Category Archives: Financial Planning

HSA: Save it for Retirement

HSA: Save it for Retirement, Health Saving AccountAccording to Fidelity Investments, the average 65-year-old couple retiring today will need about $300,000 for out-of-pocket healthcare expenses during retirement. And that doesn’t even include long-term care. One way to help pay for this enormous cost is to open a health savings account (HSA), which is a savings and investment vehicle designed to help people pay for medical-related expenses on a tax-free basis.

To open one of these accounts, you must be enrolled in an HSA-eligible, high-deductible health insurance plan (HDHP). These are offered by many employers and also are available on the individual insurance market. One of the little-known advantages of the HSA is that if you delay withdrawing from it until retirement, you’ll have money ready to tap for those out-of-pocket expenses on as-needed basis.

An HDHP works exactly as it is named; comprehensive coverage does not kick in until the plan member reaches an annual deductible that is typically higher than other healthcare plans. The trade-off for the higher deductible is that monthly premiums are lower. Therefore, this type of plan is generally suited for healthy individuals or families that do not have a lot of ongoing medical expenses.

In 2021, the annual HSA contribution limit is $3,600 for individuals and $7,200 for family coverage.  In 2022, these limits increase to $3,650 for individuals and $7,300 for families. Account owners age 55 and older may add another $1,000 “catch-up” contribution. With a work-sponsored HDHP, both the employee and the employer may contribute to the savings account, but their combined contributions may not exceed the annual limit. As long as you are enrolled in an HDHP, you may contribute to the HSA. Even when you no longer contribute, the account belongs to you and maybe invested for growth and tapped as needed.

Investment Advantage

An HSA is maintained at a financial institution, such as a bank. Once saved assets have reached a certain threshold, that custodian will allow the owner to invest a portion of the balance. While the HSA rules technically allow you to invest starting with your first dollar, many custodians have their own minimums required in the HSA (usually $1,000 to $2,500) to be available for medical expenses. Beyond that the balance, the savings can be invested for growth. Also, the owner can transfer money to and from the bank and the investment account as needed.

The invested portion of an HSA is transferred to a brokerage account. There, the owner has a variety of options to invest in, including mutual funds and individual securities. According to Morningstar, more than 80 percent of HSA investment funds have earned gold, silver, or bronze analyst ratings, and the lower end of investment fees range from 0.02 percent to 0.68 percent a year. Note that some investment management fees run higher, so it’s important to compare fees just as you would with any other type of investment.

Triple Tax Advantage

The health savings account features more tax benefits than any other type of investment, including a 401(k), a traditional IRA, or a Roth IRA. That’s because all contributions are tax-free (either through payroll deductions at work, which also avoid FICA taxes or as a tax deduction when health insurance is purchased independently). Moreover, HSA investments grow tax-free. If eventual withdrawals are used to pay for qualified medical expenses, they are not taxed either. So essentially, savings, investments, and gains from an HSA account that are used to pay for healthcare expenses are never subject to taxes. If you do use this money for nonqualified expenses, you’ll have to pay income taxes and, if taken before age 65, a penalty fee as well.

However, consider when most people encounter their highest medical bills: during retirement. If you pay for all out-of-pocket expenses with current income throughout your career, your HSA has the opportunity to grow into a substantial nest egg by (and during) retirement. The most effective use of these funds is to pay for health-related expenses, such as Medicare premiums, dental, and vision care, long-term care insurance premiums, and nursing home costs.

An additional advantage is that health savings accounts are not subject to required minimum distributions. However, be aware that when an HSA is left to a non-spouse heir, it converts to a taxable account – so it’s best to use up these assets while you’re still alive.

35 Million Unprocessed Tax Returns Due To IRS Delays

The various pandemic-era programs introduced by the federal government have increased the tax authority’s workload and caused delays in the tax refund process.
The IRS has been under extreme pressure since the start of the pandemic, tasked with implementing a range of federal relief programs designed to support individuals, families and businesses affected by covid-19.
“The IRS and its employees deserve tremendous credit for what they have accomplished under very difficult circumstances, but there is always room for improvement.” Taxpayer Advocate Erin Collins wrote in her report. “This year, the IRS is dealing with an unprecedented number of returns requiring manual review, slowing the issuance of refunds,” Collins continued. “These processing backlogs matter greatly because most taxpayers overpay their tax during the year by way of wage withholding or estimated tax payments and are entitled to receive refunds when they file their returns. Moreover, the government uses the tax system to distribute other financial benefits.”
The 35 million pending returns account for 20 percent of the total returns submitted. And with the May 17 federal tax deadline almost two months in the past, the IRS is well beyond the 21-day processing time it typically strives for. Myriad reasons account for the delay.

