Stimulus checks of $1,400 per person
The American Rescue Plan began sending $1,400 stimulus checks in mid-March. For married couples filing a joint tax return, the amount is double, $2,800. Each dependent adds another $1,400, and unlike the first two rounds, adult dependents including SSI or SSDI recipients and college students claimed as dependents are eligible for the extra dependent credit. (For college students, the payment goes to the taxpayer-parent.)
The stimulus began to phase out if a single filer’s AGI was $75,000 or more, a head-of-household’s was $112,500, or a married couple filing jointly’s AGI was $150,000. The phase-out was swift: Missing out were single filers with an AGI above $80,000, heads-of-household over $120,000, and joint filers over $160,000. Payments for children decreased on the same figures.
Child tax credit increased to $3,600 per child
As an effort to help about 27 million children, individuals who have up to $75,000 in AGI and couples with up to $150,000 in AGI will receive $3,000 for each child age 6 to 17 and $3,600 for each child under 6. The credit is reduced by $50 for every additional $1,000 of AGI, so it will phase out entirely for individuals earning over $95,000 and married couples filing jointly earning more than $170,000. Families who are ineligible for the new credit because of a higher AGI can still claim the $2,000 per child tax credit (available to individuals with AGI up to $200,000 and married couples filing jointly with AGI up to $400,000).
This one-time credit will start around July, is fully refundable, and you don’t need to be employed.
The maximum Child and Dependent Care Tax Credit also rises from 35% in 2020 to 50% for 2021. The 50% applicable percentage does not begin phasing out until AGI exceeds $125,000, regardless of filing status. Above $185,000 of AGI, the applicable percentage drops to 20%.
More childcare expenses can be applied to the credit. Instead of up to $3,000 in expenses for one child and $6,000 for two or more, the credit can be applied for up to $8,000 in expenses for one child and $16,000 for two or more.
Unemployment beneﬁts continue through September
The $300 weekly supplemental unemployment benefit was extended through September 6 (it had been set to expire on March 31). Benefits through the Pandemic Unemployment Assistance program, which covers many workers who would otherwise be ineligible for unemployment benefits (such as the self-employed), will also be available through September 6.
Significantly, the plan waives taxes on the first $10,200 in unemployment income for those whose AGI was less than $150,000 in 2020.
Health insurance, expanded COBRA
If someone collects unemployment at any time this year, they qualify for a free silver plan with bonus coverage that will lower the deductible and co-payments. The Plan provides short-term subsidies to buy coverage on the HealthCare.gov marketplace.
COBRA can be very costly, as employers can charge up to 102% of the full premium. The government will pay the entire COBRA premium from April 1 through September 30, provided the former employee did not leave their job voluntarily.
Finally, for 2021 only, you can set aside $10,500 in a dependent care account instead of the standard $5,000, as long as your employer allows the change in withholding.
Tax breaks for coronavirus-related student loan debt forgiveness
If a person qualifies for student loan forgiveness or cancellation, there will be no income tax due on debt forgiven between January 1, 2021 and the end of 2025.
Earned Income Tax Credit expanded
For 2021, more workers without qualifying children will be able to claim the earned income tax credit (EITC). Plus, the amounts will be higher. The minimum age to claim the EITC has been lowered to 19 from 25 (except for certain full-time students), and the maximum age of 65 has been eliminated. The total credit available is $1,502 (up from $543).
There are also some permanent changes to the EITC. Workers who otherwise wouldn’t claim the credit because their children can’t satisfy the requirements can now claim the childless EITC. Certain married but separated couples can claim the EITC on separate tax returns, too. The limit on investment income is also increased from $3,650 (for 2020) to $10,000 (adjusted for inflation after 2021).
Small businesses grants and tax credits for businesses that provide emergency paid leave
There is now a $28 billion grant program for restaurants and bars to help them meet payroll and other expenses; a single business can get up to $5 million. There will be $15 billion in Emergency Injury Disaster Loans (through the SBA) for small businesses with less than 10 workers, $7 billion added to the Paycheck Protection Program (that will now allow non-profits to qualify), and $1.25 billion earmarked for music halls and concert venues.
Through October 1, 2021, employers who offer paid sick leave and paid family leave benefits receive a tax credit.
And the markets?
The stock market has seen some movement away from growth stocks and toward cyclical ones, and value stocks have been outperforming growth stocks by one of the widest margins in recent memory. Overall, this movement is a sign of confidence that we will have a strong economic rebound this year. Value shares are also appealing because they are generally cheaper to buy. Small-cap stocks also are rallying.
Developed and emerging markets are a somewhat undervalued opportunity as well. These markets have been hurt by rising interest rates over the last few weeks and the strengthening dollar. It is possible that the dollar could eventually weaken with all the stimulus spending; if that is the case, developed and emerging markets will continue to be a good holdings.
We are always looking at what the market is doing and making sure our clients’ portfolios have appropriate levels of exposure to different investment categories. We are also always happy to talk with you and go over why we chose certain investments and how your portfolio has been put together.
We are in an unusual economic situation, one in which we have tremendous stimulus spending, a Fed more tolerant than normal toward inflation temporarily rising above its target, and a high level of consumer savings.
The risk to the economy is that if runs very hot, this will create excessive pricing somewhere (housing, equities, etc.). The Federal Reserve may have no choice at some point but to raise interest rates in order to fight inflation. Then, debt payments will take a portion out of GDP.
We will see how this all turns out. At Strategic Edge Wealth Management we strive to take a measured, balanced approach that does not get too caught up in anything while remaining poised for opportunities as they arise. Again, we are happy any time to talk with you about our philosophy and the investments we choose.