the following:
- Free universal pre-school for all three- and four-year olds.
- Two years of free community college.
- Increased assistance to low-income students by raising the maximum Pell Grant award that pays for college education by about $1,400.
Child care
Low- and middle-income families would pay no more than 7% of their income on child care.
Nutrition
Summer and school meal programs would be expanded for low-income families.
Unemployment insurance
Funds would be provided for unemployment system modernization, equitable access, and fraud prevention. The plan proposes to automatically adjust the length and amount of unemployment insurance benefits depending on economic conditions.
Paid leave
A national comprehensive paid family and medical leave program would be created and scaled in over a 10-year period.
Health insurance
- The American Rescue Plan Act of 2021 (ARPA 2021), enacted in March 2021, provided that persons who bought their own health insurance through a government exchange might qualify for a lower cost through December 31, 2022. The AFP would make that provision permanent.
- The AFP would also lower prescription drug prices by letting Medicare negotiate prices.
- In addition, the AFP would create a public option and the option for people to enroll in Medicare at age 60.
Child tax credit
ARPA 2021 made the following temporary changes to the child tax credit. For 2021, the credit amount increased from $2,000 to $3,000 per qualifying child ($3,600 for qualifying children under age 6), subject to phaseout based on modified adjusted gross income. The legislation also made 17-year-olds eligible as qualifying children in 2021. For most taxpayers, the credit is fully refundable for 2021 if it exceeds tax liability. The Treasury Department is expected to send out periodic advance payments (to be worked out by the Treasury) for up to one-half of the refundable credit during 2021.
The AFP would make permanent the full refundability of the child tax credit, and extend the other child tax credit provisions through 2025. Longer term, the plan would seek to make all these provisions permanent.
Child and dependent care tax credit
ARPA 2021 made the following temporary changes to the child and dependent care tax credit. For 2021, the legislation increased the maximum credit up to $4,000 for one qualifying individual and up to $8,000 for two or more (based on an increased applicable percentage of 50% of costs paid and increased dollar limits). Most taxpayers will not have the applicable percentage reduced (can be reduced from 50% to 20% if AGI exceeds a substantially increased $125,000) in 2021. However, the applicable percentage can now also be reduced from 20% down to 0% if the taxpayer’s AGI exceeds $400,000 in 2021. For most individuals, the credit is fully refundable for 2021 if it exceeds tax liability.
The AFP would make these provisions permanent.
Earned income tax credit
In addition to some other changes to the earned income tax credit (some temporary, some permanent), ARPA 2021 made the following temporary changes to the earned income tax credit for 2021. The legislation generally increased the credit available for individuals with no qualifying children (bringing it closer to the amounts for individuals with one, two, or three or more children which were already much higher). For individuals with no qualifying children, the minimum age at which the credit can be claimed was generally lowered from 25 to 19 (24 for certain full-time students) and the maximum age limit of 64 was eliminated (there are no similar age limits for individuals with qualifying children).
The AFP would make these provisions permanent for individuals with no qualifying children.
Increase in top tax rate on wealthiest taxpayers
The AFP would raise the top income tax rate on individuals back up to 39.6%, applying only to the top one percent. The 39.6% rate would also apply to the capital gains and dividends of households making over $1 million (the top 0.3 percent).
Stepped-up basis
The tax basis of most property is stepped-up (or down) to fair market value when an individual dies. The AFP would eliminate this step-up in basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions). There would be provisions designed with protections for family-owned businesses and farms.
Like-kind exchanges
Current tax law allows real estate investors to defer taxes when they exchange property. The AFP would eliminate the tax deferral on like-kind exchanges for gains greater than $500,000.
American Rescue Plan Act Provides Relief to Individuals and Businesses
On Thursday, March 11, 2021, the American Rescue Plan Act of 2021 (ARPA 2021) was signed into law. This is a $1.9 trillion emergency relief package that includes payments to individuals and funding for federal programs, vaccines and testing, state and local governments, and schools. It is intended to assist individuals and businesses during the ongoing coronavirus pandemic and accompanying economic crisis. Major relief provisions are summarized here, including some tax provisions.
