Are you tired of hearing about taxes?

Me too.

But here we are. Let's dive in.

So, we've got dueling infrastructure bills, plus a big proposed budget with lots of spending (and higher taxes inside).

That's a lot of expensive legislation on the table.

What's going to happen next?

The Democrats and Republicans seem pretty far apart on their respective infrastructure deals, which opens up the possibility that Democrats could go it alone and try to pass a package entirely without Republican support.1

That would be very difficult to accomplish.

It's also possible that both parties could align around a smaller bill and then the Democrats attempt to pass any extras through budget reconciliation.

The bottom line, we don't have enough clarity to know what a final infrastructure deal will look like. Given the political hurdles, the debate might drag on through summer.2

How likely are taxes to go up?

Well, my crystal ball's about as clear as mud right now, but let's break down what we see on the table.

President Biden's $6 trillion proposed budget offers a lot of spending and higher taxes to pay for it.3 None of these tax hikes are a surprise as they are in line with what Biden has promised before.

Wealthy taxpayers are looking at a higher top income tax rate, higher capital gains taxes, and the loss of the step-up basis on inherited assets.

Corporations are also in the line of fire, facing an increase in corporate tax rates, which could affect profitability.

That's currently what's on the table.

However, Biden's desire to raise taxes faces major headwinds (even inside his own party). His proposed budget is very much a wish list and will face challenges getting approved by legislators.4

It's very possible that some (or all) of these proposed tax hikes will get axed during negotiations.

How likely is it that any tax hikes will be retroactive?

One of the big shockers coming out of recent tax news is that the higher capital gains taxes could be made retroactive to April 2021.5

There is a historical precedent for this as it has happened a number of times before.6 However, retroactive tax changes are often for tax decreases.

I think it's very unlikely for an increase to be retroactive. There is too much opposition from both sides of the aisle.

Bottom line, I do think that higher taxes are coming. But I'm not sure that they will be as big or far-reaching as the Biden administration wants.

With so much uncertainty around taxes, now is not a time to panic, but to think carefully and make adjustments where needed.

Please reach out if there's anything specific you need to discuss.

How much inflation can the country afford before we’re in trouble?

Let’s discuss.

First, let’s get on the same page about some basics.

If you’ve noticed the price of a thing increasing over time (say, your favorite candy bar or the cost of college tuition), that’s inflation in action.

Economists use the broad increase (or decrease) in prices of goods and services across the country as a measure of economic health.

When inflation is stable and predictable, it’s a sign of a basically healthy, growing economy.

But, high inflation can quickly eat away at the purchasing power of your dollars, indicating that the economy might be overheated.

Deflation, or a decline in prices, can be a warning sign of a shrinking economy.

Recent data highlighted a surprise spike in inflation, indicating that prices increased faster than economists expected last month.1

Could this be a worrisome sign that the economy is overheated? Could $50 burgers be in our future?

Maybe.

On the other hand, could it be a temporary blip caused by the economy emerging from the pandemic-driven slowdown, complicated by supply chain issues?

Very possible.

Are the headlines catastrophizing?

They usually are.

Let’s look at the data.

The Consumer Price Index (CPI), one of the major indexes economists use to track inflation, showed a surprising spike in April, igniting fears of runaway inflation.

Core CPI (which excludes the highly volatile categories of energy and food) showed a 0.9% increase in April month-over-month and 3.0% year-over-year. That’s much higher than the expected 0.3% and 2.3%, respectively.1

However, digging a bit deeper, we see that just two categories of goods (used cars and transportation services) accounted for the vast majority of the surge.2

That suggests things like flights and train travel suddenly became more expensive after a year of rock-bottom prices.

Is that runaway inflation or the normalization of prices as the world reopens?

We can't tell from a single data point, but it's not unusual to see prices increase in sectors that experienced a severe slowdown last year.

And the jump in used car prices? Well, many folks are turning to the second-hand market right now, in part because new cars are caught up in global supply chain bottlenecks for things like semiconductors and raw materials.3

Inflation is something to keep an eye on, especially in a year when so many of the usual variables have been thrown into flux. An ongoing surge in prices could hurt our wallets as our dollars buy less over time.

However, a single monthly spike following a very weird period for the economy is not cause for alarm yet; we should prepare ourselves for more odd numbers coming out of different parts of the economy in the weeks and months to come.

Shortages of everything from ketchup to gasoline could lead to price increases and fluctuations as supply chains attempt to disentangle from pandemic disruptions.4

Should we expect markets to react to inflation (and other) headlines?

A negative market reaction is not surprising after weeks of strong performance. We should expect volatility ahead as we (and the economy) adjust to a post-pandemic world.

Bottom line: Expect the unexpected in 2021.

