The Stimulus Package
The stimulus package should be passed by tonight. It contains tax law changes and other benefits that may affect you, in terms of tax credits, AMT relief, education costs and the credit for first time home buyers. A good summary from the N.Y Times is reprinted below.
As for the actual stimulus of the package, many argue that it may not be enough (see the Op-Ed piece by Nobel laureate Paul Krugman, Failure to Rise, Published: February 12, 2009 at http://www.nytimes.com/2009/02/13/opinion/13krugman.html?em)
Professor Krugman argues that the government needs to find more ways to create economic production, through job creation and spending, because “will be a $2.9 trillion gap between what the economy could produce and what it will actually produce. And $800 billion, while it sounds like a lot of money, isn’t nearly enough to bridge that chasm.”
Whether it is enough or not, tracking the government response to see if jobs are created and spending resumes will be one crucial side to an economic recovery. (see the editorial at http://www.nytimes.com/2009/02/13/opinion/13fri1.html?_r=2 for more on what happens next…)
Banks, Credit and TARP II
The other side of an economic recovery is the bail out. So far, the roll out from Treasury Secretary Timothy Geithner disappointed many for its lack of detail. (see http://www.nytimes.com/2009/02/11/business/11markets.html?fta=y )
The roll out focused on more capital infusion for banks, which is important as some argue that a large number of banks are actually insolvent. However, what may be more important is that Mr. Geithener’s remarks still skirt the issue of the toxic assets.
Some of the original plans proposed buying the toxic assets. Today, no one really knows the total of bank assets that should be written off as bad (or, on the other side, which should be bought by the government-private fund …)
Until the full measure of these assets is understood, banks will continue to have trouble resuming lending at full capacity and that will hamper the recovery.
So, as an investor, how do you respond? People still argue about moving to cash, but while that seems safe it (1) sells assets that are down and could recover and (2) misses upswings, like the jump in value of convertible bonds this past January.
On the other side, some argue that falling prices mean that stocks are cheap now. An advisor upon whom I rely has considered this and come away feeling that many stocks are not cheap as much as properly valued in today’s economy. Remember, if you measure stocks by the price to earnings ratio, the E of the P/E fell more than the P so that stocks are actually more expensive by this measure. (This was discussed in a conference call discussion by Mark Yusko of The Endowment Fund.)
In this recent conference call, Mr. Yusko argued that stocks are not the investment to make now because “debt is the new equity”. He has shifted from his investment focus on energy, Asian consumers, emerging markets, Japanese reflation, and health care to buying debt instruments because of the dislocation in that market.
As stated above, we do not have a clear picture of which debt assets have value and which are worthless or “toxic”. This dislocation, as he called it, or failure of the market to properly value, provides for some great opportunities. If you buy debt instruments for under 40% of their face value, you still stand to have a substantial return even if some of the debtors default. (I have made this argument before, so I will not elaborate more in this e-mail.)
Let me know if you have questions or concerns.
What’s in the Bill for You
By RON LIEBER Published: February 12, 2009 NY Times
All the talk the last couple of days about the stimulus bill was about compromise and slimming down. What is left, though, is a huge spending bill, with well over $100 billion in tax breaks and handouts for individuals.
And most of us will be able to use at least one of them, though it will be difficult to get much money immediately, unlike the stimulus checks that went out last year.
What follows is a list of some of the biggest provisions in the bill that will hit you directly in the wallet. Keep in mind that the language in the measure isn’t quite final and the Senate and House still have to vote to approve it.
INCOME TAX In 2009 and 2010, there is a tax credit of up to $400 for individuals and $800 for married couples filing their taxes jointly. You calculate your credit, subtracted from other federal taxes you owe, by taking 6.2 percent of your earned income.
Your eligibility for this credit begins to phase out if you’re an individual with an adjusted gross income over $75,000 or a couple with income higher than $150,000.
Employers may end up adjusting tax withholdings on paychecks so that this credit trickles into your bank account over the course of the year. People who are self-employed can adjust their quarterly tax filings to account for the credit.
This credit is refundable, according to a summary of the stimulus bill that the Senate Finance and House Ways and Means committees released Thursday. That means that even if you have no federal income tax liability, you will still get the money.
