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Here are three reasons to expect the e-commerce giant to follow in Apple’s footsteps.

Stock splits had almost become a thing of the past when Apple (NASDAQ:AAPL) came out with its surprise announcement to split its stock. The move was the fourth time that Apple had made such a move, but most of its tech peers — including Amazon.com (NASDAQ:AMZN) — had eschewed stock splits for years.

Apple’s decision has some wondering whether other companies might jump back onto the stock split bandwagon. It’s been more than 20 years since Amazon delivered a split to its shareholders, but there are some compelling reasons why now might be a good time to reconsider. Here’s a quick look at them.

1. Amazon’s high stock price is a lightning rod for political criticism

Amazon has been under fire in Washington for a variety of practices, ranging from how it treats its employees to whether it pays its fair share of taxes. Inevitably, politicians point to the meteoric rise in Amazon stock and the resulting boost to the wealth of CEO and founder Jeff Bezos as symbols of avarice not just for the company itself but for the entire American corporate sphere.

A big stock split obviously wouldn’t do anything to reduce the market capitalization of Amazon or the amount of wealth Bezos has. However, it would potentially take away the most evident measure of the company’s rise in value. If a stock split sent Amazon’s stock price back to levels at which it could just fade into the background, it might reduce its high profile at least to a minimal extent.

IMAGE SOURCE: GETTY IMAGES.

2. Amazon could get an invitation to the Dow

The Dow Jones Industrials (DJINDICES:^DJI) strive to include companies of all kinds among its 30 components. Back when Amazon was generally considered a tech stock, it looked unlikely that it would ever join the Dow, because there were already a huge number of tech companies among its ranks.

However, the creation of the communication services sector has effectively pulled Amazon’s business out of tech entirely. The unit’s internet retail business falls under consumer discretionary, while its Web Services division facilitates cloud-based communication for its clients. If that sounds like a technicality, it is — but it might be just the excuse the Dow needs to add Amazon.

Before Amazon gets a Dow invite, though, it would have to reduce its stock price significantly. That’s because the Dow is a price-weighted average, so Amazon’s high share price is a non-starter for negotiations right now. If joining the Dow is the motive Amazon has, investors should expect a 15-for-1 or 20-for-1 stock split to get the job done.

3. Amazon wants to keep up with Apple

Finally, Amazon has always had aspirations to become the most important company on Earth. That makes keeping up with Apple a necessity, and Amazon will look closely to see what if any impact Apple’s stock split has on its future share-price trajectory.

Apple’s stock split announcement boosted interest in the stock even beyond its already impressive levels. That has sent Apple’s market capitalization above the $1.9 trillion mark. Amazon remains closer to $1.6 trillion.

It might seem petty for such a successful company to pay attention to its market cap rankings. But Bezos has started to sell off significant portions of his stock, and if he wants to keep doing so, keeping the stock price high by whatever means are available is worth considering.

It ought to happen — but don’t hold your breath

Before Apple announced its stock split, the odds of Amazon splitting its shares were essentially zero. That’s changed with the Apple split. Now, with these compelling reasons to move forward, there’s a much greater chance that the FAANG stock will split its shares and try to get out of the uncomfortable spotlight in which the company finds itself.

Author: Dan Caplinger

Source: Fool: Why Amazon Will Be Next to Do a Stock Split

The electric vehicle pioneer set the terms for inclusion in the most popular stock benchmark in the world.

Like it or hate it, Tesla (NASDAQ:TSLA) has indisputably been one of the biggest success stories of the past decade. Since going public in 2010, Tesla’s stock has soared, and the electric vehicle manufacturer has defied industry naysayers by ramping up production and becoming the most valuable automaker on earth.

Along with its stock price rise, Tesla has demonstrated its ability to perform financially and fundamentally. By becoming consistently profitable, Tesla is likely to join the S&P 500 Index (SNPINDEX:^SPX) in the near future. Yet by making a highly unexpected move on Aug. 11, CEO Elon Musk brought out his usual flair for the dramatic — and made his case for why Tesla should join the Dow Jones Industrial Average (DJINDICES:^DJI).

