CARES Act – Reacting to COVID-19 and Stimulus Payments

CARES ACT – REACTING TO COVID-19 AND STIMULUS PAYMENTS

We don’t need to recite the obvious. You all know by now that COVID-19 has impacted our lives in many ways. Whatever disruption it has caused in your daily lives, we certainly hope you and your loved ones are healthy.

This letter is long but has vital information about the new legislation recently passed, IRS relief and property taxes.

I. What We Know – CARES Act is now Law
After a lot of talk, Congress did something. The Coronavirus Aid, Relief, and Economic Security Act, (CARES Act), a $2 trillion stimulus package to mitigate the impact of the Coronavirus pandemic was signed into law on Friday March 27, 2020. CARES has relief for individuals and businesses. Below is a brief digest of provisions affecting businesses and individuals.

Individuals
The CARES Act includes stimulus payments of $1,200 for each individual and $500 for each dependent child, defined by the child tax credit rules as under age 17. Below is a brief digest of its provisions.

Who and How Much?

  • Individuals with adjusted gross income (AGI) up to $75,000 a year are eligible for the full $1,200 payment. The payment is reduced by $5 for every $100 in income above $75,000. The payment amount is entirely phased out at an AGI of $99,000.

  • Married filing joint couples with AGIs up to $150,000 a year are eligible for a $2,400 payment. The payment is reduced by $5 for every $100 in income above $150,000. The payment amount is entirely phased out at an AGI of $198,000 (if the taxpayers have no dependent children). Married couples also will receive an additional $500 for every dependent child under 17.

  • Example: MFJ with no children. Keith and Norma are married filing joint. They have no dependent children. If they have AGI of $150,000 or less, they are eligible for a $2,400 payment. If they have AGI above $150,000, their rebate will be reduced and finally phased out at an AGI of $198,000.

  • Example: MFJ with two children. Chris and Pat are married filing joint. They have two dependent children under age 17. If they have AGI of $150,000 or less, they are eligible for a $3,400 payment. If they have AGI above $150,000, their rebate will be reduced and finally phased out if their income hits the top of the threshold amount.

  • Head of household filers with AGIs up $112,500 a year are eligible for the full $1,200 payment and an additional payment of $500 for each dependent child under age 17. The payment is reduced by $5 for every $100 in income above $112,500. Head of household taxpayers will also receive an additional $500 per dependent child under age 17. With no eligible children, a head of household filer is phased out at AGI of $137,000. With one eligible dependent child, a head of household filer is entirely phased out of the rebate payment at AGI of $146,400.

  • Example: Head of Household – no children under 17. Heather has an 18-year-old high school senior living with her and qualifies as a head of household filer. If her AGI is $100,000, Heather’s payment is $1,200. Her dependent child does not qualify her for the additional $500 payment because the child is not under age 17. If Heather’s dependent child is under age 17, her payment is $1,700.

  • Phase-out of the rebate. If your income is above the threshold amounts, a reduced payment will result. The reduced amount using your own income (AGI) can easily be calculated using the Washington Post calculator.

What needs to be done to get the Stimulus Rebate?

Nothing.
The IRS will deposit the calculated amount directly into your bank account, using the AGI and the bank information on your 2019 tax return. If your 2019 return hasn’t been filed, the IRS will use the AGI and the bank information from your 2018 tax return. If there’s no bank information on the return, the IRS will mail a check.

When Will the Payments Arrive?
The IRS says that a direct deposit should be in your bank account in about three weeks. Checks should start arriving in six to eight weeks.

2020 Required Minimum Distributions
Required Minimum Distributions (RMDs) are waived for 2020 and individuals that have already taken their RMDs for 2020 can return those if they so desire. This is specific to defined contribution plans and IRA accounts (including Inherited IRAs) but not defined benefit plans at the moment. The provision includes RMDs for individuals who turned 70½ during 2019 and had not taken their distribution prior to January 1, 2020.  Beginning January 1, 2020, the new age at which one must start taking RMDs is 72.

2020 Tax Return
Technically the stimulus rebate is a 2020 refundable tax credit. The payment received in the next few weeks is an IRS advance. If you have less income in 2020 than in 2019 because of layoffs, reduced hours and closed businesses, and your rebate payment was reduced by the income threshold, you’ll receive a credit for the difference on your 2020 return. If for some reason, you receive too much of an advanced payment, you do not have to pay back the excess.

Businesses
The U.S. Chamber of Commerce is an invaluable resource for business owners. They have pulled together a significant amount of information that summarizes your eligibility and options under the CARES Act. We recommend visiting their website for more information.

