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Bob’s Journal for 12/31/20

Published on: Dec 31 2020

Some Notable Events That Grabbed My Attention This Week

Reporting New Tax Law Surprises

Congress recently passed, and the President signed into law, the largest legislation — by volume — ever approved by Congress.

The Consolidated Appropriations Act was more than 5,000 pages. Most of the media attention was on the fiscal stimulus provisions, but there was a lot more in the law than that spending portion, the overlooked by most of the media were some tax law changes.

Let me inform you now about what I consider the most important ones. To start, several key changes affect income tax deductions on medical expenses.

More medical expenses will deductible through the changes. Recent laws provided that only medical expenses exceeding 10% of adjusted gross income were deductible. The floor was reduced to 7.5% in the 2017 tax law but was set to return to 10% after 2020.

The new law sets the floor at 7.5% of adjusted gross income indefinitely. There is no expiration date on the 7.5% floor. It stays in place unless a future Congress acts to change it.

Keep in mind that medical expenses are deductible only if you itemize expenses on your federal income tax return, which means all your itemized expense deductions must exceed the standard deduction amount.

Another change expanded charitable contribution deductions.

The CARES Act earlier in 2020 provided that every taxpayer could deduct some charitable contributions without having to itemize expenses. For 2020 only, individuals could deduct up to $300 of cash charitable contributions without itemizing.

The new law extends the benefit to 2021. In addition, in 2021 the deduction limit on single taxpayers is $300 but for married couples filing jointly, the limit is $600.

The CARES Act also provided that cash charitable contributions could be deducted for up to 100% of an individual’s adjusted gross income. That provision was set to expire at the end of 2020.

The new law extends the 100% limit to 2021. The 100% limit applies only to cash contributions and doesn’t apply to contributions made to donor-advised funds or supporting organizations of charities. Of course, you can use the 100% limit only if you itemize expenses.

The limit of 100% of adjusted gross income is at the taxpayer’s option. You might not want to elect to use the higher limit, because it means part of your charitable contribution deduction would offset income taxes at the lower tax rates. It might be better to deduct a portion of the contributions over several years so more of the deductions offset income taxed at the higher rates.

But note what wasn’t in the law.

While the CARES Act suspended required minimum distributions (RMDs) from individual retirement arrangements (IRAs) and other retirement plans in 2020, the suspension was not extended.

In addition, taxpayers in 2020 were allowed more than 60 days to return distributions to IRAs or other retirement accounts to avoid taxes. That provision also wasn’t extended past 2020. If you take a distribution from a retirement plan, it must be rolled over into another plan within 60 days to avoid owing taxes on the distribution.

Brexit Finally is Done

The United Kingdom (U.K.) and European Union (EU) finally agreed to the terms of the U.K.’s exit from the EU.

The deal concludes a process that began in 2016 when a majority of voters in a U.K. referendum favored leaving the EU.

Under the deal, businesses in the U.K. and EU will continue to be able to trade in both regions without tariffs or quotas. But companies will have to deal with new trade bureaucracies and rules that could delay and disrupt trade.

In addition, the unrestricted movement of workers between the two sides ends. That could reduce the flow of services between the regions and also hurt London’s important financial services industry.

The U.K. now is free to negotiate trade deals with other countries, but the deals must adhere to certain guidelines, so they don’t stray too far from the EU’s policies.

Leaving the EU is likely to reduce gross domestic product (GDP) in the U.K. as it adjusts to the new regime. A model used by the U.K. government earlier estimated the GDP reduction at 4% or more. But the reduction in Europe’s GDP is likely to be small.

The Small Company Stock Resurgence

Small company stocks finally sprang to life in 2020.

For years, small company stock returns usually lagged large company stock returns. That ended in 2020, especially during the last few months.

Since the market bottom in late March, the Russell 2000 index of small company stocks has returned more than 100%. Since late October, the index surged about 35%. During that time, the S&P 500 was up only about 11%.

The surge still leaves the Russell 2000 trailing the S&P 500 over the last three years, with annualized returns of 10.30% for the small company index and 13.71% for the S&P 500.

