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Happy New Year!

Updated: Jan 11


Happy Holidays to you and yours from NorthAvenue! We hope all of you are enjoying the season and finding creative ways to get together with family safely. Our team celebrated with a Zoom holiday party to share a meal and play Jackbox games. Even Kristen's penguin office-mate, Julius, got dressed up for the occasion. Cheers to ringing in the new year!


Read on for a few 2021 updates.

Coronavirus Relief Bill Signed by President


Last Sunday night on Dec. 27th, after days of uncertainty and delay, President Trump signed into law a $900 billion coronavirus relief bill. This bill extends unemployment benefits for millions, and eligible persons will receive a $600 stimulus check.


Last Monday, on Dec. 28th, the House approved a bill to increase stimulus checks to $2,000. However, as of the time of this newsletter mailing, it is unclear when or if the bill will get a vote on the Senate floor.


Eligibility for this second stimulus check is similar to that of the first stimulus check with some important adjustments. This stimulus check, as we know it, will be $600 per eligible person in a household, subject to income limitations. Due to the timing of this stimulus package, Congress has made it clear that eligibility will be based on 2019 income, specifically your 2019 Adjusted Gross Income (AGI). AGI income limitations are listed below.


We also see, similarly to the first stimulus check, that this bill leaves out adult dependents from receiving this benefit. To calculate your stimulus check, you can use this calculator.


Also, student loan payment relief was also not included in this package. Currently, the freeze on student loan payments and interest accrual has been extended through the end of January 2021.


As discussed in many of our tax planning meetings this past year, the CARES Act waived the requirement to take required minimum distributions (RMDs) from IRA and Inherited IRA accounts in 2020. This waiver has not been extended to 2021. At this time, you can expect that RMDs will be required in 2021.


There is additional good news for small business owners who took out existing PPP loans. PPP loan recipients can now deduct expenses paid for with PPP funds, effectively reversing a Treasury Department ruling that previously denied these deductions.


For more questions on the new stimulus package as it pertains to your specific situation, please don't hesitate to reach out to your advisor.

Allowable $300 Cash Donation Deduction for 2020


As a provision of the CARES Act, taxpayers who take the standard deduction will be allowed to take up to $300 of an "above-the-line" deduction for cash donations made in 2020 on 2020 tax returns. If you do not itemize your deductions, this is an opportunity to receive a tax benefit from your charitable giving. The $300 deduction limit applies to taxpayers filing as Single as well as Married Filing Joint. For tax year 2021, the tax benefit for taxpayers who file as Married Filing Joint is increased to $600. If this deduction applies to you, we will include a request for documentation of cash donations along with our request for other necessary tax documents for tax preparation.

Dimensional Fund Advisors Lowers Fees!


Dimensional Fund Advisors (DFA) is reducing their management fees across 33 equity mutual funds effective February 28, 2021. This fee decrease results in a 15% fee reduction on an asset-weighted basis for these select funds. Click here to see the list of funds as well as their pre- and post- management fees. This fee reduction applies to all of the DFA funds that we use within our client portfolios.


What does this mean for you? Every fund charges an annual fee, called an expense ratio, to invest in that fund. These expense ratios are a percentage of your investment and are paid to the fund management company for their operating expenses. We primarily utilize DFA funds, as they are already considered a low-cost option, and we also use a number of other ETFs with low expense ratios. With a lower cost to you to invest in DFA funds, you keep more of the investment growth within your portfolio. This fee reduction also makes DFA's fees more competitive with pure index funds, which are the lowest-cost option available.

President-Elect Biden's Tax Plan


We are keeping well-apprised of President-Elect Biden's tax plan. There is still much unknown about how his plan will apply to our clients' financial situations. We don't know when it will get passed, if it will get passed, and if it does, how much the actual law will differ from the original tax proposal. However, we can make you aware of the key provisions that we see impacting our clients. At this time, given the uncertainty of if, when, and what will pass into law, we are not recommending sweeping changes to current savings or tax plans based on Biden's tax proposal. Any potential planning opportunities have already been addressed and discussed with you, if they were applicable to your situation, at your tax planning meeting.


Biden has drawn a clear line in the sand at $400k, stating that he will not raise taxes on anyone earning less than $400k. However, it is still unclear if this limit applies to Single or Married taxpayers, and it's unclear whether $400k applies to Adjusted Gross Income or taxable income.


His proposal also includes several changes that will impact (i) taxpayers' ability to itemize as well as (ii) the benefit of itemizing deductions. The plan states that the benefit of itemized deductions is to be capped at 28%. As a general example: As of current, if you itemize your deductions and are in the 37% federal tax bracket, you save $37 in federal taxes on a $100 donation to charity. Under Biden's proposed plan, only $28 of federal tax would be saved in this scenario. Additionally, while not directly part of his plan, it is anticipated that any tax law change under the Biden Administration will also include the repeal of the state and local tax (SALT) $10,000 deduction cap.


As a means to increase taxes on high income earners, Biden's tax plan also includes an adjustment to the benefit of 401k tax deferral. Rather than receiving a full tax deferral of your entire 401k contribution, the proposal states that you would receive a tax credit, which would decrease as income increases. Accordingly, under these provisions, it is possible that high income earners would pay some tax on 401k deferrals and then would also pay tax on those dollars as they are withdrawn in retirement. Lower income earners would receive a more substantial tax benefit to pre-tax retirement savings. To be clear, these adjustments would only apply to future 401k and IRA contributions that would occur after the tax changes are passed into law.


A notable provision of Biden's plan is his plan to significantly decrease the federal estate and gift tax exemption, which is currently at a historical high of $11.58 million per individual. If no action is taken, the current exemption amounts will sunset on Dec. 31, 2025, back to the 2017 exemption level of $5 million adjusted for inflation. Biden has called for the immediate halving of the estate tax exemption, which would have occurred in 2026 anyway. He has also called for more aggressive action to cut the exemption levels back to the 2009 exemption level of $3.5 million for estate and $1 million for gift tax, but such aggressive reform is unlikely to pass into law.


Lastly, Biden's plan addresses eliminating/making adjustments to the step-up in cost basis for inherited assets. Under current law, when a decedent passes away, assets in their estate receive a step-up in basis to the fair market value, such that the inheritor's cost basis in the asset is reset to the fair market value on the date of death. It is not crystal clear how Biden will adjust the cost basis step-up rule, but we know it will be on the table.


We will continue to stay informed of how potential tax law changes will apply to our clients, as the new administration takes office.

The Bumpy Road to the Market's Long-Term Average



Discussing and applying market growth assumptions to retirement and investment plans is a crucial part of our planning process. While we talk about market returns in terms of averages, the truth is that there are very few years in which the annual return is close to the average. Since 1926, the US market has returned an annual average of ~10%. However, only 6 years in that time have resulted in returns within 2 percentage points of the long-term 10% average. In reality, we seldom experience an "average" year, from a market growth perspective. Accordingly, our approach is to first determine how much risk is appropriate for your financial situation, then to set your investment strategy to align with your goals and acceptable risk. Finally, we advocate for sticking with this plan for long-term growth in order to achieve the average growth over time.


Annual returns for the S&P 500 from year 1926 - 2019 are depicted above.

Citi Bank is advertising their year-end limited-time offer of a cash bonus for new customers opening their first bank account with Citi Bank. Earn $200 for a $5k cash balance and up to $1,500 for a $200k cash balance. If interested, you can check out the offer here.

Happy New Year & Goodbye 2020!


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