Fourth Quarter 2020 Newsletter

INVESTMENT QUARTERLY

TAX ALERT - THE STEALTH TIME BOMB IN BIDEN'S PROPOSED TAX PLAN

As we head to the finish line in the 2020 elections, we are seeing further analysis of the competing party’s platforms. We are somewhat reconciled to the idea that spending will increase no matter which party wins. The Biden campaign has specified a number of changes they will hope to make, particularly on taxes paid by high wage earners. There are triggers for tax increases at $400,000 and $1 million for different income sources. The impression the public is left with is that tax increases will only affect the top earners and that the middle class will be left untouched.

Perhaps the most significant example of this “tax the rich” approach is the proposed change to the estate tax exemption. Currently, on death, an individual is allowed an exemption from Federal taxes of $11.58 million which amounts to $23 million per couple. Estate values above this amount are taxed at 40%. Biden’s plan calls for a reduction of $8.58 million in the individual credit to $3 million and a raise in the rate on the excess to 48%. This will allow a couple to have a combined exemption of $6 million if the estate is correctly set up. However, the increased rate on the excess, which will start at a lower dollar level, will result in a tax increase of over $4 million versus the tax on today’s $11.58 million estate. This is not chump change. The odds of this passing if there is a Blue Wave are pretty high. If Democrats control both the House and Senate in addition to the White House there won’t be much, if any, resistance to this revision.

To most people these issues don’t raise much concern or even interest. It is not our money and our estates are still in a $0 tax position. For those who are blessed with a higher net worth these proposals should cause them to schedule a meeting with their estate planning attorneys to see what they can do to lessen the tax bite.

You may wonder why this Quarterly is titled “The Stealth Time Bomb”. Well, there is another change, less widely published, that is part of this tax plan. Present estate tax regulations allow the cost of investments to be adjusted to their value on the date of death. This means that a stock you bought for $2 a share that is worth $100 at the time of your death would have its cost basis adjusted up to $100 upon your death. If an heir sold the stock at that time they would have no gain or loss so the $98 capital gain would be avoided. At a tax rate of 20% this would result in a Federal tax saving of $19.60 per share. In Massachusetts one would have state capital gains taxes that would be avoided by the stepped-up cost basis as well. As a result, estates below the exemption amount pay no estate or capital gains taxes if the beneficiaries sell the investments

at the time of death. If they continue to hold and sell later there may be some tax ramifications but it will only be based on the gain or loss from the stepped-up basis of the investment.

Your parents may have bought a house years ago for $50,000 and it is now worth $400,000 at the time of their death. Under current regulations you would be able to take that $350,000 gain tax free. The changes under consideration would disallow the stepped-up basis going forward. This would mean you would have to pay a capital gains tax on the estate’s appreciated property whenever you sold it. This could amount to a significant tax payment and reduction in the net amount heirs receive from an estate. Perhaps the largest gains for most people of modest means would be their home. In our example above of a $350,000 gain, reversal of the cost basis step-up rule would result in a federal tax of $70,000 plus Mass state tax of over $17,000. For many heirs a family inheritance is used to fund children’s college costs. A loss of $87,000 equates to 2 years of college expenses solely because of eliminating the stepped-up cost basis. After paying for college the balance of the inherited funds are frequently used to supplement retirement for the heirs. So ultimately this will make a comfortable retirement unreachable for more middle/lower income families.

Despite claims that Biden’s tax plans will only affect the rich, those with over $400,000 of income, or estates over $3,000,000, the estate tax change would surprisingly hit a number of lower income estates that are exempt from taxes under current rules. There may be some strategies that will be developed over time to help alleviate this tax should it come to pass, but nothing is being discussed at this time.

A similar plan was originally proposed in the 1980’s but failed to get support because of the perceived difficulty in administering it. Old records to support cost basis would likely be difficult, if not impossible to locate. The IRS assumes that if you can’t support a cost, your cost basis is zero. This could mean that an entire estate, with the exception of savings deposits, would be subject to capital gains taxes. If the approach is proposed today, a more liberal and progressive party could garner more support in an “end supports the means” world. Be on the alert and ready to write your senator and congress person if you see or hear that this proposal has seen daylight.