The 2021 tax filing season started late and was extended an extra month due to the coronavirus pandemic. To make matters worse, the agency was inundated with phone calls and unable to keep up. During the 2021 filing period, the IRS received 167 million phone calls, four times more than during the 2019 season. As a result, only 9% of calls were answered by a live customer service representative.The popular “1040” line, the most frequently dialed IRS toll-free number, received 85 million calls during the 2021 filing season, with only 3% of callers reaching a live person.

Since the start of 2021, the IRS has issued the second and third economic impact payments, better known as stimulus checks. The second, for up to $600, started going out at the end of December 2020, as part of the Coronavirus Response and Relief Supplemental Appropriations Act. The third, for up to $1,400, started going out in the middle of March, as part of the American Rescue Plan Act. The IRS began accepting tax returns on February 12. So the latest check was processed during tax season, its busiest time of the year.

Another key component of the American Rescue Plan is the updated Child Tax Credit. Starting July 15, the IRS will pay $3,600 per child to parents of children up to age five. Half will come as six monthly payments, and half as a 2021 tax credit. That comes out to $300 per month and another $1,800 at tax time. The total amount changes to $3,000 per child for parents of six to 17 year olds, or $250 per month and $1,500 at tax time. The IRS has also been standing up this new program of monthly Child Tax Credit payments during tax season. While the agency has now sent out three stimulus checks, it has no experience sending out millions of periodic payments. Resources dedicated to setting up this program are resources not dedicated to its core mission, which is to “provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.”

Erin Collins’s report also cites limited resources and technology issues as reasons for delays in processing tax returns. The agency operated under many of the same limitations that have affected office workers the world over during the pandemic. That included remote work, which can affect efficiency. The IRS is also understaffed and underfunded. Congress has continually reduced the agency’s budget over the last decade. Funding and total employment are both down by about 20 percent.

Beginning the tax season at a disadvantage contributed to the 35 million-return backlog. Tasking the IRS with stimulus checks and the updated Child Tax Credit at the same time drew resources away from processing tax returns. And a history of understaffing and underfunding set them up for failure. All of this put a strain on Americans who were counting on timely refunds.

Wishing on a Star: Investors Pour Billions in to SPACs

A SPAC is a special purpose acquisition company. It is typically sponsored by a venture capitalist or a private equity firm that has expertise in a specific sector or industry, such as green technology. A SPAC launches as an IPO, but it is nothing more than a shell company that raises money from investors. Post-IPO, it has a limited amount of time (one to two years) to merge with an existing company, where the capitol is deployed. Once that happens, the private operating company trades publicly under the SPAC name.

While SPACs have been around for about 30 years, they’ve only become popular in the past year or so. In fact, this year investors have already poured more than $100 billion into these vehicles, and that’s more than the total amount raised since they were first introduced. SPACs offer investors the opportunity to buy into a startup, which might be at early-, middle- or late-stage development when it partners with the SPAC. In 2020 and 2021, industries heavily represented by SPACs include electric vehicles, consumer-oriented technology, communications and retail.

What makes the SPAC particularly interesting is that investors do not know what company they are buying into since the entity has no commercial operations of its own. As such, they are sold largely based on trust in the management sponsor and belief in the growth potential for the industry it represents.

SPACs differ from traditional IPOs in that the IPO price is not based on the valuation of an existing business. Instead, investors typically pay $10 per common share of regular stock at the initial offering. These shares are referred to as units. Each unit also includes a warrant, which offers the right to purchase the company’s stock at a specific price and at a later date. Once a SPAC merges with a private company, the shares and warrants are listed and publicly traded on the stock exchange. Capital raised by the sale of warrants is typically used to compensate the SPAC sponsor.

