As you probably know - if you've read one or more of my past blogs - I am not what you would call a daring or speculative investor. Even so, I urge anyone considering a SPAC investment to dig deep before making a commitment. In this week's Q&A, I explain my SPAC suspicions, talk stimulus checks and talk shop with a fellow investor who never plans to retire. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. VIEW THE VIDEO
A: Not in this old conservative’s mind.
But first, let’s define the term Special-Purpose Acquisition Company (SPAC), also known as a blank check company. It is an empty shell that raises money for the sole purpose of looking for a target to merge with and take public. SPACs have a set period, usually two years, to search for an acquisition. They’re not new (what is?), but suddenly they are very popular vehicles for taking shortcuts to the public markets…cheaper, faster alternatives to an initial public offering (IPO). They often utilize public figures (influencers) to attract attention to their fundraising efforts, which is typically a red flag to me. But the SEC has tightened regulations and procedures for SPAC activities, and they now have to register with the SEC.
SPACs generally have to place investor funds in a trust or escrow account until a target company is publicly announced. If investors don't like the deal, they have an opportunity to recover their funds. SPAC investors… and often the sponsors… don't know how their money will be used, making a SPAC deal difficult on the front end to evaluate. And there is that long gap, up to two years, before a SPAC actually buys a target company and starts operations. Dollars sitting idle for that long makes this old investor very nervous. Recent studies show that the average SPAC underperformed both the S&P 500 and the Russell 2000 indexes during the 3-, 6-, and 12-month periods after merger completions. By the way, getting into a SPAC is not as simple as buying regular equities. It helps if an investor has an existing relationship with a SPAC sponsor. In short, hedge funds, mutual funds, and the deep-pocket institutional boys usually find out about new SPACs first.
In my opinion, SPACs are not for long-in-the-tooth investors like me. Money can be tied up for a year or two, uninvested. Small investors are usually kept in the dark about ultimate funds disposition… not so much for sponsors and institutional investors. And, of course, there are no guarantees. SPACs are speculative investments because they tend to acquire startups or struggling companies… by nature, high risk. The allure is that SPACs offer smaller investors a way to participate in the IPO game – not necessarily up front, but not too far behind.
Lazy investors like me shy away from SPACs and allow the Amazing Power of Compounding to do the heavy lifting.
A: My most recent read is that the latest stimulus check will be $1,400. When added to the late December/early January’s $600 stimulus check the combined would total $2,000.
By the way, the latest stimulus package is not yet law – but parts of it seem destined to pass a Democrat-controlled Congress. It’s still up in the air who might receive those checks, individuals with incomes up to $50,000… or $75,000, and folks filing jointly with incomes up to $100,000… or $150,000. Right now, the rumor mill favors the high end of the ranges. Incidentally, no individual earning more than $100,000 or couple earning more than $200,000 would receive a relief check. Previously, only children listed as dependents on a federal tax return could receive a payment. A new tweak to the law says all adult dependents in the household (such as college students) can be counted and receive money. This foregoing information is House bill info. The Senate could very well lower the income thresholds to lower the bill’s final cost.
A: I recommend 3-4% annual portfolio withdrawal, adjusted for inflation, for day-to-day expense coverage. The top end of that range might be more appropriate for “total” withdrawals during the early retirement years when folks are more inclined to travel, tapering off during the middle golden years, and increasing in the later years due to the probability of increased medical issues. But those “top of the range” numbers are often financed by tapping what I call the “capital buckets”; whereas day-to-day expenses are usually financed with cash flow assets (Social Security, annuities, pensions, etc.).
Day-to-day expense withdrawals in retirement tend to mimic those of pre-retirement lifestyles. But don’t overdo this 4% rule. I’ve read where only about 16% of retirees exhaust their assets within a given timeframe. Many end life leaving small fortunes to their kids. Michael Kitces, noted financial planner, hypothesized that “The 4% retirement rule has quintupled wealth more often than depleting principal after 30 years.” In short, many retirees spend their lives fretting about money, and then let their kids enjoy spending it.