Getting over the last speed bump in Tesla’s path to the Dow

Until Tuesday, there was one seemingly insurmountable obstacle that would have made Tesla getting into the Dow Jones Industrials impossible. Its stock price of nearly $1,400 per share as of the Aug. 11 close would’ve made it an impractical choice to join the price-weighted average, because its influence over the entire Dow Jones Industrials would’ve been unjustifiably high. Even now, the fact that Apple has a nearly 11% weighting in the Dow is somewhat controversial, and that’s with Apple’s share price of just $450. The idea of having Tesla represent 30% was a complete nonstarter.

IMAGE SOURCE: GETTY IMAGES.

Yet Musk surprised just about everyone by doing something that Tesla has never done before: splitting its stock. It announced a 5-for-1 split for owners of record on Aug. 21, with shares to start trading on a split-adjusted basis a week and a half later on Aug. 31.

To be clear, Tesla’s board of directors didn’t explicitly say it’s trying to join the Dow. In its press release, the company cited the desire to “make stock ownership more accessible to employees and investors.” Yet with the advent of fractional share trading, that’s an increasingly difficult argument to make. And there’s no doubt that becoming one of the Dow 30 stocks would be a big ego boost for Musk.

One might also see the choice of a 5-for-1 split as a testament to Musk’s vanity. Given the boost to the stock price Wednesday morning to nearly $1,500 per share, the 5-for-1 ratio would put Tesla shares around $300 after the split takes effect. That would make Tesla the third-most influential stock in the Dow behind only Apple and UnitedHealth Group and give the electric car maker about a 7% weighting in the average.

Why Tesla in the Dow isn’t a crazy proposition

With its share-price problem solved, the case for Tesla joining the Dow is compelling:

  • The Dow has been without a car company for more than a decade after going through most of its history with at least one.
  • Tesla’s market capitalization of more than $250 billion puts it in the upper third of current Dow components.
  • Its exposure to solar energy would also add to the Dow’s breadth, complementing the two large oil companies currently among its ranks. Its other adjacent industrial applications would similarly boost the average’s industrial origins.

The best argument against Tesla joining the Dow is that it’s a relatively new company. Most of the current members of the Dow have long pedigrees dating back for decades. Yet the move wouldn’t be unprecedented. Microsoft had only been publicly traded for 13 years before it joined the average, and Visa got into the Dow in 2013, just five years after its 2008 IPO.

It’s Dow Jones’ move

Other than that, the big uncertainty about Tesla joining the Dow comes largely from the fact that there aren’t any obvious candidates to get kicked out to make way for the automaker. Although some companies have low share prices that give them insignificant influence over the overall Dow, their fundamental businesses are still solid.

Nevertheless, the ball is now in the court of Dow manager S&P Dow Jones Indices to decide what to do next. If a vacancy comes up in the Dow Jones Industrials, investors should expect Tesla to get a close look, thanks to Elon Musk’s decision to split the stock.

Author: Dan Caplinger

Source: Fool: Elon Musk Splits Stock, Makes Tesla’s Case to Join Dow Jones

Here are three reasons to expect the e-commerce giant to follow in Apple’s footsteps.

Stock splits had almost become a thing of the past when Apple (NASDAQ:AAPL) came out with its surprise announcement to split its stock. The move was the fourth time that Apple had made such a move, but most of its tech peers — including Amazon.com (NASDAQ:AMZN) — had eschewed stock splits for years.

Apple’s decision has some wondering whether other companies might jump back onto the stock split bandwagon. It’s been more than 20 years since Amazon delivered a split to its shareholders, but there are some compelling reasons why now might be a good time to reconsider. Here’s a quick look at them.

DATA SOURCE: AMAZON.COM INVESTOR RELATIONS.

1. Amazon’s high stock price is a lightning rod for political criticism

Amazon has been under fire in Washington for a variety of practices, ranging from how it treats its employees to whether it pays its fair share of taxes. Inevitably, politicians point to the meteoric rise in Amazon stock and the resulting boost to the wealth of CEO and founder Jeff Bezos as symbols of avarice not just for the company itself but for the entire American corporate sphere.

A big stock split obviously wouldn’t do anything to reduce the market capitalization of Amazon or the amount of wealth Bezos has. However, it would potentially take away the most evident measure of the company’s rise in value. If a stock split sent Amazon’s stock price back to levels at which it could just fade into the background, it might reduce its high profile at least to a minimal extent.