Our accounting firm partner, The Accountancy, has also compiled a wealth of information for businesses. Here are some links to various topics:

Forgivable SBA Loan Program
Business Tax Relief
Employee Retention Credits
Payroll Tax Deferral
Net Operating Losses
Business Interest Deductions
Suspension of Non-Corporate Loss Limitation
Alternative Minimum Tax (“AMT”) Credits
Individual Relief and Assistance
Unemployment Compensation Benefits
Student Loans
Credit Reporting
Federally Backed Mortgages
Retirement and Other Employee Benefit Plans Relief

II. IRS People First Initiative
The IRS has provided significant relief in the form of filing extensions (covered in our last communication), dispute resolution and deferring payment on installment loans. If you owed money to the IRS and entered into a payment arrangement, you are allowed to not make payments until July 15, 2020. If this applies to you, see a more complete explanation by clicking on this link: IRS Newsroom

If you owe taxes from prior years, now may be a good time to file Offers in Compromise to reduce the amounts owed in your favor.

III. Property Taxes
In case you are wondering about property taxes, county assessors have indicated that there is no reprieve from the payment of your property taxes due on April 10. However, some counties have also stated they will waive penalties if you do pay after that date if you request a waiver. Since not all counties are handling this the same way, we suggest you visit the county’s property tax website for more information.

We want to help our clients understand how this Act impacts them. Any change in tax laws presents planning opportunities that should be considered and discussed. As we learn more about the CARES act in the coming days and weeks, we will continue to update you.

California Prop 19: Does it Help or Hurt You?

CALIFORNIA PROPOSITION 19: DOES IT HELP YOU OR HURT YOU?

California proposition 19 becomes effective on February 16, 2021 and allows homeowners over age 55, disabled or wildfire/natural disaster victims to transfer their primary residence tax base (assessed value for property taxes) to a new residence in California. It also creates a state fire protection services fund to help with the future costs of the large wildfires our state has been experiencing.

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To help pay for these changes, proposition 19 changes the taxation of family property transfers. The result is many inheritors will pay significantly higher property taxes or be forced to sell the property.

Before Proposition 19, primary residence transfers between parent and child were excluded from property tax reassessment.  The state did not consider this type of transfer a change of ownership and had no dollar limitations or other restrictions. The transfers could also be from child to parent and between grandparent and grandchild if the parents were deceased.

For family property transfers not involving the primary residence, value reassessment only occurred on the amount above $1 million of assessed value or $2 million on community property.

This allowed many families to pass vacation homes, rental properties, and commercial properties valued at $2 million or less to their children without an increase in property taxes.

After Prop 19 (February 16th, 2021), primary residence transfers for the above family groups are not subject to value reassessment if the inheritor uses the property as their primary residence and the fair market value is not greater than $1 million of the assessed value.  If it is, value reassessment occurs on the amount over $1 million.

Transfers of all other property types are subject to value reassessment.

This means the family vacation home, rentals, and commercial property are subject to value reassessment.  After you pass, the inheritor will receive a “step up” on the property’s value to fair market value. If they sell the property immediately, they will likely be subject to little if any capital gains taxes on the sale. This assumes there is no change in the IRS inherited asset “step up” rules.

If they keep the property, they will have to pay property taxes at the new “assessed value” amount. For Los Angeles County, the rate is 1.25% of assessed value or $12,500 annually per million.

Proposition 19 applies to all family property transfers including property titled under a Revocable Trust, Qualified Personal Residence Trust (QPRT) or Revocable Transfer on Death.

There are options available which can reduce the negative impact of proposition 19. After February 15th, 2021 several of the options below will be less attractive. In addition, new state legislation is required to answer questions created by the Proposition 19 changes which could impact your decision. Each option has advantages and disadvantages and should be thoroughly reviewed with a qualified Trust attorney.

  1. Gift or sell the property to your children before you pass.

    1. Add your child to your deed as tenants in common or joint tenancy.

    2. Gift or sell the property to a Trust (IDGT) Intentionally Defective Grantors Trust with or without a leaseback.

    3. Transfer at least 50% interest in the property to a Trust (IDGT) and create an LLC.

Consideration of the impact to the new assessed value (step up) must be weighed against the value of maintaining a low property tax amount for your children. In addition, Federal gift tax, estate tax and income tax should be considered.

All information is meant to be educational and correct as of the date of this article.  This article is limited to proposition 19 and its impact. Please contact your Trust attorney for your unique circumstances. If you do not have a Trust attorney, please contact us.

This article was adapted from a presentation by Kevin J. Moore, LLM, Kevin J. Moore & Associates, 301 E. Colorado Blvd., Suite 600 Pasadena, CA 91101 (626) 568-9300 [email protected] and a presentation by the San Francisco Assessors Office on January 5, 2021.