As to asset allocation, my approach differs from that of many folks for two reasons: I’m overly cautious about inflation (we can’t print bushels of money forever and not finally pay the price), and I refuse to accept near-zero returns on a majority of my long-term investments. Thus, my allocation (80:20) is virtually the reciprocal of the general rule of thumb (20:80) for my age. Risky, yes, but I’m a buy-and-hold guy… and even if I run out of time, I expect my heirs to also be buy-and-hold folks.
A: Interesting question.
I’m going to assume health is not an issue, but for safety’s sake, make sure you have Medicare Parts A, B & D coverage plus one of the better “Supplemental Health Care Plans” (I personally prefer a supplemental over the various Advantage Plans that can be full of surprises). A good dental and eyewear plan might be in order, too.
With this in mind, I would worry more about inflation and less about a periodic balancing toward more bonds due to aging. Why? Many folks who plan NOT to retire probably own profitable ongoing businesses or possess fatter-than-average portfolios of investments, which produce reliable income streams. If this assumption is true, your concern might be more about keeping up with inflation (dollar power erosion) than outliving your savings. Not to say some rebalancing shouldn’t be done, but to a lesser degree than someone retiring on a slowly declining portfolio of savings.
My own experience suggests continuing investing more like in your 40s and 50s, but somewhere along the way (60s and 70s) start adding in a larger (but not excessive) percentage of Target Dates or the like as a safety precaution against cognitive decline.
"A former farm kid's perspective: If a farmer always looks to the sky to see if rain is on the way, he might never plow his fields. If an investor is forever looking for the 'best time' to get back into the stock market [after a big downturn], he will probably never do it...on a timely basis."
― Hugh F. WynnSights
I was very pleased to get a question from a young, fledgling investor who is ready to storm the market with a year's worth of income! Count me impressed. In this week's Q&A, I talk PDQ principles and enter a one-sided discussion about what percentage of pre-retirement income you can expect to spend annually in your Golden Years. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. WATCH VIDEO
A: I assume you mean you have the equivalent of a year’s worth of income saved and available for investing. If so, that means you have accomplished the first important step to becoming a wise investor… you’ve become a saver.
The next step is to develop an investment program you plan to follow for years to come. I like the “dollar-cost-averaging” approach; the buy and hold approach; the mutual fund versus individual stocks approach… in short, my PDQ Principles approach to investing. Buy Quality products, Diversify and be Patient. The easist way to do this is to buy good quality mutual funds, and to build your portfolio around an index fund (e.g. a total stock market index fund, S&P 500, etc.). And don’t go “whole hog” into the market. Consider instead buying a given dollar amount of quality assets on a certain date each period (week, month, quarter, etc.). Having established this approach, remain faithful to your investment portfolio. In short, stay put. Don’t join the thundering herd when the market goes up or down, particularly down in the instance of a major correction. Corrections are part of an investor’s life.
If you have built a quality, highly diversified portfolio, don’t bail out. Such a choice often results in the creation of a needless tax event, possibly a loss, and later, an opportunity cost of not getting back in the market on a timely basis when there is a recovery. To benefit from the stock market you have to be there, and you have to stay there to optimize the Amazing Power of Compounding. Every sell you make disrupts compounding. Don’t forget that.
A: The primary advantage of a Roth is in retirement when an individual begins withdrawing money… tax-free. But this raises a thorny issue… will you be in a higher or lower tax bracket in retirement? If you think you'll be in a higher tax bracket, then the Roth is the way to go. So basically, a crystal ball would be helpful in making this decision. I absolutely favor a Roth IRA, but as with all things in life, it depends.
Age Matters: At age 72, one can no longer contribute to… and must make minimum withdrawals (RMDs) from... a traditional IRA. Why? Uncle Sam wants his cut. A Roth IRA has no age 72 restrictions as to contributions or withdrawals. Uncle Sam already has his piece of that pie. And as long as sufficient “earned income” is available, anyone can contribute to either type of IRA (no dice if it’s income from selling property, stock, etc.). Also, Traditional IRAs (for workers without 401(k)s) have no income restrictions. They’re open to all. Roth IRAs, however, have upper-income limits. Currently, if individuals makes more than $140,000 a year, no Roth IRA for them. And if couples (filing a joint tax return) earn more than $208,000 a year, no Roth IRA for them. The government frequently increases these upper limits from year-to-year. The current annual contribution limit for both Traditional and Roth IRAs is $6,000 ($7,000 after age 50).