2. Amazon could get an invitation to the Dow

The Dow Jones Industrials (DJINDICES:^DJI) strive to include companies of all kinds among its 30 components. Back when Amazon was generally considered a tech stock, it looked unlikely that it would ever join the Dow, because there were already a huge number of tech companies among its ranks.

However, the creation of the communication services sector has effectively pulled Amazon’s business out of tech entirely. The unit’s internet retail business falls under consumer discretionary, while its Web Services division facilitates cloud-based communication for its clients. If that sounds like a technicality, it is — but it might be just the excuse the Dow needs to add Amazon.

Before Amazon gets a Dow invite, though, it would have to reduce its stock price significantly. That’s because the Dow is a price-weighted average, so Amazon’s high share price is a non-starter for negotiations right now. If joining the Dow is the motive Amazon has, investors should expect a 15-for-1 or 20-for-1 stock split to get the job done.

3. Amazon wants to keep up with Apple

Finally, Amazon has always had aspirations to become the most important company on Earth. That makes keeping up with Apple a necessity, and Amazon will look closely to see what if any impact Apple’s stock split has on its future share-price trajectory.

Apple’s stock split announcement boosted interest in the stock even beyond its already impressive levels. That has sent Apple’s market capitalization above the $1.9 trillion mark. Amazon remains closer to $1.6 trillion.

It might seem petty for such a successful company to pay attention to its market cap rankings. But Bezos has started to sell off significant portions of his stock, and if he wants to keep doing so, keeping the stock price high by whatever means are available is worth considering.

It ought to happen — but don’t hold your breath

Before Apple announced its stock split, the odds of Amazon splitting its shares were essentially zero. That’s changed with the Apple split. Now, with these compelling reasons to move forward, there’s a much greater chance that the FAANG stock will split its shares and try to get out of the uncomfortable spotlight in which the company finds itself.

Author: Dan Caplinger

Source: Fool: Why Amazon Will Be Next to Do a Stock Split

Forget about free money — you might have to do more to earn any future aid from the federal government.

The coronavirus pandemic has had a devastating impact on the entire world. Millions of people have caught the COVID-19 disease, with hundreds of thousands of deaths. Even those who’ve avoided the coronavirus itself have had to deal with its economic consequences, which include shutdowns and stay-at-home orders that have thrown tens of millions of people out of work.

The U.S. government has already provided substantial financial assistance to address the consequences of the pandemic, including the much-publicized $1,200 stimulus checks that the majority of Americans have either already received or will receive within the next few months. Some lawmakers believe that more assistance is necessary, and that’s what prompted the House of Representatives to pass the HEROES Act, which includes another set of stimulus checks. However, the Senate has taken a much less aggressive approach toward further coronavirus economic relief, and it’s far from a foregone conclusion that it will vote in favor of the House bill.

Instead, a bipartisan group of lawmakers there are looking to provide more targeted relief to those Americans hit hardest by the coronavirus crisis. If it becomes law, it could provide thousands of dollars in assistance — but only to a more select group of those in need, and only in exchange for agreeing to do some hard work of your own.

Getting help — to get back to work

With political issues hurting the chances of further economic relief, Senate lawmakers have had to get creative in coming up with ideas to get more money to those Americans in need. Four senators came up with a bipartisan idea that could get as much as $4,000 into the hands of those who’ve lost their jobs because of the pandemic. The group of senators includes Sen. Tim Scott (R-S.C.) and Sen. Ben Sasse (R-Neb.) on the Republican side of the aisle, along with Sen. Amy Klobuchar (D-Minn.) and Sen. Cory Booker (D-N.J.) as the Democrats in the bipartisan effort.

The proposal, to be called the Skills Renewal Act, would create a tax credit that would cover the costs of training programs necessary to build skills that will be in higher demand among employers in the near future. Workers who lost their jobs as a result of the pandemic in 2020 would have access to the credit, and they’d have until the end of 2021 to get the training eligible to receive it. The $4,000 credit amount would be fully refundable, allowing taxpayers to get it even if they’d otherwise owe no tax.

Eligible programs include traditional degree programs as well as certificates, apprenticeships, and other work arrangements. Distance learning would also be included in the measure.

Accelerating a trend that already existed

Although the pandemic has caused massive economic disruptions, many of the conditions that made workers vulnerable to its effects were already in place before the COVID-19 outbreak began. The types of jobs that more low-income workers tend to gravitate toward have been particular susceptible to closures, while higher-income work has been more likely to be available even on a remote basis. That’s exacerbated income inequality issues during the pandemic and the related shutdowns.