One of the appeals of the SPAC model is that individual investors have the opportunity to invest in a startup that has been vetted and funded by an experienced private equity partner. This presents less risk as well as a ground-floor opportunity that is usually not feasible for individual investors. Most IPO opportunities require higher capital investments and occur at a later stage of development. SPACs provide the opportunity to commit a smaller investment at an earlier stage in a company’s life cycle, which often offers the potential for higher returns.

Unfortunately, the lack of a longer, established track record also increases risk – which is something the Securities and Exchange Commission (SEC) is currently scrutinizing. For now, the SEC has taken a hands-off approach, hoping the market will regulate itself. However, if SPAC sponsors oversell the entity’s capabilities or investors become disillusioned with the returns on their investment, the SPAC market may be subject to considerable regulation in the future.

As for investment returns, the outcomes are mixed. Initial SPAC IPOs tend to outperform the S&P 500. However, once SPACs merge with their respective private companies, the results tend to be less impressive. Given their recent surge in popularity, there’s no way to gauge their long-term performance success. 

NJ Governor Murphy signs $235M in relief for small businesses

New Jersey small businesses and other entities crushed by the coronavirus pandemic are now eligible for another round of grant funding under a package of bills totaling $235 million in aid that Gov. Phil Murphy signed into law Tuesday.
“Throughout the past year, we have focused our relief efforts on supporting New Jersey’s small businesses so they can emerge from the pandemic stronger than before,” said Governor Murphy. “This additional funding will help us add to the more than 60,000 small businesses that have received aid to date.”
In the Assembly the bills were sponsored by Assembly members Vince Mazzeo, Roy Freiman, Lisa Swain, Andrew Zwicker, John Armato, Chris Tully, Pedro Mejia, Angela McKnight, Adam Taliaferro, Nicholas Chiaravalloti, Linda Carter, Joann Downey, Yvonne Lopez, Stanley Sterley, and Eric Houghtaling. In the Senate, the bills were sponsored by Senators Dawn Marie Addiego, Vin Gopal, and Joseph Lagana.
The funding will be administered by the NJEDA, which has reopened its Phase IV grant pre-application for those businesses that missed the original deadline. To date, the EDA has distributed more than $420 million in aid to some 63,000 businesses across the state. The breakdown of the $235 million in proposed today’s bill package is as follows:
  • Microbusinesses: $120 million
  • Bars and Restaurants: $20 million
  • Child Care Facilities: $10 million
  • Other Small Businesses and non-profits: $50 million
  • New Businesses and Start-Ups: $25 million
  • Sustain and Serve: $10 million

 

Small Business Recovery Grant Program

The New York State COVID-19 Pandemic Small Business Recovery Grant Program was created to provide flexible grant assistance to currently viable small businesses, micro-businesses and for-profit independent arts and cultural organizations in the State of New York who have experienced economic hardship due to the COVID-19 pandemic. Applications open last Thursday for $800 million in state grants to help the smallest businesses recover from the pandemic – and the money may not be taxed by Albany.
The State Legislature is expected to approve a proposal from Gov. Andrew M. Cuomo to exempt the COVID-19 Pandemic Small Business Recovery Grant Program from state income tax. The grants vary between $5,000 and $50,000.
The money will serve as reimbursement of employee wages, rent and mortgage payments, taxes, utility bills and other operating expenses from the pandemic, between March 1, 2020 and April 1, 2021. Also reimbursable is the purchase of masks, gloves, face shields and other personal protective equipment and improvements to ventilation systems to slow the coronavirus’ spread during the period.
Read more on eligibility and apply here:

New York Forward Loan Fund accepting Pre-Applications

New York Forward Loan Fund (NYFLF) is a new economic recovery loan program aimed at supporting New York State small businesses, nonprofits and small landlords as they reopen after the COVID-19 outbreak and NYS on PAUSE.
Pre-applications for the New York Forward Loan Fund are now open. This is not a first-come, first-served loan program. Applications will be reviewed on a rolling basis.  For small businesses and nonprofits, you are encouraged to prepare your pre-application in advance by taking advantage of the application preparation resources available here.