Tax Considerations: The total taxable conversion amount depends on whether the underlying contributions to the IRA were deductible. Deductible contributions and subsequent gains are taxed at full current value. In short, if only deductible contributions were made to the IRA, taxes will be due on the full amount. Further, the tax due on a conversion will be collected by Uncle Sam along with the rest of income taxes due on the return filed in the year of the conversion. And yes, you may be required to make estimated tax payments in the year of the conversion, before you do your return. Logic tells me those taxes come due and payable during the quarter the conversion occurs. Again, converting to a Roth can have a significant impact on current year’s taxes since previous untaxed contributions and subsequent earnings within the IRA are considered to be taxable income.
Administrative Advantage: Direct the financial institution holding your 401(k) assets to transfer the funds directly to the trustee of your Roth IRA. This avoids the possibility of violating the 60-day rule regarding transfers from one account to another, which could entail tax penalties.
A: I usually suggest to people that they buy and hold. However, in today’s healthy market, if your portfolio hasn’t grown much, you might want to take inventory of its content. Perhaps you’re too bond heavy. As to the annuity, you may be locked into a long-term choice… and most likely without inflation adjustments. It’s hard to comment on your exponentially rising debt without knowing why, except to say quit borrowing. As to your nervousness about the market, it seems a bit toppy, but you have to be there to reap its benefits. Take a hard look at the quality and diversity of your current holdings. Changes may be in order… more so than abandoning the market.
A: Eighty percent of pre-retirement income may be a place to start the planning process, but factors such as potential years to retirement, anticipated lifestyle including enhanced travel plans and health expectations must all be considered to help estimate future retirement expenses.
Most pre-retirees have probably read about the 4% rule – the concept that if you spend 4% of your retirement portfolio the first year of retirement, and then adjust spending upward each year to account for Izzy the Inflation Monster, your portfolio will likely accommodate that level of spending through a 30-year retirement. A shortcoming of this concept is that folks dedicated to the idea often consider it a “no-no” to spend more than 4% (inflation-adjusted) regardless of changing circumstances. Spending more than 4% per annum isn’t necessarily risky. As usual, it depends… for example, depending on your age, spending more than 4% might make perfect sense, because you don’t need your portfolio to last 30 years. Or perhaps you desire to spend at a lower rate, hoping to leave a significant portion of your estate to heirs.
As to what percentage of pre-retirement income is a good number for a comfortable retirement income, it’s largely a function of pre-retirement income and the amount of money saved for retirement. Based on a number of studies I’ve read, in the early years of retirement, it’s not uncommon for folks to spend in retirement as much as they had spent while still working, but as they age, spending levels off. Logically, retirement spending on food, entertainment, and transportation remains relatively stable (except, perhaps, for travel), while spending on housing (due to downsizing, mortgage payoff, etc.) tends to decrease… offset somewhat by spending on healthcare, which tends to increase with age. One might conclude from this statement that spending in retirement might remain fairly steady.
As to the significance of pre-retirement income, a person making $50,000 a year might wish to adjust the 80% factor of their pre-retirement income to 100% during those early years of retirement as opposed to someone making $200,000, who might only need 50-60% of their pre-retirement income to fund a retirement lifestyle, particularly in the waning years of retirement.
In summary, consider using 80% of pre-retirement income as a starting point, plot the range somewhere 50% and 80%, and then make those necessary adjustments for travel, lifestyle, medical considerations, etc. to get to a final number… and then expect to adjust it to accommodate life’s many surprises.
The younger investors among us made a loud and strong statement with GameStop stock in the past month. I am impressed by their resolve, but can't resist the temptation to view it as a investing lesson. In this week's Q&A, I expound on the great GameStop stock heist. I also throw out my opinion on 401(k)s and IRAs per usual. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. WATCH THE VIDEO
A: Because of a still ongoing, widely publicized kerfuffle, lost in the momentary chaos is the fact that GameStop is a business, not just a bunch of shares with lives of their own.