 

YMCA’s Fiesta Days Memorial Run/Walk

YMCA’s Fiesta Days Memorial Run/Walk

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This year, Penniall & Associates is proud to be a title sponsor for the YMCA of the Foothills will host the 43rd Annual Fiesta Days Run on Memorial Day, Monday, May 28th, at Descanso Gardens.

The YMCA Fiesta Days Run has grown into a major Memorial Day weekend tradition, as part of LCF Chamber of Commerce Fiesta Days Celebration bringing over 1000 local runners, families and volunteers together for a fun and inspiring morning.

$10 discounts available for teams of four or more, use promo code “TEAM”’

All proceeds from the event benefit the Y’s Health Aging initiative. The Y’s life-saving initiative empowers seniors through balance and strength programs.

Did you know 1 in 3 seniors experience a serious fall?  The Y is saving lives with the Balance and Thrive!

This event will feature a beautiful 5K, 10K & 1 Mile Family Run/Walk Registration fees include:

• Race Entry and Goody Bag including the YMCA Fiesta Days Run T-shirt

• Refreshments, Awards and Raffle prizes from local businesses

WHERE AND WHEN IS THIS:

The event will be held on May 28th at the beautiful and scenic Descanso Gardens.

The 1 Mile Family Run/Walk will begin at 7:00 am

The 10K/5K Run will begin at 7:30 am

What’s Your Investment Theme?

What’s Your Investment Theme?

Well, we appear to be approaching the end of the pandemic tunnel. Perhaps it is better stated as the beginning of the end. The world as a whole is clearly not out of the woods yet but the United States and much of the developed world has made impressive progress in vaccinating their respective populations. Economic data, while still far from great is coming off the pandemic lows and some data points are producing their best readings on record (see ISM Non-manufacturing Index for March). There is a strong consensus that we will see a robust uptick in economic activity this year. How long it will last is a much more difficult question. The developed world has seen government debt balloon, has an aging population and the techonological frontier may disrupt long standing economic norms. When and how these forces may exert their influence is unknown but they must be acknowledged. The past five quarters have presented numerous events that underscore the foundation of our investment approach – whether it be taking advantage of tax-loss harvesting when opportunities present themselves or the importance of having a plan and a well diversified portfolio that will allow you to ride out times of market stress, much of our approach was tested and reaffirmed.

YOLO, MEME, AND EMH: WHAT’S YOUR INVESTMENT APPROACH?[1]

You only live once (“YOLO”)! Social media investors have banded together on unconventional platforms to drive up the prices of a handful of “meme stocks,” seemingly without traditional evaluation of investing risks and rewards. They made headlines with their “short squeeze” of GameStop (GME), and, as they garnered media attention, their tactics continued. While it’s not the intended victim of the YOLO traders, will the efficient market hypothesis be a casualty of these events? The answer depends a lot on your definition of efficient markets. Perhaps long-term investors would be better served questioning the potential impact on their investment philosophy.

Nobel Laureate Eugene Fama (1970) defines the efficient market hypothesis (EMH) to be the simple statement that prices reflect all available information. The rub is that it doesn’t say how investors should use this information. EMH is silent on the “correct” ways investors should use information and prices should be set. To be testable, EMH needs a companion model: a hypothesis for how markets and investors should behave. This leaves a lot of room for interpretation. Should asset prices be set by rational investors whose only concerns are systematic risk[2] and expected returns? It seems implausible to link recent meme-stock price movements to economic risks. Rather, they seem fueled by investor demand to be part of a social movement, hopes to strike it rich with a lucky stock pick, or plain old schadenfreude.

There is a vast ecosystem of investors, from individuals investing in their own accounts to governments and corporations who invest on behalf of thousands. Ask investors why they invest the way they do, and you’ll likely get a range of goals and approaches just as diverse. It’s this complex system that generates the demand for stocks. Another complex system fuels the supply of stocks. Supply and demand meet at the market price. People may contend that the market is not always efficient, or rational, but the stock market is always in equilibrium. Every trade has two sides, with a seller for every buyer and a profit for every loss.

There are plenty of well-studied examples that show supply and demand at work. The huge increase in demand for stocks added to a well-tracked index often creates a run-up in the stock price. Some of this price increase can be temporary and reversed once the tremendous liquidity demands at index reconstitution[3] are met. Index reconstitution is just one example; instances of liquidity-driven price movements happen all the time. It is well documented that liquidity demands can produce temporary price movements.[4] Investors may wonder if temporary price dislocations motivated by users of r/WallStreetBets differ from those caused by changes to an index. Lots of buying puts temporary upward pressure on prices, which later fall back to “fundamental value”–it sounds familiar. The more relevant observation may be that markets are complex systems well adapted to facilitate the supply and demand of numerous market participants.