Recovery rebates (stimulus checks)
Many individuals will receive another direct payment from the federal government. Technically a 2021 refundable income tax credit, the rebate amount will be calculated based on 2019 tax returns filed (or on 2020 tax returns if filed and processed by the IRS at the time of determination) and sent automatically via check, direct deposit, or debit card 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 $1,400 ($2,800 if married filing a joint return) plus $1,400 for each dependent. Recovery rebates start to phase out for those with an adjusted gross income (AGI) exceeding $75,000 ($150,000 if married filing a joint return, $112,500 for those filing as head of household). Recovery rebates are completely phased out for those with an AGI of $80,000 ($160,000 if married filing a joint return, $120,000 for those filing as head of household).
Unemployment provisions
The legislation extends unemployment benefit assistance:
- An additional $300 weekly benefit to those collecting unemployment benefits, through September 6, 2021.
- An additional 29-week extension of federally funded unemployment benefits 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 (allowing individuals to receive a maximum 79 weeks of benefits)
- Unemployment benefits through September 6, 2021, for many who would not otherwise qualify, including independent contractors and part-time workers.
For 2020, the legislation also makes the first $10,200 (per spouse for joint returns) of unemployment benefits nontaxable if the taxpayer’s modified adjusted gross income is less than $150,000. If a 2020 tax return has already been filed, an amended return may be needed.
Business relief
- The employee retention tax credit has been extended through December 31, 2021. It is available to employers that were significantly impacted by the crisis and is applied to offset Social Security payroll taxes. As in the previous extension, the credit is increased to 70% of qualified wages, up to a certain maximum per quarter.
- The employer tax credits for providing emergency sick and family leave have been extended through September 30, 2021.
- Eligible small businesses can receive targeted economic injury disaster loan advances from the Small Business Administration. The advances are not included in taxable income. Furthermore, no deduction or basis increase is denied, and no tax attribute is reduced by reason of the exclusion from income.
- Eligible restaurants can receive restaurant revitalization grants from the Small Business Administration. The grants are not included in taxable income. Furthermore, no deduction or basis increase is denied, and no tax attribute is reduced by reason of the exclusion from income.
Housing relief
- The legislation allocates additional funds to state and local governments to provide emergency rental and utility assistance through December 31, 2021.
- The legislation allocates funds to help homeowners with mortgage payments and utility bills.
- The legislation also allocates funds to help the homeless.
Health insurance relief
- For those who lost a job and qualify for health insurance under the federal COBRA continuation coverage program, the federal government will generally pay the entire COBRA premium for health insurance from April 1, 2021, through September 30, 2021.
- For 2021, if a taxpayer receives unemployment compensation, the taxpayer is treated as an applicable taxpayer for purposes of the premium tax credit, and the household income of the taxpayer is favorably treated for purposes of determining the amount of the credit.
- Persons who bought their own health insurance through a government exchange may qualify for a lower cost through December 31, 2022.
Student loan tax relief
For student loans forgiven or cancelled between January 1, 2021, and December 31, 2025, discharged amounts are not included in taxable income.
Child tax credit
- For 2021, the credit amount increases from $2,000 to $3,000 per qualifying child ($3,600 for qualifying children under age 6), subject to phaseout based on modified adjusted gross income. The legislation also makes 17-year-olds eligible as qualifying children in 2021.
- For most individuals, the credit is fully refundable for 2021 if it exceeds tax liability.
- The Treasury Department is expected to send out periodic advance payments (to be worked out by the Treasury) for up to one-half of the credit during 2021.
Child and dependent care tax credit
- For 2021, the legislation increases the maximum credit up to $4,000 for one qualifying individual and up to $8,000 for two or more (based on an increased applicable percentage of 50% of costs paid and increased dollar limits).
- Most taxpayers will not have the applicable percentage reduced (can be reduced from 50% to 20% if AGI exceeds a substantially increased $125,000) in 2021. However, the applicable percentage can now also be reduced from 20% down to 0% if the taxpayer’s AGI exceeds $400,000 in 2021.
- For most individuals, the credit is fully refundable for 2021 if it exceeds tax liability.
Earned income tax credit
For 2021 only:
- The legislation generally increases the credit available for individuals with no qualifying children (bringing it closer to the amounts for individuals with one, two, or three or more children which were already much higher).
- For individuals with no qualifying children, the minimum age at which the credit can be claimed is generally lowered from 25 to 19 (24 for certain full-time students) and the maximum age limit of 64 is eliminated (there are no similar age limits for individuals with qualifying children).
- To determine the credit amount, taxpayers can elect to use their 2019 earned income if it is more than their 2021 earned income.
For 2021 and later years:
- Taxpayers otherwise eligible for the credit except that their children do not have Social Security numbers (and were previously prohibited from claiming any credit) can now claim the credit for individuals with no qualifying children.