Fact is, the company has suffered six or so years of stock price declines as sales of video games increasingly moved online - the company's current business model is “disappearing under their feet”. This conundrum attracted the attention of the Wall Street buzzards, more commonly know as the short sellers - investors who borrow shares and immediately sell them anticipating a price decline. Whether or not a decline happens, they have a legal obligation to buy back shares (regardless of price) to replace those borrowed and hopefully pocket a positive price difference. Fact is, GameStop became one of the most “shorted” stocks on Wall Street. Then came the 2020 rebound.
The stock rose sharply, particularly in early January 2021, after a co-founder of Chewy joined GameStop’s board hoping to transform the company by focusing more on digital sales and less on its struggling brick-and-mortar outlets. Though alarmed by the sudden price increase, short sellers remained pessimistic that GameStop's stock could retain its stock price gains. After all, they say, it’s just a place to buy a video game.
But then, a blood-letting broke out involving countless small investors, many of whom were neophyte traders making a bold… and surprisingly successful… stand against a cohort of savvy hedge-funders. Shares of GameStop spiked dramatically for fundamentally questionable reasons. Occupancy of the high ground offered increasing validation to this cohort of small investors, encouraging others via Reddit… many for the first time… to buy the stock through brokers on free-trading apps. Question is, will GameStop’s stock eventually tumble? Yes. Are GameStop investors, specifically, and investors in general, taking excessive risks? Yes. Is a broad-based stock market bubble developing? Not necessarily. The Fed downplays its rather conspicuous role (of continuing low interest rates) and points to investors' expectations for widespread COVID-19 vaccinations and still another generous stimulus package out of Washington as important drivers of record stock prices. And, by and large, marketplace fundamentals appear strong despite the pandemic.
The little guys (and some hedge fund boys) drew first blood from the short sellers, but it could be a fleeting victory. They’re backing a weak horse. Many are almost certain to lose their big paper gains. Because I believe in the old saw - pigs get fat and hogs get slaughtered – if I still had a gain in GameStop, I’d take it and run. A weak, overpriced stock will eventually reach its apex, and then drop like a rock. Signs indicate that’s already happening. I hope I’m wrong but paying off a student loan or credit card balance just might be the wise thing to do with those remaining chips.
And, despite a pending SEC investigation, encouraging “volunteers” to bid up the value of a stock to make a point doesn’t seem like criminal activity to me. Just saying.
A: Hmmmmm. As to taking the lump sum or not, if you do, you should seriously consider rolling it into an eligible retirement plan – to avoid immediate taxation – and investing the entire proceeds in a low-cost, highly diversified fund. Note: Since 2000, Vanguard’s Total Stock Market Index Fund has earned an average annual yield of better than 7.75%, and their Target Retirement 2050 has averaged 8% since inception. Investment options abound that seem equal to or better than the 3.8% you mentioned.
If your company allowed you to contribute after-tax dollars to the plan, then no taxes would be due on the portion of your lump sum benefits that represents a return of your initial investment. However, you can defer paying taxes on the lump sum distribution by requesting your old company’s plan administrator to directly roll the money (within 60 days) into an IRA or other eligible retirement plan. A direct transfer exempts you from having to pay the 20% federal withholding on an indirect transfer. By transferring the lump sum amount to an eligible retirement plan, you effectively defer paying taxes on it until you start making withdrawals in retirement or at age 72.
A: Since you have a 401(k), I assume you are working and that you have “earned income” with which to make contributions to a Roth retirement account. Contributing an annual maximum to a Roth IRA makes sense, but does not quickly achieve your second objective of putting money to work ASAP.
Since you seem to be somewhat unprepared for retirement at this point, tying up funds in a new home (as opposed to renting) might be ill-advised, depending on your age. I would suggest you consider a low-cost, highly diversified index or Target Retirement Fund as a place to park your supplemental $100k during the time you draw it down to fund your Roth. Hopefully, you will have a nice Social Security check as supplemental income to the savings proceeds mentioned.