UNEMPLOYMENT Normally, you pay federal income taxes on federal unemployment benefits. In 2009, however, you won’t have to pay taxes on the first $2,400 in benefits you receive.
HEALTH INSURANCE If you get fired, your company is required, thanks to a law known as Cobra, to allow you to pay to keep your health insurance, generally for up to 18 months.
The problem is, it can cost you $1,000 a month or more to keep the coverage.
Now, the federal government will subsidize 65 percent of the premium for up to nine months. To be eligible, you need to have been forced out of your job between Sept. 1, 2008, and Dec. 31, 2009. Also, your income in the year you receive the subsidy cannot be more than $125,000 for individuals or $250,000 for married couples filing their taxes jointly.
If you lost your job after Sept. 1, 2008, and declined Cobra coverage, you’ll now get another chance. Call your former company in the next two months to find out how this will work.
You need not keep an eye on the mail for a subsidy check from the government, according Kathryn Bakich, senior vice president in Washington of the Segal Company, a benefits consulting firm. Instead, your former employer will collect the money from the government.
SOCIAL SECURITY In 2009 a number of retirees and disabled people, including Social Security recipients, will receive a $250 refundable tax credit. The money would arrive within 120 days of the bill’s signing.
CAR BUYER TAX DEDUCTION For the rest of 2009, you’ll be able to deduct the state and local sales and excise taxes you pay on the purchase of a new (not used) car, light truck, recreational vehicle or motorcycle.
This will be an “above-the-line deduction,” according to Clint Stretch, the managing principal of tax policy at Deloitte L.L.C. in Washington. That means that you can take it regardless of whether you itemize other deductions on your tax return.
Mark Luscombe, principal tax analyst for CCH, a tax information service, notes that state sales taxes alone can run 6 to 7 percent, before any county or local tax kicks in. That said, if you trade in a vehicle, your taxable purchase price may be lower.
Eligibility for this tax break begins to phase out for single people with adjusted gross income over $125,000 or $250,000 for married couples filing jointly. And the deduction does not apply on spending above $49,500.
PELL GRANT According to a summary from the office of House Speaker Nancy Pelosi, the maximum Pell Grant will increase by $500, to $5,350 in 2009 and $5,550 in 2010. The grants are generally for low-income students.
HIGHER EDUCATION TAX CREDIT This credit covers up to $2,500 of the cost of college tuition and other related expenses in 2009 and 2010. You’ll need to spend at least $4,000 in a single year to get the full credit. The credit begins to phase out for individual taxpayers with adjusted gross incomes over $80,000 or $160,000 for married couples filing jointly.
Forty percent of the credit is refundable, which benefits low-income students paying their way through school (who may owe no federal income taxes).
529 PLAN EXPANSION When you withdraw money from a 529 college savings plan, you can use it for tuition, room, board, books and other college expenses. In 2009 and 2010, families can also use the money for computers and computer technology, which could include educational software and Internet service for students living at home.
FIRST-TIME HOME BUYER CREDIT First-time home buyers are eligible for a refundable tax credit equal to 10 percent of the purchase price of their home, up to $8,000, if they made the purchase after Jan. 1, 2009, but before Dec. 1, 2009.
Unlike a similar credit that Congress provided last year, you don’t have to pay this one back over 15 years. The new credit, however, does phase out for individuals with incomes over $75,000 or married couples with incomes over $150,000 who file their taxes jointly. Also, you forfeit the credit if you sell the house within three years.
TRANSIT ACCOUNTS If you commute to work via public transportation, your employer may allow you to set aside pretax money from your paycheck to pay for the bus, train or parking. Currently, you can put aside only $120 a month for mass transit while those who drive and park can save $230. This year and next, those who take mass transit will also be able to put aside $230 each month.
A.M.T. PATCH Each year, Congress creates a temporary fix to keep millions of people from paying the alternative minimum tax. This year, the patch is part of the stimulus bill. “If you didn’t pay the A.M.T. last year, you probably won’t this year,” said Mr. Stretch of Deloitte. “For most people, this is a nonevent. They didn’t even realize they were in danger of being shot in the head by the A.M.T.”