- The credit is now available to certain separated spouses who do not file a joint tax return.
- The level of investment income at which a taxpayer is disqualified from claiming the credit is increased from $3,650 (as previously indexed for 2021) to $10,000 in 2021 (indexed for inflation in future years).
Social Security and Medicare Face Financial Challenges
Most Americans will eventually receive Social Security and Medicare benefits. Each year, the Trustees of the Social Security and Medicare Trust Funds release lengthy reports to Congress that assess the health of these important programs. The newest reports, released on April 22, 2020, discuss the current financial condition and ongoing financial challenges that both programs face, and project a Social Security cost-of-living adjustment (COLA) for 2021.
How Social Security and Medicare will be affected by the COVID-19 pandemic is still uncertain; the Trustees acknowledge that the estimates and analysis included in the reports do not reflect the potential effects.
Social Security Trust Funds
The Social Security program consists of two parts, each with its own financial account (trust fund) that holds the Social Security payroll taxes that are collected to pay Social Security benefits. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. The combined programs are referred to as OASDI. Other income (reimbursements from the General Fund of the U.S. Treasury and income tax revenue from benefit taxation) is also deposited in these accounts. Money that is not needed in the current year to pay benefits and administrative costs is invested (by law) in special Treasury bonds that are guaranteed by the U.S. government and earn interest. As a result, the Social Security Trust Funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits.
Note that the Trustees provide certain projections based on the combined OASI and DI (OASDI) Trust Funds. However, these projections are hypothetical, because the trusts are separate, and generally one program’s taxes and reserves cannot be used to fund the other program.
Highlights of Social Security Trustees Report
- Social Security’s total cost is projected to be less than its total income in 2020 and higher than its total income (including interest) in 2021 and all later years. The U.S. Treasury will need to withdraw from trust fund reserves to help pay benefits. The Trustees project that the hypothetical combined trust fund reserves (OASDI) will be depleted in 2035, the same as projected in last year’s report, unless Congress acts.
- Once the hypothetical combined trust fund reserves are depleted in 2035, payroll tax revenue alone should still be sufficient to pay about 79% of scheduled benefits initially, with the percentage falling gradually to 73% by 2094.
- The OASI Trust Fund, when considered separately, is projected to be depleted in 2034, the same as projected in last year’s report. Payroll tax revenue alone would then be sufficient to pay 76% of scheduled benefits.
- The DI Trust Fund is expected to be depleted in 2065, 13 years later than projected in last year’s report. For a second year in a row, the depletion date has changed significantly, reflecting the fact that both benefit applications and the total number of disabled workers currently receiving benefits have been declining over the past few years. Once the DI Trust Fund is depleted, payroll tax revenue alone would be sufficient to pay 92% of scheduled benefits.
- Based on the “intermediate” assumptions in this year’s report, the Social Security Administration is projecting that the cost-of-living adjustment (COLA), which will be announced in the fall of 2020, will be 2.3% (last year’s report projected a COLA of 1.8% and the actual COLA was 1.6%). This COLA would apply to benefits starting in January 2021.
Medicare Trust Funds
There are two Medicare trust funds. The Hospital Insurance (HI) Trust Fund helps pay for hospital care (Medicare Part A costs). The Supplementary Medical Insurance (SMI) Trust Fund comprises two separate accounts, one covering Medicare Part B (which helps pay for physician and outpatient costs) and one covering Medicare Part D (which helps cover the prescription drug benefit).
Highlights of Medicare Trustees Report
- Annual costs for the Medicare HI Trust Fund exceeded tax income each year from 2008 to 2015. There were small fund surpluses in 2016 and 2017. In 2018 and 2019, expenditures exceeded income, and deficits are expected for all later years.
- The HI Trust Fund is projected to be depleted in 2026, the same year as projected in last year’s report. Once the HI Trust Fund is depleted, tax and premium income would still cover 90% of estimated program costs, declining to 78% by 2044 and then gradually increasing to 90% by 2094. The Trustees note that long-range projections of Medicare costs are highly uncertain because the health-care landscape is shifting and the effects are unknown.
Why are Social Security and Medicare Facing Financial Challenges?
Social Security and Medicare are funded primarily through the collection of payroll taxes. Because of demographic and economic factors, including higher retirement rates and lower birth rates, there will be fewer workers per beneficiary over the long term, worsening the strain on the trust funds.
What is Being Done to Address These Challenges?