Many of us started with nothing (except that egg money, Joe) but did have the good sense to pay attention to parental and other financial advice, particularly about “never” dipping into those retirement savings accounts… let’s call ‘em our capital preservation reserves. In fact, we were told to set aside emergency (Rainy Day) funds specifically to avoid invading our retirement funds prematurely. In short, hoard those long-term, revenue-producing capital accounts at all cost because that’s what makes the Amazing Power of Compounding work so efficiently on our behalf across a 40-year career. The money steadily saved and the income it produces in those capital accounts will grow like topsy if left alone.
For some of us, this capital preservation habit becomes so ingrained in our financial toolbox that we never relent… even after it has served its worthy purpose; even after we enter that phase of life the habit prepared us for – those golden years. In short, at the very time we should be enjoying all of the fruits of our labor we just can’t seem to bring ourselves to do it.
Hands off those pots of capital, our subconscious screams! Thus, we find ourselves spending only the income derived from these carefully accumulated reserves of capital.
It’s an exceedingly difficult habit to break. The government has been very quick to slap our hands and penalize us 10% if we tap into our 401(k) or IRA retirement funds prematurely. And Uncle Sam also warns us not to request those hard-earned Social Security checks too quickly (often wise advice but not always).
We hear all of the horror stories about how so very few people enter retirement with sufficient savings. These rumors are frightening and take a toll on us. We fret about outliving our resources as we watch our capital reserves grow in size. Fair enough, but how much is enough?
I’m reminded of those Economics 101 principles learned long ago, but one in particular stands out as I write this blog: the diminishing marginal utility of income and wealth... that each additional dollar we earn provides less satisfaction and happiness than the dollar before… that going from zero to $500,000 in assets provides a much bigger boost to our happiness and well-being than going from $1 million to $2 million.
Might we safely assume that the same diminishing marginal utility principle applies to security as well as happiness? Where do we draw the line about the degree of security we need to feel comfortable in retirement: $500,000; $1 million; $2 million, etc.?
In summary, my point is simply this. Optimize that margin of financial security that gives you peace of mind. But don’t overdo it; don’t require so much financial security that you fail to enjoy the well-earned fruits of your labor, keeping in mind, of course, those important factors like diversification and Izzy the Inflation Monster.
… and yes, I’m guilty as charged.
I focus a lot on saving, investing and saving some more for retirement. This week I do a 180 and talk about the opposite: What to do when you have reached retirement and need to tap into your retirement to pay your living expenses. I also throw out my opinion on investing in mutual funds vs. individual stocks. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. WATCH THE VIDEO
A: Let’s first define the term, decumulation. Simply, it’s the antithesis of one’s wealth accumulation phase; it is a thoughtful plan/strategy on how best to draw down (spend) accumulated wealth/investments during retirement.
Often folks facing retirement give too little thought to the shift from wealth accumulation to wealth decumulation, which involves an important shift in investment strategy as investors transition to retirement. A necessary starting point includes the development of a retirement budget to better assess which assets might first be exhausted and which should remain invested. This, of course, involves an analysis of how your assets are currently invested and how you might best withdraw funds from those various sources. Don’t feel alone in this “chasing your tail” exercise.
How you decide to decumulate your assets is the most important decision you’ll make as retirement approaches. Specifically, when deciding how to decumulate your assets in retirement, consider taking these three important steps:
To summarize, a decumulating investment strategy requires a sound strategy involving the sale of certain assets to fund recurring retirement expenses as well as determining which assets to keep for purposes of continuing to grow one’s investment portfolio without exposing it to inordinate risk and volatility. Each individual’s asset base is different, thus requiring different approaches. Expert third-party input is always advised and can be downright helpful.
A: According to the AARP and the National Alliance for Caregiving, the average duration of time spent by caregivers providing care for a parent or parents is 4.5 years. So, planning is paramount whether you’re a caregiver or being cared for. The planning categories can be reduced to four: Income and Budgets, Estate Planning, Taxes, and Remodeling. Let’s start at the top.
