Tax Planning For 2021

After having read several economists’ reports regarding what they expect Federal tax policy will look like for 2021, I believe the most likely case is that any change in tax rates that Congress passes and President Biden signs will go into effect as of 1/1/22 and not retroactive to 1/1/21. Though there is a strong urge to purge anything and everything that the Trump administration did including tax cuts, I believe the remaining issues related to the economic troubles we face as a result of Covid will outweigh the urge to purge. Raising taxes during slow economic times is contrary to Keynesian orthodoxy and it makes no sense to raise taxes while at the same time writing checks directly to the citizenry. I believe you can count on current tax rates for individuals, corporations, and estates to remain as they currently are for 2021.

Better For Planning

If I am correct, then it would be really good for financial planners and/or anyone else who does their financial and tax planning for themselves. Uncertainty about tax laws and rates is bad because it makes planning difficult, even for a few months out. Conversely, if you know that rates are going to change as of next year and not retroactive to this year, you can make plans this year to address those changes. This goes for individuals, businesses, and estates. For instance, what if Congress doesn’t take up the tax debate until late in Q1 or even after that and doesn’t get it passed for a bit longer? If the law were to be retroactive back several months, then that would really be moving the goal posts well after the game has started. We need to be able to count on laws that are on the books at the start of the year remaining on the books for the entire year. Otherwise you have to change your entire attack in the middle of the game, and that is a recipe for disaster. Surely the new Congress and President recognize this, right?

Individual Tax Rates

For most of us, the rates that are most pertinent are Individual Tax Rates. The following are 2021 tax rates, taken from the IRS.gov website:

The tax items for tax year 2021 of greatest interest to most taxpayers include the following dollar amounts:

  • The standard deduction for married couples filing jointly for tax year 2021 rises to $25,100, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for tax year 2021, up $150.
     
  • The personal exemption for tax year 2021 remains at 0, as it was for 2020; this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act. 
     
  • Marginal Rates: For tax year 2021, the top tax rate remains 37% for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly). The other rates are:
     
    • 35%, for incomes over $209,425 ($418,850 for married couples filing jointly);
    • 32% for incomes over $164,925 ($329,850 for married couples filing jointly);
    • 24% for incomes over $86,375 ($172,750 for married couples filing jointly);
    • 22% for incomes over $40,525 ($81,050 for married couples filing jointly);
    • 12% for incomes over $9,950 ($19,900 for married couples filing jointly).
    • The lowest rate is 10% for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).

If in fact these rates remain the law through 2021, think about how you might use this standard deduction and these tax brackets to minimize your tax burden this year. Alternatively, perhaps use this information to pay taxes this year at a lower rate so that you don’t pay even higher taxes next year if and when the law changes. Hopefully soon you will have the proposed new tax laws and brackets to help you with that planning.

IMO

With the Democrats in power in DC and with astronomical budget deficits due to efforts to prop up the economy as a result of Covid, I think it is a pretty safe bet that taxes will be going up. However, I believe part of the recovery plan will be to keep them at their current lower rates this year, then raise them in 2022 when hopefully Covid will not be as much of a problem. Let’s see if I and the others who agree with me are correct.

Growth Won In 2020

Granted, it was an unusual year, but Growth investing outpaced Value investing in 2020 according to the metrics and definitions of both categories. The Center for Research of Security Prices (CRSP) publishes several stock indexes, two of which are the US Large Cap Growth Index and the US Large Cap Value Index. Whereas the Value Index was barely breakeven for 2020, the Growth Index returned about 33%. A big win for Growth Investing – or is it?

According To The Metrics and Definitions

Notice that I used the qualifying phrase “according to the metrics and definitions of both categories.” A Value Stock is considered as such and is included in a Value index if it meets one or more of certain “value” metrics such as low P/E ratio, low Price to Book or Price to Sales ratio, or low Price to Cash Flow ratio. A stock can be considered to be a value stock without being a good value. Conversely, a stock can be a good value (at least for some investors) even if doesn’t meet any of the value metrics. My point is that Value is in the eye of the beholder. You can invest in growth stocks and still consider yourself to be a “Value Investor” even if your investments don’t fit with the definition of value stocks. If you buy a stock with the belief that you are buying it at a price that is lower than what its value will be in the future, then you are a “Value Investor”. Consider this: One of Warren Buffett’s largest and best performing holdings is Apple. How can the most renowned value investor in the US own a big chunk of Apple, which is not a “value” company by any metric? Because Buffett believes in Apple’s ability to generate and grow its cash flow in the future, and that that cash flow discounted back to the present represents a positive net present value to Apple’s current stock price by his calculation. Buffett believes Apple’s current price represents good value to him and his shareholders even though Apple’s current ratios do not qualify it for any Value index.

IMO

If you are a committed value investor and your performance in 2020 has lagged, don’t give up being a value investor. Instead, enlarge the definition of what it means to be a value investor. Think about buying good companies at prices that make sense rather than finding unloved gems in the scrap heap. Good companies are rarely found at scrap heap prices. That said, they can often be found at prices that can be deemed to represent good investments if the future turns out the way you believe it will. This is not throwing in the towel on value investing. It is pivoting somewhat to allow you to keep in tune with market conditions while remaining faithful to Buffett’s and Benjamin Graham’s concepts of value investing.