Both reports continue to urge Congress to address the financial challenges facing these programs soon, so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. Combining some of the following solutions may also lessen the impact of any one solution.
- Raising the current Social Security payroll tax rate (currently 12.40%). According to this year’s report, an immediate and permanent payroll tax increase of 3.14 percentage points to 15.54% would be necessary to address the long-range revenue shortfall (4.13 percentage points to 16.53% if the increase started in 2035).
- Raising or eliminating the ceiling on wages currently subject to Social Security payroll taxes ($137,700 in 2020).
- Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later).
- Reducing future benefits. According to this year’s report, to address the long-term revenue shortfall, scheduled benefits would have to be immediately and permanently reduced by about 19% for all current and future beneficiaries, or by about 23% if reductions were applied only to those who initially become eligible for benefits in 2020 or later.
- Changing the benefit formula that is used to calculate benefits.
- Calculating the annual cost-of-living adjustment for benefits differently.
You can view a combined summary of the 2020 Social Security and Medicare Trustees Reports and a full copy of the Social Security report at https://www.ssa.gov/. You can find the full Medicare report at https://www.cms.gov/.
CARES Act: Retirement Plan Relief Provisions
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. This $2 trillion emergency relief package represents a bipartisan effort to assist both individuals and businesses in the ongoing coronavirus pandemic and accompanying economic crisis. The CARES Act provisions for retirement plan relief for individuals under federal tax law are discussed here.
For those seeking access to their retirement funds, these include special provisions for coronavirus-related distributions and loans. For those seeking to preserve their retirement funds, certain required minimum distributions from retirement funds have been suspended.
Coronavirus-related distributions
A 10% penalty tax generally applies to distributions from an employer retirement plan or individual retirement account (IRA) before age 59½ unless an exception applies. Due to the coronavirus pandemic, the penalty tax will not apply to up to $100,000 of coronavirus-related distributions to an individual during 2020. Additionally, income resulting from a coronavirus-related distribution is spread over a three-year period for tax purposes unless an individual elects otherwise. Coronavirus-related distributions can also be paid back to an eligible retirement plan within three years of the day after the distribution was received.
What does “coronavirus related” mean?
For purposes of the distribution and loan rules described here, “coronavirus related” applies to individuals diagnosed with the illness or who have a spouse or dependent diagnosed with the illness, as well as individuals who experience adverse financial consequences as a result of the pandemic. Adverse financial consequences could include quarantines, furloughs, and business closings.
Loans from qualified plans
Qualified plans such as a 401(k) can allow an employee to take out a loan. These loans can generally be repaid over a period of up to five years. They’re also generally limited to the lesser of $50,000 or 50% of the total benefit the employee has a right to receive under the plan. However, for a coronavirus-related loan made between March 27, 2020, and September 22, 2020, the loan limit is increased to $100,000 or 100% of the amount the employee can rightfully receive under the plan (whichever amount is less). In the case of a loan outstanding after March 26, 2020, the due date for any repayment that would normally be due between March 27, 2020, and December 31, 2020, may be delayed by coronavirus-related qualifying individuals for one year, and the delay period is disregarded in determining the five-year period and the term of the loan.
Most required minimum distributions (RMDs) suspended for 2020
RMDs are generally required to start from an employer retirement plan or IRA by April 1 of the year after the plan participant or IRA owner reaches age 70½ (age 72 for those who reach age 70½ after 2019). If an employee continues working after age 70½ (age 72 for those who reach age 70½ after 2019), RMDs from an employer retirement plan maintained by the current employer can be deferred until April 1 of the year after retirement. (RMDs are not required from a Roth IRA during the lifetime of the IRA owner.) RMDs are also generally required to beneficiaries after the death of the plan participant or IRA owner. A 50% penalty applies to an RMD that is not made.
The CARES Act suspends RMDs from IRAs and defined contribution plans (other than Section 457 plans for nongovernmental tax-exempt organizations) for 2020. This waiver includes any RMDs for 2019 with an April 1, 2020, required beginning date that were not taken in 2019. This one-year suspension does not generally affect how post-2020 RMDs are determined.
A recent IRS Notice (2020-23) clarifies the application to RMDs taken between February 1 and May 15. The 60-day rollover rule is waived if rolled over by July 15, 2020. The one-per-year rule still applies to all rollover situations, and inherited IRA RMDs cannot be rolled over.
There may be additional guidance issued in the future. It is not clear why RMDs made in January and after May 15th are not covered. Maybe the one-per-year rule would be modified.