SBA Launches $100M Community Navigator Pilot Program

The U.S. Small Business Administration (SBA) announced today that it is accepting applications for its new Community Navigator Pilot Program. This new initiative, established by the American Rescue Plan, will leverage a community navigator approach to reach our nation’s smallest businesses, with a priority focus on those owned by socially and economically disadvantaged individuals, as well as women and veterans. SBA will accept applications through July 12, 2021, and anticipates making award decisions by August 2021.

The Community Navigator Pilot Program will roll out $100 million in grants total and between $1-$5 million per applicant for “a two-year performance period” to “eligible organizations to provide counseling, networking and to serve as an informal connection to agency resources to help small businesses recover from the economic devastation” brought about by the coronavirus pandemic.

In February 2021, Congress met to provide a blueprint on assistance to small businesses with provisions under the American Rescue Plan. Members of Congress met with constituents to discover at local levels the impact of the pandemic and the effect it is having on businesses that may have been left out in early rounds of relief.

“As someone proudly representing one of the most diverse congressional districts in the country, I am glad the Community Navigator Pilot Program will soon be launching,” said Rep. Carolyn Bourdeaux of Georgia. “We have already seen the difficulties diverse communities face in accessing critically-needed relief resources, from securing PPP funds to rental relief. Through targeted outreach to small businesses in underserved communities, we can ensure that everyone is able to take advantage of the resources offered by the American Rescue Plan.”

Here’s how the SBA explains in full what the Community Navigator program is:

“Through the Community Navigator Pilot Program, SBA will engage with states, local governments, SBA resource partners, and other organizations in targeted outreach for small businesses underserved communities. These efforts began with SBA issuing an Information Notice that offers advice and guidance on best practices for adopting the community navigator model for use by SBA district offices, state and local government partners, Small Business Development Centers (SBDCs), Women’s Business Centers (WBCs), Veterans Business Outreach Centers (VBOCs), SCORE, and other resource partners. The Biden-Harris Administration and Congressional leaders supported a $100 million investment, as part of the American Rescue Plan, to establish Community Navigator Programs for individuals with disabilities and/or in minority, immigrant, rural, and other underserved communities across the country.”

Making a Difference in Underserved Small Business Communities.  Key in this initiative are partners and people in the community, serving as a two-way information stream, enabling enterprising business owners to receive the help needed from the SBA. Serving as the foundation of America’s economy, these underserved businesses have areas of concern that need to be addressed. Community Navigator Pilot will provide counseling, networking, and the assistance needed during this time of economic recovery.

“The SBA understands the importance of partnering with organizations as well as smaller, local institutions that are already embedded in the fabric of the Main Street business communities they serve,” said Assistant Administrator for the Office of Women’s Business Ownership Natalie Madeira Cofield. “Community Navigators are the backbone of aiding underserved and underrepresented communities across the nation with recovery.”

For more information on the Community Navigators Initiative, please visit www.sba.gov/navigators.

Real Estate Opportunities in 2021

Real Estate Opportunities in 2021Even before the pandemic began, the U.S. residential real estate market was short on houses, with more people looking to buy than those who were selling. And yet, unlike the 2008 recession, any economic woes related to the pandemic did not undercut housing prices. If anything, real estate had a banner year as home prices continued to rise. In April of this year, the median sale price of existing homes rose by 19.1 percent to a record high of $341,600.

There are several reasons we haven’t seen a repeat of the housing crisis that we experienced during the Great Recession. Today’s market is different from 2007, when the economic decline was launched by a housing bubble that sent many homeowner values underwater – followed by job losses and the inability to pay their mortgage. This time around, the government stepped in to ensure Americans didn’t lose their homes when they lost their jobs. The stimulus-relief packages included a moratorium on foreclosures and evictions. This, too, has contributed to the low inventory of existing homes, which normally would be put up for sale when owners become cash strapped.

The Homebuyers’ Market

However, in addition to the cash-strapped – we now have the cash-rich. Among the gainfully employed, savings rates increased during 2020. This means there are now several types of eager homebuyers: millennials trying to buy their first home; mid-career professionals looking to trade up; and retirees (or near-retirees) looking to make a cash offer for a smaller or second home.

