dsmWealth: October 19, 2023

BY STEVE DINNEN

The big news on the tax front this year has centered on fraud (again?) involving billions of dollars of federal tax credits tied to the pandemic.

Last month, the Internal Revenue Service halted processing any more Employee Retention Credit claims. Here’s their headline: “To protect taxpayers from scams, IRS orders immediate stop to new Employee Retention Credit processing amid surge of questionable claims; concerns from tax pros.”

Tax pros such as Joe Kristan, CPA and partner at the Des Moines office of the accounting firm Eide Bailly. He said all too many businesses that didn’t qualify for the credit have gone ahead and requested one anyway. They’ve been abetted, perhaps urged along, by an industry that has sprung up overnight to guide companies through the application process. (An honest player in this ERC processing pop-up industry, Innovation Refunds, has laid off 40% of the staff at its headquarters in West Des Moines and has quit taking new applications, according to a story in the Wall Street Journal.)

Companies claiming the refund have to amend prior-year tax returns. And there’s the rub with accountants: “You’re amending a tax return because you claimed a credit we don’t agree with,” Kristan said. He added that although many clients have claimed the credit, none have gone with the highly advertised ERC providers.

In less troublesome tax news, a new law allows Iowa entities organized as partnerships or S corporations to work around the cap on itemized SALT deductions (state and local taxes). They can now opt to directly pay taxes that are treated as business expenses of the entity rather than as itemized deductions of the business owner. The owner receives a credit against personal taxes to avoid the income being taxed twice. Congress had gutted SALT deductions with its 2017 tax bill.

Kristan said that’s good news for S corporations but wage income earners won’t see any benefit. Iowa enacted it retroactive to 2022.

Businesses should also note that Iowa taxes on corporations will drop to a top rate of 8.46% for 2023, from 9.8%. They’ll decline to 7.1% next year, on their way to a flat rate of 5.5%.

Iowa is cutting individual tax rates, as well. The rates for 2023 top off at 6%.

Of greater note, perhaps, is that most retirement income will no longer be taxed at the state level. This includes income from 401(k), 403(b) and 457 plans, as well as SEPs, SIMPLEs, Keogh plans and ESOPs. So live it up, seniors!

Overwhelmed by the Medicare menu? There's help.
BY STEVE DINNEN

By now, everyone nearing or past age 65 should have received “Medicare & You 2024,” a 130-page guide to the way Medicare works. The government mailed this out because the Medicare and Medicare Advantage enrollment periods opened as early as Oct. 15. (You can switch plans if you’re already enrolled.)

Making sense of what “Medicare & You” presents is a formidable task. For example, Aetna Medicare offers its Elite PPO (preferred provider organization), its Premier PPO, its Premier Plus PPO and something called a SmartFit PPO. Then they are four different HMOs (health maintenance organizations). Altogether, there are 73 different ways to buy a Medicare Advantage or other health care plan in Iowa. Each has different expenses, charges and deductibles.

Fidelity estimates that retired couples will need, on average, $315,000 to cover health care expenses. Since Medicare plays an outsized role, you might seek help. SHIIP, the Iowa Insurance Division’s Senior Health Insurance Information Program, educates consumers on Medicare. They have counselors, 800-351-4664, and they also stage information events.

Check the SHIIP website to find an in-person seminar near you or watch a recording of a recent meeting.

Surge in wealth has boosted most U.S. households since 2020
BY CHRISTOPHER RUGABER FOR THE ASSOCIATED PRESS

The net worth of the typical U.S. household grew at the fastest pace in more than three decades from 2020 through 2022, while relatively low interest rates at that time made it easier for households to pay their debts, according to a government report Wednesday.

Wealth for the median household — the midpoint between the richest and poorest households — jumped 37% during those three years, the Federal Reserve reported, to nearly $193,000. (The figures are adjusted for inflation.) The increase reflected primarily a jump in home values and higher stock prices and a rise in the proportion of Americans who own homes and stocks.