Income & Budgets: There are two components to this finance issue, which demands knowledge of the state of financial affairs of a parent coming aboard – an often touchy subject but it must be addressed. Is he, she (or they) of modest or comfortable means? If financially comfortable, that implies he/she will be able to contribute to now higher household expenses. If a parent is of modest means, this implies more household expenses due, perhaps, to higher utility and grocery bills, and more trips to primary care physicians and specialists resulting in unplanned prescription and uncovered doctor bills. In more extreme cases, a working caregiver might have to reduce hours spent on the job to provide care for an invalid parent. Handled poorly, this can impact the budgets of all involved. Uncovering your parent’s financial condition up front helps plan for and avoid future financial surprises.
Estate Planning: It's vital to have an updated version of your parent’s last will and testament (and related documents). It’s also a good time to discuss other financial and guardianship matters… a time when, inevitably, a caregiver will need to assume financial and other responsibilities previously handled by the parent. Because rumors circulate about adult children taking advantage of elderly parents, a clear understanding of who will assume what roles and when is particularly important. Even discussions about an ultimate move to a nursing home, if affordable, should be discussed at the appropriate time. Old folks worry about losing control of their finances and future. They need assurances that caregivers have their best interests at heart.
Taxes: Research whether tax deductions or credits are available to you based on the significant contributions you will make to your parent’s care. This can help ease the financial burden on all parties involved. Discussions with a tax expert might be in order. But begin your own research by studying IRS Publication No. 501, “Dependents, Standard Deduction and Filing Information”, and IRS Form 2441, “Child and Dependent Care Expenses”. Always ensure that your parent’s federal tax return is promptly and accurately filed.
Remodeling: Because of the lengthy time period a parent might spend in a caregiver’s home, the stay often leads to remodeling efforts to accommodate the aging process… improved lighting, grab bars in bathrooms, changing handles on doors and faucets, relocating upstairs bedrooms to avoid stairs, door widening to accommodate wheelchairs, and even an additional bedroom or bathroom, or both. Some families even find it necessary to move to a larger home. In any event, this can result in significant unexpected outlays, so be prepared.
Obviously, there can be some major financial and physical issues involved in becoming caretakers of elderly parents… or becoming an elderly parent. And regardless of which position you occupy (probably both at different stages of life) it’s wise to plan ahead.
A: The primary advantage is automatic diversification… to varying degrees. For example, buying the S&P Index Fund gives you ownership in 500 of the country’s largest companies, by valuation… the best and the less good. Alternatively, if you should buy Vanguard’s Healthcare Fund you would be highly diversified in that particular sector of the market but not in other sectors.
There are companies that exist to assess the quality of mutual funds, which saves investors the trouble depending on how much they trust the evaluators. Morningstar, for example, rates funds based entirely on the numbers. It assigns one to five stars based on a given fund's past risk-adjusted results, taking into account sales charges the fund levies in calculating performance. The best (in Morningstar’s opinion) receive five stars; the bottom-dwellers receive one star.
A disadvantage of owning mutual funds is that investors have no control over the kinds of dividends to pursue, nor when to sell given stocks. Mutual fund managers make those decisions. With the advent of index funds and ETF’s, management fees approaching zero have become a very enticing feature of unmanaged funds and have helped to reduce the operating cost of managed funds as well.
The $900 billion Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (CRRSA Act), signed into law on Dec. 27, 2020, delivered a second round of economic stimulus for individuals, families, and businesses. It also expands many of the provisions already in place under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), including a second direct stimulus payment to individuals who qualify. WATCH THE VIDEO
According to data released by the U.S. Treasury Department, the majority of stimulus payments are already in householders’ bank accounts… up to $600 for eligible individuals, $1,200 for joint taxpayers, and an additional $600 for each dependent child under 17 (e.g., a family with two children could receive $2,400).
This second round of stimulus payments ($164 billion), like the first round, IS NOT TAXABLE... nor is it repayable to the government at some later date. And there’s no action required on your part to receive the stimulus money. The IRS is using the most recent information on file – most likely your 2019 tax return or Social Security address – to get the stimulus payment to you either by direct deposit or by check.