The coronavirus contributed to this fiercely competitive market of buyers. Some are looking to take advantage of the newly mainstreamed remote work model and move to rural areas for a more affordable lifestyle. People who are nearing retirement are rethinking moves to large metropolitan areas or continuum of care retirement communities, where future outbreaks can spread more quickly.

The point is, there are millions of people looking to buy a home right now and not enough housing stock There are 72 million millennials alone, the oldest of who are approaching their 40s, with Generation Z right at their heels. Over the next 10 years, the demand for first-time homebuyers alone will persist regardless of how conditions change in the housing market.

The Home-Sellers’ Market

While the buyers’ market is booming with demand, the sellers’ market is starting to grow as well, just not as fast. Rising real estate values due to low inventory have presented an attractive opportunity to cash-in on home equity. In fact, according to a recent NerdWallet survey, about

17 percent of today’s homeowners say they plan to put their home on the market within the next year and a half.

The seller’s market is boosted by historically low mortgage rates, which when compared to renting make taking out a home loan even more appealing. Sellers also benefit from the near-desperation of buyers, many of whom are willing make offers before seeing the property, for as-is condition and above offer price. Not only can sellers take their pick of multiple offers, but they can often skimp on home repairs and upgrades before putting their house on the market.

In recent months, existing homes have stayed on the market for an average of only 20 days. Sellers also have the luxury of making their buyers wait under contract until the owner can buy another home. But here’s the tricky part: due to low inventory, it can be very difficult to find a replacement. Sellers who become buyers enter the fray of contract wars just like everyone else.

New Home Building

The single-family homebuilding industry recovered from last year’s economic decline quickly. In March of this year, new home starts swelled 15.3 percent to 1.238 million units. But even with the surge, real estate agents say that new builds need to range between 1.5 million and 1.6 million units per month to meet demand.

Unfortunately, one factor that is holding this market back is access to building materials. Low supply of lumber due to increased demand for new homes and renovations has catapulted lumber prices to record highs. According to the National Association of Home Builders, the cost of lumber has driven up the price of the average new single-family home by more than $35,000 within the past year.

While more inventory will come onto market as people emerge from their lockdowns and the economy fully reopens, one thing is certain: demand in the home-buying market is expected to remain high among Millennials and Gen Z for at least another decade. The momentum for high prices is expected to continue through 2021, so it may be a better time to sell than buy.

Tax Highlights of New York’s 2021-2022 Budget Bill

On April 19, 2021, New York State Gov. Andrew Cuomo signed the state’s 2021-2022 Budget Bill, which contains significant tax measures including, but not limited to, increased taxes on businesses and high-net-worth individuals and an elective pass-through entity (PTE) tax.

Read the key tax provisions in this comprehensive Budget Bill  HERE. To this end, we anticipate that additional guidance will be issued by the New York State Department of Taxation and Finance (“the Department”), especially addressing the newly enacted PTE tax.

Corporation tax 

The Budget Bill sets the tax rate for corporations with business income that exceeds $5 million at 7.25%, up from 6.5%. It also delays the scheduled phase-out of the capital base tax to Jan. 1, 2024, and establishes a tax rate of 0.1875% for tax years beginning on or after Jan. 1, 2021. Note that the phase-out delay does not apply to manufacturers and small businesses.

Personal income tax 

The Budget Bill increases the personal income tax rates on high-income earners for the 2021 through 2027 tax years. The new rates are as follows:

  • 65% for individuals with income over $1,077,550 but not over $5 million; joint filers with income over $2,155,350 but not over $5 million; and heads of household with income over $1,646,450 but not over $5 million
  • 30% for all classes of taxpayers with income over $5 million but not over $25 million
  • 90% for all classes of taxpayers with income over $25 million

Factoring in the current New York City personal income tax rate (3.876%), these new rates will result in a combined state and local personal income tax rate of 14.776% for affected high-income taxpayers with taxable income exceeding $25 million. Clearly, high-net-worth individuals will be significantly impacted by this increase in personal income tax rates.

Pass-through Entity Tax

Partnerships and S corporations can elect to pay an optional pass-through entity income tax on the entity’s taxable income at rates ranging from 6.85% to 10.9%. Partners/shareholders of electing partnerships and S corporations will be allowed to take an offsetting personal income tax credit for the portions of the PTE tax paid by the entity that are attributable to such partners/shareholders.