The jump in wealth occurred even as the brief but brutal pandemic recession cost 20 million Americans their jobs in 2020. Extensive government relief aid, totaling about $5 trillion, helped spur a rapid recovery that regained the lost jobs much faster than had been true after the 2008-2009 recession. The additional spending, though, is believed to have helped fuel the worst bout of inflation in four decades.

The broad-based wealth increase helps explain the surprising durability of the U.S. economy this year and the consumer spending that powers about two-thirds of it. For at least a year, economists have been warning of a forthcoming recession. Yet the economy has kept chugging along.

Economic growth in the just-completed July-September quarter might have topped a robust 4% annual rate, boosted by strong consumer spending for physical goods as well as for services, a broad category that includes airline travel, entertainment, restaurant meals and other experiences.

Government-provided stimulus payments in the aftermath of the pandemic also boosted households’ finances. The median value of checking and savings accounts and other cash holdings surged 30%, according to the Fed’s survey, which it conducts every three years. And with borrowing rates historically low, Americans dedicated just 13.4% of their incomes to paying off debt in 2022, the lowest such proportion since the Fed survey began in 1989.

Even so, substantial wealth inequality remained in place during the survey period, reflecting decades of widening disparities between the richest households and everyone else. Among the wealthiest 10% of households, median wealth reached nearly $3.8 million in 2022.

Still, more Americans bought individual stocks after the pandemic — a likely reflection, in some way, of the “meme stock” craze that was fueled partly by stimulus checks. The proportion of families that directly owned stocks — as opposed through mutual funds — jumped from 15% to 21%, a record increase, the survey found.

The median value of individual stock holdings was $15,000, the Fed report said. The average value of direct stock ownership was much higher — $404,000 — the survey found, reflecting the holdings of richer families.

Household net worth rose more, on a percentage basis, for Black and Hispanic households than for white ones, though measured in dollar terms the disparities remained wide. The median net worth of Black households jumped 60% but remained comparatively low at $45,000. For Hispanics, the figure surged 47% to nearly $62,000. Among white households, median household net worth rose 31% to $285,000.

The Fed’s survey found that even as wealth inequality declined, income disparities worsened. Median incomes grew 3% compared with the previous survey, which covered 2017 through 2019. But average incomes, which are swollen by the earnings of the wealthiest one-tenth of households, jumped 15%. The outsize gain among the richest households was driven by profits on stock and property holdings as well as higher wages.

Continue reading the story from the Associated Press right here.

What is APY? Here's everything you need to know.
BY ERIN BENDIG FOR KIPLINGER

Simply put, annual percentage yield (APY) is the amount of interest earned on a savings account in one year. It takes into account compounding interest — when both your principal balance and any garnered interest earn interest. Since simple interest only pays on the principal, accounts with a high APY can help you accumulate more cash on deposits. Currently, both high-yield savings accounts and CD accounts are offering exceptionally high APYs, in many cases over 4% or 5%.

APY and compound interest
Opening an account with compound interest can be an easy way to maximize your savings. If you open a savings account with compound interest, you’ll earn interest on your savings (the principal balance) as well as on any interest you've accrued.

Depending on the account, interest can be "compounded" daily, monthly, quarterly or annually.

For example, if you put $2,000 into an account that pays 1% annual interest, you’ll earn $20 in interest after a year. The next year, thanks to compound interest, you’d earn on both the principal (your initial $2,000) and on the interest, so 1% on $2,020, which would give you $2,040.

Try Kiplinger’s savings calculator to determine how much you'll save over time.

High-yield savings accounts

APY is a key factor to consider when deciding where to deposit your savings, and high-yield savings accounts usually pay a higher-than-average APY on deposits than traditional savings accounts. Currently, APYs on some of the best high-yield savings accounts are over 5%, much higher than those of traditional accounts. The same goes for CDs. In many cases, some of the best CD rates are also well over 5%.

Use Kiplinger’s tools to compare rates across high-yield savings accounts and CDs.