The four senators agree that giving workers more tools and training to help them succeed is a worthy way to spend federal money. Rather than hoping that lost jobs will come back once businesses reopen, the measure would encourage people to improve their skills in a way that ideally they would have done even without the pandemic.

Get ready to do more

Many people wouldn’t call a $4,000 tax credit for skills improvement a “stimulus check” at all. Yet to the extent that the money is intended to help foster economic growth, the credit could well have a longer-term benefit for the workforce than the original round of $1,200 stimulus checks.

Even with bipartisan support, there’s no guarantee that lawmakers will be able to agree to anything related to a phase 4 stimulus bill. Until the air clears somewhat, it’ll be tough to plan for 2020, and you shouldn’t take any aid for granted until you actually receive it.

Author: Dan Caplinger

Source: Fool: Your Next “Stimulus Check” Could Have Big Strings Attached

This isn’t the first time people have been asked to sell out their Social Security.

Tens of millions of people are out of work and desperately awaiting any financial help they can get. With the full impact of the coronavirus pandemic still not yet known, lawmakers have already offered most Americans $1,200 stimulus checks to help them make ends meet. Many believe that won’t come close to meeting the needs of most Americans, however, and that has legislators looking for solutions to get more money out to those hit hardest by the outbreak.

Several proposals for additional stimulus payments are making their way around Washington, varying from one-time payments to ongoing financial support over the next few months or even as long as a year. Yet one of the newest stimulus check proposals would force Americans to accept a trade-off — and it’s one that those who watch the ongoing Social Security debate on Capitol Hill have seen before in different contexts. By inviting desperate Americans to give up Social Security benefits down the road, the proposal will only trade current financial pain for future challenges.

Making a trade

The proposal from policymakers at the Hoover Institute and the American Enterprise Institute is a departure from most of the stimulus packages that we’ve seen before. The key difference is that rather than simply making a stimulus payment to Americans without asking anything in return, this proposal would have the government extend loans that it would expect Americans to pay back.

Here’s how the stimulus loans would work. The government would agree to make a payment in a certain amount, with the authors of the proposal suggesting $5,000 as a possible size. In exchange, borrowers would agree to give up the first few months of their monthly Social Security checks once they became eligible. In the interim, borrowers would pay nominal interest rates of 1% to 1.5%.

The money for the loans would come from the Social Security Trust Funds, with the idea that the interest charged would replace the income that the trust funds’ investments would otherwise have produced. That would eliminate the need for further deficit spending to make additional stimulus payments, which the policymakers would prefer to avoid.

Another attempt to divert retirement income

Unfortunately, this isn’t the first time that the federal government has considered proposals that would force Americans to choose between their immediate needs and their long-term financial futures. Back in 2017, in response to the student loan crisis, one proposal would have allowed student loan borrowers to have a portion of their loan debt forgiven if they agreed to delay taking their Social Security benefits without getting the usual bump in their monthly Social Security checks that they’d otherwise be entitled to receive. Another proposal would’ve allowed those seeking family leave benefits to agree to a similar trade-off, again with upfront money coming at the price of some initial Social Security checks.

Proponents of these proposals have noted that they’re voluntary, and so no one’s being forced into them. If the deal isn’t attractive, then you can simply decline. Yet opponents note that the impact of all of these proposals is to reduce the amount of money that people receive in retirement — at a time when most Americans are already facing a significant shortfall in the amount of savings they’d need to be financially secure after the end of their working careers.

No real choice

Given the severity of the coronavirus crisis, it’s disingenuous to claim that Americans can make truly voluntary decisions about their finances. Millions of people would grasp at a $5,000 lifeline no matter what the future consequences might be, simply because they need the money now. That could lead to a real financial disaster for those people when they retire.

Nevertheless, the stimulus payment proposal to take an early loan from Social Security reflects the growing disagreement among lawmakers about the best way to proceed. Now that the federal government has spent trillions of dollars in support of the economy, we’re likely to see more ideas like this that seek alternative funding sources that don’t require further deficit spending — at least not right now.

Author: Dan Caplinger

Source: Fool: This $5,000 Stimulus Check Idea Is a Disaster Waiting to Happen

Investors want to know if the bottom is in. Find out the best way to invest for whatever the future brings.