An irrevocable, annual election must be made by the due date of the first estimated tax payment. For the 2021 tax year, the election must be made on or before Oct. 15, 2021, and there are no estimated taxes required to be remitted.

Resident Tax Credit

The Budget Bill also amends the resident tax credit provisions, and, effective for the 2021 tax year, New York residents who are partners or shareholders in entities that pay “substantially similar” PTE in other jurisdictions will be allowed a credit for their respective share of PTE taxes paid to other states. Prior to this amendment, it was the Department’s position that residents were not eligible for such a resident tax credit for entity-level taxes paid.

Sales and Use Tax 

The Budget Bill increases the threshold from $300,000 to $500,000 for gross receipts from property delivered into New York State and maintains the threshold of 100 sales transactions in the state to require vendors to register in response to the Wayfair decision.

Real Estate Transfer Tax 

The Budget Bill clarifies that the Real Estate Transfer Tax is the responsibility of the grantor. The grantor cannot pass the liability to the grantee unless there is a contract or a written agreement between both parties.

Real Property Tax Relief Credit

Individuals with qualified adjusted gross income of less than $250,000 will be eligible for a new credit if New York real property taxes on their New York State principal residence exceed 6% of qualified adjusted gross income. The credit is based on the real property tax paid in excess of that 6% amount, and the rate is determined on a gradual sliding scale from 14% to 0%.

Qualified Opportunity Funds 

Effective Jan. 1, 2021, taxpayers will no longer be able to defer current capital gains by reinvesting them into Qualified Opportunity Funds. The Budget Bill no longer allows a federal exclusion of the reinvested capital gain amount, and now requires an add-back modification for the gains deferred in the year of such deferral.

Restaurant Return-to-Work Tax Credit

The Budget Bill creates a new “Restaurant Return-to-Work-Tax Credit” program. Eligible businesses can claim a $5,000 credit for each full-time net employee increase, up to a total of $50,000 in tax credits. To qualify, the restaurant should have experienced at least a 40% decrease in gross receipts and/or average full-time employment due to the pandemic.

Employees working outside N.Y. due to COVID-19

Due to COVID-19, many businesses have New York-based employees working remotely. The Budget Bill allows these businesses to treat “such remote work as having been performed at the location such work was performed prior to the declaration of such state disaster emergency,” in order to claim tax credits and incentives requiring a minimum number of employees.

It is critical to note that the Budget Act does not address the personal income tax implications of remote workers. That is, the Department has already made its position clear on remote workers and its interpretation of its “convenience of the employee” rule. In this regard, “if you are a nonresident [of New York] whose primary office is in New York State, your days telecommuting during the pandemic are considered days worked in the state unless your employer has established a bona fide employer office at your telecommuting location.”

Given the magnitude and complexity of the tax changes in the Budget Bill, all taxpayers (New York and non-New Yorkers) should review the new provisions to see how these changes impact their specific tax positions. In addition, given New York State’s tax rate increases on high-net-worth individuals and businesses, coupled with the pandemic’s current remote workforce climate, we would anticipate more individuals contemplating a change in domicile/residency outside of New York State and businesses exploring whether they need to have a physical location within the State of New York.

Moreover, partnerships and S corporations also need to evaluate whether the newly enacted PTE tax should be timely elected and whether this would be beneficial to their respective entities and partners/shareholders. We expect that the Department will need to issue clarifying guidance on the PTE, as we anticipate there will be many open questions that will have to be addressed based on what we have seen in other states that are administering a PTE.

 

SBA Rolls Out New $5B Grant Program for Small Businesses

Small businesses and nonprofit groups hardest hit by the coronavirus pandemic now are eligible for additional support under a $5 billion Small Business Administration program.
The new round of Economic Injury Disaster Loan assistance, known as Supplemental Targeted Advances, is available for up to 1 million small businesses and nonprofits with no more than 10 employees.

To qualify, applicants must be located in a low-income community; suffered greater than a 50% economic loss over an 8-week period since March 2, 2020 compared to the previous year; and have 10 or fewer employees.

You can get more information at SBA.gov/eidl. You can also email questions to TargetedAdvance@sba.gov.

To see if your business is located in a designated low-income area, you can use this map.