Looking ahead, most market forecasters are projecting equity returns of 3 to 5 percent and bond returns of 1 to 1 1/2 percent over the next few years in the US. Internationally the forecasts are not much better. The sage Jeremy Grantham’s 7-year projection calls for negative equity returns with the exception of emerging markets. Most of his bond projections are negative because of the potential for rising rates. Covid and government stimulus will be key determining factors.

At the ninth month marker the Dow Jones Industrial Average has returned (0.91%); the S&P 500 has returned 5.57%; the Russell 3000 has generated a return of 5.41% and the Bloomberg 1-5 year US Govt/Corp Credit has returned 4.20% so far this year.

Robert B. Needham, CFA

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8 Financial Steps to Finish 2024 Strong with Needham Advisory

September 16, 2024

As we enter the final 100 days of 2024, there's still plenty of time to make this year count. At Needham Advisory, we've compiled a list of eight essential steps to help you finish strong and set yourself up for success in the new year. These actions can provide a financial cushion, streamline your investments, and give you a head start on your 2025 financial goals. 1. Save $1,000 with Daily Contributions By setting aside just $10 every day for the rest of the year, you can save $1,000. This simple strategy creates a financial cushion or helps you reach a specific savings goal with minimal daily effort. 2. Max Out Your Retirement Accounts Make the most of your retirement accounts by contributing the maximum allowable amounts. In 2024, the contribution limit for a 401(k) is $23,000 (or $30,500 if you're 50 or older). For Roth IRAs, the limit is $7,000 (or $8,000 if you're 50 or older). Maximizing these contributions not only boosts your retirement savings but also takes advantage of potential tax benefits. 3. Roll Over Old 401(k)s If you have any old 401(k) accounts from previous employers, now is the perfect time to track them down and consider rolling them over into a current retirement account. This can streamline your investments and potentially reduce fees. However, keep in mind that rolling a 401(k) into a post-tax account like a Roth IRA means you will have to pay taxes on the 401(k) balance. 4. Research High-Yield Savings Accounts Consider moving some cash from your checking or savings account into a high-yield savings account (HYSA). HYSAs typically offer higher interest rates, which can help your savings grow faster, maximizing the returns on your emergency fund or other cash reserves. 5. Take Advantage of Gift Exclusions This year, you can give up to $18,000 per person without incurring any gift tax. Consider giving financial gifts to family members as a way to help them financially while also reducing your taxable estate. 6. Review Your Budget Take a fresh look at your budget to identify areas where you can cut back or reallocate funds. Even small adjustments can lead to significant improvements in your financial health. If you anticipate receiving end-of-the-year bonuses, plan now for how you will use those funds wisely. 7. Start Preparing for the Holiday Season Early Set aside a little money each week for holiday expenses. Consider affordable gift options, such as homemade gifts or experiences, and start organizing any travel plans to secure better deals and ensure a smoother season. 8. Check in with a Financial Advisor Schedule a quick call or meeting with a financial advisor to enter 2025 with a clear, up-to-date plan and some financial planning momentum. Whether it’s refining your budget or optimizing your investment strategy, getting expert advice now can set the tone for a successful new year. These steps can significantly impact your financial stability and preparedness as we approach the end of the year. If you need help with any of these strategies, we at Needham Advisory are here to assist you. Let’s make the most of the remaining days of 2024 together!