The stock market has seen one of its fastest bear market declines ever, with fears about the coronavirus pandemic taking more than 35% off the Dow Jones Industrial Average (DJINDICES:^DJI) in just a single month. The drop was not only steep but also psychologically punishing, as day after day, small recoveries would give way to larger downward moves. All along the way, investors wanted to know when the bottom would come.

Last week, the Dow and other major market benchmarks finally posted a solid recovery. Briefly on March 26, the Dow had climbed more than 20% from its March 23 lows, prompting some to declare the end of the coronavirus-inspired bear market and the beginning of a new bullish period for stocks. Here, we’ll take a closer look at the question of whether the bottom is in — and offer some thoughts on how investors should decide about whether it’s safe to get back into the stock market.

The great debate

No investor wants to buy stocks right before a big downward market move, so it’s natural for people to be hesitant to put new money into stocks right now. Plenty of investors believe there’s a lot more room for downside even after the market’s declines over the past month. Here are some of the reasons:

  • First-quarter earnings season is about to start, and the impacts of the coronavirus will become clearer than they have been. For many hard-hit industries, including retail, airlines, travel, and manufacturing, the numbers will likely be scary and sobering.
  • It’s unclear whether the pandemic is coming under control. Case numbers continue to rise in the U.S. and throughout Europe, and there might not be the political will to stick with mitigation measures long enough to avoid further upticks in the rate of spread of COVID-19.
  • Stresses to the financial system have spread beyond the stock market. Bond markets are facing new strains as liquidity concerns rise. Some fear carry-on effects in other financial markets as well — as we’ve already seen in the plunge in crude oil prices.
  • Even once the immediate threat of the coronavirus ends, there could be a long readjustment period before economic activity returns to normal levels. For instance, in travel, airlines will need to return cancelled flights to their schedules, and passengers will need to buy tickets to fly. Similarly, manufacturing companies will need to restore their operations gradually, all the while remaining uncertain whether consumer demand will pick up in time to justify having larger inventories available. The necessary ramp-up period could take longer than most people realize.

At the same time, there are plenty of bullish arguments for why the stock market has already hit bottom:

  • The speed of the market’s decline — and its significant bounce subsequently — had the appearance of a slow-motion “flash crash” driven by algorithmic trading activity. Even if fundamental business conditions remain slow, the argument goes, share prices won’t necessarily keep falling back to those artificially low levels.
  • Many market participants believe that investors are incorporating worst-case scenarios into their expectations for stocks. Unless you believe that the coronavirus will remain a permanent fixture affecting markets for years to come, rising optimism as growth in case numbers starts to decelerate should help support share prices.
  • Orders for people to stay at home will create pent-up demand for many goods and services, and consumers will eventually want to make up for lost time. That could create a temporary boom once the worst of the pandemic has passed, bolstering the stocks of companies hit hardest by the crisis.

My answer: who cares?

I’m afraid that I don’t know whether the market’s hit bottom. I can’t predict whether some new crisis will emerge to send stocks lower, or whether a quick solution to the coronavirus pandemic will appear to restore confidence.

What I do know, though, is that I haven’t changed the strategy I’ve used for years. For long-term investors, the entire premise of using short-term market timing to try to wait for the absolute bottom in the stock market before buying stocks is flawed. If you have cash to invest at this point, you’re already getting a huge bargain compared to where prices were as recently as January and early February. Nailing the perfect buy has some psychological value, but the difference in your long-term returns from buying at current prices compared to paying 5% less or 5% more just isn’t that large.

The easiest way to overcome your fear of further declines is to invest your available cash in multiple parts. For instance, you could take a third of your investing capital and buy the stocks you like now. From there, you can either commit to investing the second and third parts of your cash at fixed times in the future regardless of whether the stock market rises or falls from here. Alternatively, you could set levels that the market will have to fall to before you’ll invest the remainder of your available money.

With that strategy, you don’t have to worry about calling the exact bottom. By investing in multiple installments, at least some of your money will go in near the low. But more importantly, you’ll ensure that you get cash invested where it can do you more good over the long run — rather than waiting for a bottom that might already be in.

You can do it!

If you’re scared to invest right now, you’re not alone. But regardless of whether we’ve hit bottom yet or whether there are further declines to come, setting up an investing strategy to put money into top-performing stocks or a stock ETF like Vanguard Total Stock Market (NYSEMKT:VTI) is likely to pay off in the long run — while waiting could leave you on the sidelines if the market continues to recover from its bear market drop.

