Darkest Before Dawn

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Happy New Year! Many of us thought 2021 could not be as eventful as 2020 – we were wrong! It goes to show that you never truly know when or how change is coming. On top of new legislation, COVID death’s peaking and rioting at the Capitol, the disconnect between our country’s political disarray and the exuberant stock market further adds confusion to the chaos.

Here’s what we do know. The Consolidated Appropriations Act of 2021 was signed into law on December 27th. This massive 5,593 page bill included $900 billion for the coronavirus aid package (including stimulus checks & PPP loans), as well as addressed tax planning provisions, and a permanent medical expense provision.

Stimulus Checks

Under the new coronavirus aid package, stimulus checks of $600 per eligible person began disbursing on January 4th, 2021. Eligible persons include a taxpayer, their spouse, and any dependent children. Similar to the CARES Act, the stimulus checks phase out if your income exceeds the threshold of $75,000 for Single Filers, and $150,000 for Married Filing Jointly. Unfortunately for many who experienced the brunt of financial hardship in 2020, the stimulus was based on your 2019 tax return. However, those who qualified based on their 2020 income can apply for a rebate when filing their 2020 taxes. Additionally, President-elect Joe Biden has also promised more stimulus to come when he is in office.

Paycheck Protection Program (PPP)

The new COVID-19 relief package aims to offer $348 billion of additional funding to the hardest hit businesses. Of this, $35 billion is set aside for first time borrowers who did not apply for the PPP1 loan. To qualify for PPP2, businesses must have less than 300 employees, and have encountered 25% lower revenues in any 2020 quarter compared to the same quarter the year prior. The PPP2 loan application is expected to be made available by lending institutions in mid-January. The application window will close on March 31st 2021, so eligible applicants should organize their finances now. PPP2 applicants do not need to have their PPP1 loans forgiven in order to apply for a PPP2 loan.

Other Appropriations Act Highlights

In 2020, Required Minimum Distributions (RMDs) were waived under the CARES Act. However, 2021 RMDs are NOT waived under the new legislation – in other words, if you’re over age 72, you have to take an RMD this year. The new bill did extend the charitable gifting provision from 2020 through 2021, which allows individuals a tax deduction on qualified donations up to 100% of Adjusted Gross Income (AGI).

Political Changes Ahead

President-elect Biden will be sworn into office on January 20, 2021 – some hope sooner. With the recent Senate wins in Georgia by Raphael Warnock and Jon Ossoff, Democrats and Republicans will now be tied at 50 seats each in the Senate. In such a case, Vice President-elect Kamala Harris will serve as the tie-breaking vote, giving Democrats control of the Senate. That means President-elect Biden will lead the country with both the House and the Senate in Democratic control. This could pave the way for President-elect Biden to enact some of his campaign agendas for tax, health-care, education and social justice reform. So far the stock market appears to like those prospects, as both the Dow and S&P 500 climbed to new highs while the Capitol building was invaded by rioters. The stock market confuses many, but that’s because the stock market lives in the future rather than the present. The stock market looks ahead and is already focused on the prospects of COVID recovery, positive future GDP, and predictable political policies.

However, it should be noted that even with Democrats in control of the Senate, the 60-vote requirement to cut off debate and proceed to a vote necessitates that Democrats gain Republican backing on the most important legislative pieces. That also means that change may be more moderate than Biden campaigned on, and the stock market likes the idea of predictability and balance. For investors, moderation could mean the preferential capital gains tax rate of 15% on long-term investment gains is kept intact rather than raised to ordinary income rates, for example. President-elect Biden has said he will repeal the Tax Cuts and Jobs Act, which would raise the corporate tax rates to their prior levels and raise the top income tax bracket for individuals earning more than $400,000 per year. However, it is anticipated that tax law changes will take effect as of 1/1/2022, rather than retroactively for 2021, so anyone affected by changes will have time to plan in advance.

As difficult has 2020 has been and as dark as 2021 has started, they say it is darkest before the dawn. As we enter 2021, may we unite as Americans and focus on restoration and healing. We wish you all good health and financial wellness in the new year..


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