Also: 2020 was one thing, but let’s see how 2021 plays out with respect to this supposed Value vs. Growth competition. My sense is that there won’t be nearly the difference in returns between the two categories.

6 New Years Resolutions for 2021

Most New Year’s resolutions are pretty dull. Lose weight, exercise more, eat less, yadda yadda. Same with financial resolutions. Google it and see what comes up: create a budget, save more, spend less, work harder. Good advice all, but dull. With my 2021 Resolutions, I will try to be a little more interesting. Let’s see if I succeed.

Pay Cash

One of the selling points of Bitcoin is that you can use it to pay for stuff anonymously, leaving no digital footprint. Guess what else accomplishes the same objective? Good old cash! Don’t want anyone to know what you bought or how much you spent on it? Pay cash. Don’t like it when you get your credit card bill at the end of the month? Pay cash, and the stuff you bought won’t show up on your bill. I feel like I pay twice when I use the credit card – once when I buy the item, and again when I pay the credit card bill. Instead, just use cash and pay once. Go to the ATM once a week, withdraw as much cash as you need for the week, and when you have spent it all, that’s it until you go back to the ATM the next week. If you want to save for something big, stick a $20 in an envelope and put it in a drawer in your home. Do the same thing for 5 weeks and you have $100 you can use to treat yourself or your family. Buy your gasoline at an ARCO or another gas station that has a discount price for paying cash. It is becoming harder and harder to pay cash, especially with Amazon and electronic shopping, but that may make it more appealing. When you pay cash, you feel a little bit like you are getting away with something, and that is a good feeling that could prompt a wry smile.

Drink Cheap Liquor

My friend gave me a vodka drink with Sam’s Club store brand vodka, and it was really good. Same thing with Kirkwood-brand vodka from Costco, which rumor has it is actually Grey Goose in a different bottle. Two Buck Chuck from Trader Joes is pretty bad (imo), but some jug and box wines are actually pretty good. Try out some store brand liquor or wine and see what you think. Same thing with soda pop or seltzer water – try the much cheaper store brands. I’ve never been big on off-brand beer, but if you shop the specials at the store, you can shave several bucks off of the cost and enjoy the adventure if you aren’t too picky. All of you collectors of expensive wine have a nice hobby but not one that is good from a financial standpoint. You may tell yourself that it is, but it’s not if you are consuming a lot of high-end wine.

Figure Out A Way To Save On Phone, Internet, and Cable

Everyone has different options for phone, internet, and cable based mostly on where they live. Choose the option that best suits you and how you use these services. Make sure you get value for what you spend. For instance, many people have ditched their land line and have opted instead for an internet-based phone or just a cell phone. That doesn’t work well for our family because, for whatever reason, cell service in our house is spotty, and I am not a fan of the call quality of internet phones. So I still have a traditional land line with AT&T, but I called and downgraded the service and our bill is now only about 60% of what it was before. Those of you who are heavy internet users probably need a good, fast internet service, so you might use that as the starting point for what you pay for. Is your internet service reliable enough to stream you TV through it without degrading your ability to use the net? Then you might dump your cable TV service and go with a streaming TV service. All of the cable TV/internet providers have bundle services, and some of those bundles now include cell phone services. If you now have a stand-alone cell service, maybe you can save buy bundling up. Before you do, though, ask your neighbors if they have a different cell phone network provider than you do, and, if so, how well it works at home. Your objective should be to have quality service at a good price and not double-pay for some services. Take advantage of bundles if it makes sense with minimal sacrifice. This should be an annual exercise for you as the quality of some services change and technologies advance. For instance, as 5G service advances over the next few years, you may be able to ditch your expensive cable internet service entirely, which could realign a number of your spending priorities.

Deprioritize Politics

The TV pundits say we are a divided nation, but I think we are pretty united in our unhappiness with the current state of politics in the US. Unhappy perhaps for different reasons, but unhappy nonetheless. If watching the news on TV makes you unhappy, then don’t watch it. If your whole mood or attitude is based upon the political party in charge or what is happening in Washington DC or your state capitol, then you are setting yourself up for a life of anxiety and disappointment.

Prioritize Yoga

I don’t do yoga, but I like it, and I might take it up once the pandemic is over. Yoga is good for you physically and spiritually and hopefully puts you in a good state of mind. Unlike politics and watching the news. If not yoga, then some other physical activity such as just taking a walk or meditating or staring into space. Do some activity that puts you in a good state of mind and don’t let negative thoughts or activities ruin your life.

Buy Stocks Instead of Bonds

I say this because bond yields are so low, especially for US Treasury bonds and bank CDs. Stocks always outperform in the long run, and you can stay safe if you diversify your stock portfolio substantially. Instead of allocating to bonds, put like 1-2 years of your annual spending in a money market account in your bank, and invest the remainder in total market funds or ETFs.

Happy New Year and stick with your resolutions!