Author: Dan Caplinger

Source: Fool: Is the Coronavirus Bear Market Finally Over?

You might even benefit from filing an amended 2018 tax return to claim them.

Here in the middle of tax season, most Americans are working hard to get their 2019 returns prepared. Yet thanks to some better-late-than-never action from Washington, some tax breaks that many had given up for dead are suddenly back and better than ever — and in an unusual move, they got reinstated retroactively back to the 2018 tax year.

As you’re getting your 2019 taxes done, you’ll want to look at these four tax breaks to see if you can benefit from them this year. Moreover, if you would’ve qualified last year, you might need to file an amended return in order to get some more money back from the IRS. Below, we’ll look at how these four provisions finally got put back in the tax code and help you figure out if you can claim them.

What happened?

The four tax breaks below are all provisions that lawmakers initially established for only a short period of time. Instead of making a permanent provision, these tax extender provisions typically got extended toward the end of every year.

However, at the end of 2018, these extenders went unextended — and as 2019 went on, hopes that they’d come back dwindled. It was only the passage of a tax extender bill in December 2019 that restored these provisions, with lawmakers agreeing that it made sense to let taxpayers go back and claim them for 2018, as well, even though those returns had long since been filed.

Here’s more on the four tax breaks in question.

1. Tuition and fees deduction

The tuition and fees deduction offers a deduction of up to $4,000 for qualifying educational expenses like tuition and required fees and materials. This tax break doesn’t get claimed all that often because other educational tax breaks, like the American Opportunity and Lifetime Learning credits, tend to offer larger tax benefits.

However, because this deduction has a more generous income restriction, higher-income taxpayers are able to claim it, even if they’re not eligible for the credits. The full $4,000 break is available for those with incomes of $65,000 or less for singles, or $130,000 or less for joint filers.

2. Deduction for private mortgage insurance

Another break for taxpayers involved the allowance of deductions for homeowners who had to pay for private mortgage insurance. Under the provision, homeowners could treat PMI the same way they did mortgage interest on their primary residence. To claim the PMI deduction, though, you had to itemize your deductions.

The higher standard deductions under tax reform for 2018 caused a lot of people who used to itemize to choose, instead, to take the standard deduction. Nevertheless, if you bought your house with less than a 20% down payment, then you may have been able to benefit by including those PMI costs among your deductions.

3. Deduction for mortgage debt forgiveness

Many people have had their mortgage debt forgiven if they sold their homes for less than their outstanding loan balances. When that happened, you would have typically had to recognize taxable income in the amount of the forgiven debt. However, in the aftermath of the financial crisis, lawmakers created this provision to keep hard-hit homeowners from facing a big tax bill, and the extender kept this break alive for 2018.

4. Credit for energy-efficient home improvements

Prior law allowed homeowners to take a tax credit of up to $500 for various energy-efficient home improvements made to a principal residence. That was slated to expire in 2017, but the extender bill not only brought it back for 2018, but also kept it going for 2019 and 2020, as well.

Get the money you can

These provisions are useful for those preparing their 2019 tax returns. But if you could save money by refiling your 2018 taxes, it’s worth doing so, as well. Some of these provisions can save you hundreds or even thousands of dollars on your tax bill.

The lesson here is that it’s never too late for tax laws to change. It’s rare to have tax breaks restored this late, but for those who can save a little extra cash as a result, the news has never been better.

Author: Dan Caplinger

Source: Fool: Surprise! These 4 Tax Breaks Are Back

Early concerns about the size of tax refunds panicked some taxpayers last year.

Everybody likes to get money back from the IRS, and as tax season has finally begun, millions of Americans hope that they’ll be able to get tax refunds after they file their returns this year. With more than 70% of taxpayers for the 2018 tax year having received refunds, it’s not uncommon to expect to get at least something back.

Last year, there was some controversy about the size of tax refunds early in the season. That’s somewhat understandable, given that the 2018 tax year was the first for which new tax laws applied. Yet even though there haven’t been nearly as many tax law changes for this filing season, some still worry about whether refunds will be as big as they’ve hoped.