In the last few days, the smaller company stocks lagged the S&P 500. No doubt some small company investors are taking profits, and that might continue into the first part of the new year. But I think investors are likely to see more value and opportunities in smaller companies as we move past the pandemic economy.

The Data

New unemployment claims declined for two consecutive weeks after rising for several weeks. In the latest week, claims declined by 19,000 to 787,000.

Continuing claims for regular unemployment compensation fell by 103,000 to 5.219 million.

The number of people receiving all types of unemployment benefits declined by 800,000 to 19.6 million.

The Leading Economic Index from The Conference Board increased in November by 0.6%. The index has climbed each of the last three months but increased at a lower rate each month. That indicates growth slowed near the end of the year.

Existing home sales were down 2.5% in November from October’s level, which was the highest since 2006. That’s the first monthly decline after five months of gains. But over 12 months, sales are up 25.8%.

Realtors say sales would have been higher but there isn’t enough inventory available. There are more buyers than sellers. Median prices have increased by 14.6% over 12 months.

The Dallas Fed Manufacturing Survey indicated faster growth in Texas in December. The production index rose to 25.5 from 7.2 in November. Most components of the index increased.

The general business activity index was 9.7, indicating growth continued, but it was lower than the 12.0 level in November.

The Kansas City Fed Manufacturing Index for December was 14, which compares to 11 in November and 13 in October. Manufacturing continues to improve in the region, though it still is below its level of a year ago.

The Richmond Fed Manufacturing Index for December increased to 19 from 15.

Durable Goods Orders for November rose 0.9%. That follows a 1.8% climb in October and is the seventh consecutive month of increases.

Core capital goods orders increased 0.4% in November, down from a 1.6% rise in October.

The Chicago Purchasing Managers Index increased to 59.5 in December from 58.2 in November. That indicates the economy in the Chicago area is growing at a faster rate.

Personal Income declined by 1.1% in November. That’s the second consecutive month and the third out of four months that income slid. That reflects a reduction in the coronavirus stimulus programs.

Personal consumption declined 0.4% in November, indicating the first dip in spending in six months. But the decline wasn’t as much as the drop in income, indicating households tapped savings to maintain some spending.

The Fed’s preferred measure of inflation, the Personal Consumption Expenditure Price Index, was unchanged in November as it was in October. Over 12 months, it increased 1.1%.

Excluding food and energy, the price index was unchanged in November and increased 1.4% over 12 months.

New home sales for November were a mixed bag. Sales for November were 11.0% below October’s level. In addition, sales for the three previous months were revised to lower levels.

Even so, sales are up 20.8% over 12 months. The last five months continued to show the highest sales rates since 2006.

Pending home sales declined by 2.6% in November following a revised 0.9% decline in October. Over 12 months, sales increased 16.4%.

The S&P Corelogic Case-Shiller Home Price Index increased 1.4% in October. The index’s 12-month advance reached 8.4%.

House prices increased by 1.5% in October, according to the FHFA House Price Index. Over 12 months, prices rose 10.2%.

Consumer Sentiment, as measured by the University of Michigan, was 80.7 in December. This is lower than the mid-month estimate of 81.4, but it is higher than the 76.9 reading at the end of November.

Consumer Confidence in December, as measured by The Conference Board, slipped to 88.6 for December to mark a drop from 92.9 in November.

The third estimate of GDP for the third quarter didn’t change much. The record growth previously reported for the quarter increased a little to a 33.4% annualized rate.

The Markets

The S&P 500 rose 1.20% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 0.95%. The Russell 2000 lost 1.37%. The All-Country World Index (excluding U.S. stocks) added 1.80%. Emerging market equities increased by 2.68%.

Long-term treasuries rose 0.53% for the week. Investment-grade bonds increased 0.58%. Treasury Inflation-Protected Securities (TIPS) added 0.14%. High-yield bonds gained 0.41%.

In the currency arena, the U.S. dollar declined 0.66%.

Energy-based commodities increased 0.74%. Broader-based commodities rose 0.88% and gold gained 1.06%.

Bob’s News & Updates

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Seriesclick here.

A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

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