Expect to receive the full entitlement if your adjusted gross income (AGI) is not more than $75,000 ($150,000 if married filing jointly). AGI is gross income like wages, salaries, or interest minus adjustments for deductions like student loan interest or traditional IRA deductions. Folks receiving Social Security retirement, disability, Railroad Retirement, VA, or SSI income and who are not typically required to file a tax return, will again receive a stimulus payment. The IRS will use the information from Form SSA-1099, Form RRB-1099, or the Veterans Administration to generate the stimulus payment.
As AGI increases over $75,000 ($150,000 if married filing jointly), the stimulus amount ratchets down and will completely phase out at $87,000 for single filers with no qualifying dependents ($174,000 if married filing jointly with no dependents).
By the way, this bill expands stimulus payments to include households with different immigration and citizenship statuses not included in the first round; so, retroactively, some individuals ineligible for the first (CARES ACT) stimulus may receive that payment as a recovery rebate credit when filing a 2020 tax return.
Unemployment checks will increase by $300 per week, and benefits will extend to March 14, 2021 (unemployment compensation is taxable, tempered by the fact that tax rates drop as income drops). Also extended is the Pandemic Unemployment Assistance (PUA), which expands unemployment to include those not usually eligible for regular unemployment insurance benefits (i.e., self-employed, freelancers, and side-giggers – a hobby, seasonal, or occasional work – will continue to remain eligible for unemployment benefits). Certain workers with at least $5,000 per year in self-employment income but are disqualified from receiving PUA because they also have an employer, could also be eligible for an additional $100 per week in unemployment benefits.
This important provision will help workers who experienced lower 2020 income – or who received unemployment income in lieu of their regular wages – get bigger tax credits and larger refunds in the coming year. It allows lower income individuals to use their earned income from 2019 to determine their Earned Income Tax Credit and the refundable portion of the Child Tax Credit in 2020, since their lower 2020 income might reduce the amount they are eligible for.
The Earned Income Tax Credit is the federal government’s largest program for working people with low to moderate income. Last tax season, over 25 million eligible tax filers received, on average, an Earned Income Tax Credit of $2,476.
Of utmost importance from an employment perspective, the 2021 Act provides a second round of payments under the Paycheck Protection Program (PPP). Self-employed individuals, small businesses, small 501(c)(6) organizations, restaurants, live venues, and Economic Injury Disaster Loans (EIDL) are again eligible. And businesses that continue to experience severe revenue reductions can apply for a second PPP loan.
Businesses with 300 or fewer workers that have experienced 25% revenue loss in any 2020 quarter and small 501(c )(6) organizations that have 150 employees or fewer are eligible for a Paycheck Protection Program under the COVID-19 Emergency Relief Package. And the 2021 Act broadens the type of business expenses forgiven under the loan to include supplier costs, allows business expenses paid utilizing PPP proceeds to be tax deductible, and simplifies the loan forgiveness process.
Importantly, both students and parents carrying federal student loans will receive an additional extension on (both principal and interest) loan payments and will not be required to make any payments until April 1, 2021.
Contractors temporarily unable to work due to facility closures and other restrictions could receive reimbursement for paid leave from federal agencies.
The CRRSA Act also extends the moratorium on evictions under the CARES Act, which will protect renters from eviction until January 31, 2021… a big boost for struggling families who will receive assistance for paying past due and future rent payments, as well as utility bills. The stimulus package includes $25 billion in emergency rental assistance and extends the deadline to use relief funds set aside in the CARES Act. This assistance is in addition to the stimulus checks of $600 and a 10-week period of $300 in pandemic-related jobless benefits.
The CRRSA Act also includes the permanent passage – in some cases, a multi-year extension – of many additional tax provisions commonly referred to as tax extenders, which provide tax relief and support for families and individuals through various mortgage relief, education, and medical expense relief. For example, participants in Flexible Spending Accounts (FSAs) can carry over unused funds from 2020 to 2021 and 2021 to 2022, assuming company plans opt into the new rules.