Why people panicked last year

Early last tax season, it appeared as though the size of the typical refund would be significantly lower than it had been the previous year. The earliest set of returns that the IRS processed showed that the average refund was down about $170 from the average for 2017 tax returns filed in early 2018. More worrisome, the IRS had issued about 25% fewer refunds by early February 2019 than it did the previous year by that time.

Yet as time went by, the disparities between the two years began to go away. For the final figures as of late December 2019, 111.8 million taxpayers received refunds, down by just 343,000 from the previous tax season. Although the average refund was down from year-earlier levels, the amount of decline was relatively small: from $2,910 to $2,869.

Will this year be different?

At first glance, there’d seem to be even less reason for tax refunds to change very much during filing season for returns for the 2019 tax year. The elimination of personal exemptions, the increase in the standard deduction, and the changes of rules for a variety of itemized deductions were all one-time events that had an impact on last year’s returns, but shouldn’t see much change in tax figures this time around.

The big question is whether taxpayers made changes to their withholding practices over the past year in response to last year’s refund debacle. Many workers don’t realize that when they file their W-4 tax form when they first begin a job, it plays a major role in determining how much money gets withheld from their paychecks to go toward paying federal income taxes. Therefore, changes to the size of refunds came as a big shock last year.

However, once taxpayers received those refunds last year, many might have taken the opportunity to make some adjustments to the way they have money withheld for taxes. If a significant number of people did change their withholding using Form W-4, then the answer will depend on whether they tended to change it in the same way — and whether the changes turned out to be big or small on average.

What matters to you

Obviously, whether the general public gets bigger or smaller tax refunds isn’t nearly as important to you as whether you’re getting a refund and how big it is. You do have some control over this:

  • If you don’t like the idea of giving the federal government an interest-free loan of your money, then you can adjust your withholding and have less money taken out for taxes throughout the year. Your refund will be smaller, but your paychecks will be bigger every pay period.
  • Some people like the idea of having a big refund, as it essentially acts as a method of forced savings. Boost your withholding, and you’ll have too much tax taken out of your checks — and that’ll come back to you at tax time.

Author: Dan Caplinger

Source: Fool: Will There Be Another Tax Refund Scare This Year?

Those who are just becoming eligible for Social Security should know about what’s happening to their benefits.

Many people spend years looking forward to turning 62. That’s because 62 is the first age at which most workers can claim retirement benefits from Social Security, and a large fraction of older Americans choose to start getting monthly checks from Social Security as soon as possible.

If you’re going to be eligible for Social Security for the first time in 2020, however, there’s something you need to know. Under laws that took effect more than 35 years ago, the benefits that you’ll receive will be less than what people in a similar position in 2019 received. That’s because lawmakers back then dealt with potential financial difficulties for the program by instituting new rules that effectively reduced how much those hitting early retirement age will get from Social Security.

What lawmakers did to take away benefits now

Social Security has always been a dangerous issue to discuss in Washington, and lawmakers in the early 1980s knew that they were entering a potential minefield. Yet they also needed to ensure the long-term financial security of the program. As part of a compromise, Congress agreed to raise the full retirement age, which at the time was 65.

However, the provisions didn’t take effect immediately. The intent of waiting was to ensure that those who were close to retirement wouldn’t get punished by the law changes at a time at which it was too late for them to do anything about it.

Instead, increases to the full retirement age got implemented on a delayed basis. It went rose from 65 in two-month increments for those born between 1938 and 1942, and stayed at 66 for those born between 1943 and 1954. More recently, another set of two-month incremental increases began a few years ago for those born in 1955. Those increases will continue until those born in 1960 and later have a full retirement age of 67.

What that means for those turning 62 in 2020 is that their full retirement age will be 66 and eight months. That’s up two months from the full retirement age of 66 and six months for those who turned 62 in 2019.

Just how much money are new Social Security recipients losing?

The consequences of full retirement age rising by two months aren’t immense, which is why it’s fair to characterize the move as a stealth Social Security cut. Over time, though, the slight reductions will add up.

As an example, say that you’re turning 62 in 2020 and were an above-average earner throughout your career, therefore qualifying for a full retirement monthly benefit of $1,800 from Social Security. Because your full retirement age is 66 and eight months, retiring at 62 means that you’re getting your benefits 56 months early. That will result in your getting a Social Security check each month equal to 71 2/3% of your full retirement amount, or $1,290.