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So, the next (final?) round of stimulus was signed into law by President Biden.

Let’s dive in.

The $1.9 trillion bill called the American Rescue Plan Act of 2021 includes stimulus checks, child tax credits, jobless help, vaccine-distribution money, healthcare subsidies, and aid for struggling restaurants. What’s not inside? A higher minimum wage. 

Here's a quick visual of how it compares to prior rounds of stimulus.

Here are some immediate takeaways: 

More stimulus checks are coming: $1,400 checks could be hitting bank accounts and mailboxes this month, going out to adults, children, and adult dependents such as college students and elders. These adult dependents did not qualify for previous payments, so that’s good news for many.1

Who gets paid? Individual filers who earn as much as $75,000 (or joint filers making $150,000), plus their household members, qualify for the full $1,400 per person.1

Folks filing as a head of household can earn up to $112,500 and still qualify for the full payment. Phaseouts kick in quickly this round, and an individual with an income of $80,000 or a couple earning $160,000 get nothing.1

Not sure if you qualify? The Washington Post put out a handy calculator to help you figure it out. (Accuracy not assured, etc., etc.)

If you’ve filed your 2020 taxes, your check would be based on that income. If not, it would be based on your 2019 tax filing. If you’re waiting for a missed payment, individual tax returns have an extra line called “recovery rebate credit” to claim your stimulus payment. 

Enhanced unemployment benefits are extended through Sept. 6: Folks claiming jobless benefits will receive $300/week on top of what they already get from their state through the fall.2

Some unemployment income is now tax-free: Individuals who earned less than $150,000 in 2020 can shield up to $10,200 in unemployment benefits from taxes. For married couples filing jointly who both received unemployment, the tax-free amount goes up to $20,400, but the $150,000 income cap still applies. Unfortunately, if you earn over $150,000, it currently appears that all of the unemployment benefits become taxable with no phaseout.3

If this applies to you or someone you love, my advice is to wait to file or update your tax return until the IRS issues guidance on what to do.

The child tax credit is larger: The bill increases the child tax credit for one year to $3,600 for kids under 6, and $3,000 for kids between 6 and 17 (the current credit is a flat $2,000 per child under 17). 50% of the credit would be available as advance monthly payments that the IRS will start sending to families in July 2021.4

Unfortunately, not all families will qualify. Phaseouts begin at $75,000 for single filers, $112,500 for heads of households, and $150,000 for joint filers. However, families who earn less than $200,000 ($400,000 for joint filers) could still claim the regular $2,000 credit.4

Health insurance costs could drop on health exchanges/marketplaces: The bill removes the income cap on insurance premium tax credits for folks who purchase insurance on the federal health exchange or state marketplace (for two years). That means the amount you would pay for health insurance would be limited to 8.5% of your income as calculated by the exchange.5

Final thoughts

A lot of rules have changed in the last year, throwing an already complex tax season into a bit of confusion.

If your AGI is over the thresholds above, there are still ways you can lower your AGI retroactively for 2020 and potentially qualify for the stimulus. Consult with your financial planner to see what options are available to you.

Could there be more stimulus passed this year? It seems unlikely if the U.S. economy continues to expand.

According to a fresh estimate, our economy will expand nearly twice as fast as originally expected, growing at an estimated 6.5% in 2021 versus the 3.2% projected in December.6

Obviously, these projections rest on a lot of assumptions about vaccination rates, reopening, and consumer spending.

Let’s hope we stay on track.

P.S. Markets have hit new highs as fears of out-of-control inflation faded and hopes about the recovery surged. The usual caveats apply: we're in a roaring bull market and any time stocks reach new highs, pullbacks and corrections are possible. Keep calm, cool, and focused. I'm here for questions.7

1https://www.washingtonpost.com/business/how-can-i-qualify-for-that-1400-stimulus-check/2021/03/10/419fa7bc-81e2-11eb-be22-32d331d87530_story.html

2https://www.cnet.com/personal-finance/weekly-300-unemployment-benefits-what-happens-now-with-new-stimulus-bill/

3https://www.cnbc.com/2021/03/09/covid-bill-waives-taxes-on-20400-of-unemployment-pay-for-couples.html

4https://www.kiplinger.com/taxes/602378/congress-passes-3000-child-tax-credit-for-2021

5https://www.cnbc.com/2021/03/10/health-insurance-costs-to-drop-for-millions-under-covid-relief-bill.html

6https://www.nytimes.com/2021/03/09/business/oecd-doubles-us-growth-forecast.html

7https://www.cnbc.com/2021/03/10/stock-market-open-to-close-news.html

Chart source: https://www.wsj.com/articles/whats-new-in-the-third-covid-19-stimulus-bill-11615285802

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