There are numerous reasons people may be willing to hold different stocks at different expected returns. Can all those differences be explained by risks? Doubtful. To quote Professor Fama, “The point is not that markets are efficient. They’re not. It’s just a model.”[5] EMH can be a very useful model to inform how investors should behave. We believe investing as if markets reflect fundamental value over the long-term is a good philosophy for building long-term wealth. Trying to time markets over the short-term might be a quick way to destroy wealth.

It’s true, you only live once. The good news is that investors can look to market prices and fundamentals, not internet fads, to implement a sound investment strategy. Theoretical and empirical research indicate higher expected future returns come from lower relative prices and higher future cash flows to investors. Long-run investors can be better served by using these tried and true methods, rather than chatrooms, to pursue a better investment experience.

MARKET UPDATE – A BRIEF AROUND THE WORLD TOUR OF MARKETS

The first quarter of 2021 marked the one year anniversary of the pandemic infecting the markets and the aptly named COVID-crash. Market environments like we are living in provide no shortage of extraordinary statistics. We certainly saw our fair share last year and fast forward to the present we have a new one – through the end of March the S&P 500 had its best 12 month period since 1936! And has continued to notch new record highs as well. Overall, stock markets around the world were positive over the last 3 months. Bonds have had a much harder time after a stellar 2020. Why? The common refrain is that inflation fears and an improving economic outlook are driving interest rates higher, which is a negative for bond prices.

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ON STOCKS

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US Stocks lead global markets followed by non-US developed markets and emerging markets, earning 6.35%, 4.04% and 2.29%, respectively. Global real estate, one of the hardest hit sectors in the pandemic, experienced a strong quarter with a return just shy of 6.25%. From a sector perspective, the rotation into smaller companies and so-called value stocks continued – stocks categorized as small and value companies returned 21.17% while large growth stocks (think big tech) returned 0.94%. This trend was true across countries driven by investors renewed appetite for risk and the search for better valued opportunities after the significant run-up in large tech companies in 2020. Valuations (or price paid for some measure of cash flow or profitability) increased with the renewed economic optimism. However, they are at very high levels, especially in the US. Levels in some cases that have not been seen since the dot-com era.

ON BONDS

Longer-term interest rates (rates for loans 5 yrs or greater) jumped higher throughout the developed world to begin the year which caused bonds prices to drop and thus returns fell as well. US bonds fared worse than the broad non-US bond market. The Barclays Bloomberg US Aggregate index dropped -3.37% and the Barclays Bloomberg Global Aggregate ex-US (hedged) index dropped -1.9%. The 10 year and 30 year US Treasury bond rate rose by 0.81% and 0.75%, respectively. Intermediate corporate bonds (those coming due in approximately 5-10 years) managed a slightly positive return of 2.19% as investors bought up the assets in a search for yield.

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ON THE ECONOMY

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The global economy is on the mend and a rather quick recovery is expected for most of the developed world. The jury is still out for emerging markets given the lack of access to vaccines however many emerging markets have a better balance sheet than the developed markets. As mentioned in our opening, the economy is bouncing back from the pandemic lows and in some cases the data is showing incredible statistics. However, as most economists will tell you, data can be noisy in environments like this and some critical areas are not showing the same strength yet (e.g. unemployment in the US). Arguably the greatest question we face at the moment is whether inflation will increase? The answer is likely yes however determining whether it will be temporary or the start of a longer trend is what really matters. Most economists seem to be in the camp that there will be short-term increase in inflation that will then subside. Central bankers acted in unprecedented fashion in reaction to the economic destruction caused by pandemic related lock-downs and so far the results speak for themselves. And they are continuing their accommodative and simulative polices for the foreseeable future. These policies have certainly contributed to an excessive amount of liquidity (i. money) around the world but it seems as though the powers that be are accepting this side-effect as necessary to fend of greater economic damage in other areas.

[1] Adapted from “YOLO, Meme, and EMH: What’s Your Investment Style?” from Dimensional Fund Advisors LP.
[2] Systematic risk is the possibility of an investor experiencing losses due to factors that affect the overall performance of the financial markets in which he or she is involved.
[3] Reconstitution involves the re-evaluation of a market index. The process involves sorting, adding, and removing stocks to ensure that the index reflects up-to-date market capitalization and style.
[4] For example, see “Tesla’s Charge Reveals Weak Points of Indexing” (Dimensional, 2021)
[5] “Are markets efficient?” – Interview between Eugene Fama and Richard Thaler (June 30, 2016)