However, someone who turned 62 in 2019 and had the same earnings history and full retirement age benefit would receive slightly more. Because the full retirement age applying here was 66 and six months, claiming at 62 is just 54 months early. The 2019 retiree got 72 1/2% of their full retirement monthly benefit, or $1,305. That’s $15 per month higher.

You can’t just wait it out

If you think you can avoid the problem by holding off longer before claiming your Social Security benefits, think again. The change in full retirement age affects your benefits no matter when you claim.

For example, say you wait until age 70 to claim. You’ll get 40 months’ worth of delayed retirement credits, which will boost your check by 26 2/3%. The monthly check will be $2,280. However, for the person who turned 62 in 2019 instead of 2020, the increase would be slightly greater, with 42 months adding up to a 28% boost. That makes the corresponding monthly check $2,304 — $24 higher every month.

Cuts will continue

Those turning 62 in 2021 and 2022 will also have to deal with this Social Security cut, until the full retirement age finally maxes out at 67. However, some policy makers believe that further increases to Social Security’s retirement age could be forthcoming. Staying aware of them is critical to make sure that you don’t get any nasty Social Security surprises.

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Author: Dan Caplinger

Source: Fool: Beware of 2020’s Stealth Social Security Cut

Just about every American hopes to get some financial support from Social Security at some point during their lives. With a formula based on you average earnings over the course of your career, Social Security calculates how much you’ll be eligible to receive if you claim your benefits at various ages. Because that formula takes a limited amount of earnings into account in making its calculations, there’s a theoretical maximum amount of Social Security benefits that recipients can get each month.

The maximum Social Security benefit changes from year to year, based on factors like inflation and changes in the amount of earnings taken into account for Social Security payroll taxation. The Social Security Administration just released the new maximum benefit for 2020, and the numbers are somewhat surprising in how much they differ depending on the age at which you claim your benefits.

Let’s look at how to calculate the maximum benefit and why there were so many differences.

How to get the maximum Social Security benefit

If you want to receive the most you can from Social Security, then you have to have an extremely successful career. In making its calculations of the maximum benefit, the SSA assumes that a worker has earned the maximum wage base amount each year since turning 22, giving them the full benefit of a work history of 35 years or more.

The SSA calculates maximum amounts for claimants at four different ages: 62, 65, 66, and 70. Those who were born in 1954 and therefore turn 66 in 2020 will be at full retirement age on their 66th birthdays, making that amount the baseline for benefit calculations. Those who retire earlier than 66 will suffer a reduction in their monthly benefit, while those who retire at 70 will get delayed retirement credits that boost their payouts each month.

Here, you can see the numbers for those retiring in 2020, along with those in recent years.

The most interesting thing about this chart is that the numbers don’t go up by similar amounts each year for those of different ages. For instance, for those retiring at age 62, the 2018 increase was quite small, but increases since then have been larger. Yet for those retiring at age 70, the 2018 increase was larger than the 2019 and 2020 increases combined. The age 66 maximum is climbing $150 in 2020, compared to just a $20 increase for the age 70 maximum.

There are several reasons for those disparities:

DATA SOURCE: SSA. FIGURES ARE THE ACTUAL MONTHLY PAYMENT IN THE INDICATED RETIREMENT YEAR.

The full retirement age is in the process of going from 66 to 67, and because it’s based on the year you were born, the younger claimants on the chart have higher full retirement ages than the older claimants do.

The wage bases that people of different ages have experienced during their careers differ, giving an advantage to some over others.

Differences in the formula bend points governing people of different ages can also produce different benefit amounts.

Getting as much as you can

The other oddity is that some older recipients who’ve claimed in previous years are set to get more than these maximum amounts for new retirees next year. Those who claimed at age 70 in 2018 and 2019 and qualified for maximum benefits in those years will receive $3,862 and $3,830 per month respectively in 2020. That’s because COLAs have taken what were initially lower maximum benefits and boosted them above the number for 2020 retirees.

Few people get the maximum Social Security amount, because you’d have an extremely high income throughout your whole career. However, the best things you can do to maximize the size of your Social Security check are to work for at least 35 years and to wait as long as you can before claiming your retirement benefits. The more money you make, the closer you’ll get to maxing out your Social Security.

Author: Dan Caplinger

Source: Fool: Here’s How Much the 2020 Maximum Social Security Benefit Is Going Up

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