Understanding the Massachusetts Wage Act: Protecting Workers' Rights

By duda • August 17, 2023

In the realm of labor laws, ensuring fair compensation for employees is a cornerstone of workers' rights. The Massachusetts Wage Act, consisting of Massachusetts General Laws Chapter 149, sections 148, 149, and 150, stands as a crucial piece of legislation that safeguards the rights of workers in the Commonwealth. Enacted to address wage-related issues and promote fair employment practices, the Massachusetts Wage Act plays a pivotal role in creating a just and equitable work environment for employees across various industries. The Basics of the Massachusetts Wage Act The Massachusetts Wage Act encompasses three key sections: 148, 149, and 150. Each section addresses specific aspects of wages, penalties, and legal recourse for employees facing wage-related violations. Section 148: This section focuses on timely payment of wages. It mandates that employers must pay their employees all earned wages within a certain timeframe, often weekly or bi-weekly. In the case of involuntary separation, employers are required to pay all wages due to the employee on the day of termination. If an employer fails to meet these requirements, they may be held liable for treble damages, which could amount to three times the unpaid wages. Section 149: Section 149 pertains to minimum wage regulations. It establishes the minimum hourly wage that employers must pay to their employees. This provision ensures that workers receive a fair wage that aligns with the cost of living and prevailing economic conditions. Employers are obliged to adhere to the minimum wage requirement, and failure to do so can result in penalties. Section 150: Section 150 deals with legal actions and remedies available to employees in cases of wage violations. If an employer unlawfully withholds wages, an employee has the right to file a complaint or bring a civil action to recover the unpaid wages. Moreover, employees who prevail in their legal claims under this section can recover not only the unpaid wages but also reasonable attorneys' fees and costs. Significance and Impact The Massachusetts Wage Act serves as a powerful deterrent against wage-related abuses and unfair labor practices. By establishing strict guidelines for payment of wages, minimum wage standards, and legal remedies, the Act empowers workers to seek recourse when their rights are violated. This legislation not only supports individual employees but also contributes to a more equitable labor market and promotes a healthier employer-employee relationship. Challenges and Controversies While the Massachusetts Wage Act is a commendable effort to protect workers' rights, challenges and controversies have emerged. One area of contention is the determination of what constitutes "wages." Some employers might argue that certain forms of compensation, such as bonuses or certain benefits, are not covered by the Act, leading to disputes over what is legally owed to employees. Additionally, enforcement and compliance can pose challenges, especially for small businesses with limited resources for administrative tasks. The Massachusetts Wage Act stands as a testament to the Commonwealth's commitment to ensuring fair and just compensation for its workforce. By outlining clear guidelines for payment of wages, setting minimum wage standards, and providing legal remedies for violations, this legislation bolsters employee rights and contributes to a more equitable workplace. As workers continue to play a pivotal role in the state's economic growth, the Massachusetts Wage Act remains a cornerstone of labor law, championing the rights of employees and fostering a more balanced employer-employee relationship.

Understanding the Massachusetts Independent Contractor Statute

By duda • August 17, 2023

In the modern gig economy, the classification of workers as either employees or independent contractors has become a significant legal and economic concern. In Massachusetts, the issue is addressed through the Massachusetts Independent Contractor Statute, found under Mass. Gen. L. c. 149, s 148B. This statute plays a pivotal role in determining a worker's classification, affecting their rights, benefits, and the obligations of employers. In this blog post, we will delve into the key aspects of the Massachusetts Independent Contractor Statute, exploring its implications for both businesses and workers. Understanding the Massachusetts Independent Contractor Statute The Massachusetts Independent Contractor Statute, often referred to simply as Section 148B, was enacted to prevent worker misclassification and protect individuals by ensuring proper classification and fair treatment. Under this statute, individuals are presumed to be employees unless all three prongs of the "ABC Test" are met: A: The worker is free from control and direction in performing the service, both under the contract for the performance of service and in fact. B: The worker performs services that are outside the usual course of the business of the employer. C: The worker is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed. Implications for Businesses For businesses operating in Massachusetts, correctly classifying workers as employees or independent contractors is essential. Misclassification can lead to legal consequences, including back payment of wages, taxes, and potential fines. By adhering to the requirements outlined in the ABC Test, businesses can ensure compliance with the law and avoid potential liabilities. Additionally, businesses must be cautious about reclassifying employees as independent contractors without substantial changes in the working relationship, as this may be seen as an attempt to evade employment-related responsibilities. Implications for Workers Workers in Massachusetts who are classified as employees enjoy various legal protections and benefits, including minimum wage guarantees, overtime pay, workers' compensation coverage, and access to unemployment benefits. On the other hand, independent contractors may not be entitled to these benefits, but they have the advantage of greater flexibility and control over their work. It's crucial for workers to understand their classification accurately, as misclassification can lead to them being denied their rightful benefits and protections. Challenges and Controversies The Massachusetts Independent Contractor Statute has been the subject of debates and challenges, particularly regarding its potential impact on businesses and the gig economy. Critics argue that the ABC Test can be too restrictive, making it difficult for some businesses to classify workers as independent contractors even if the working relationship genuinely aligns with such a classification. Proponents, however, emphasize the importance of protecting workers' rights and preventing exploitation through misclassification. The Massachusetts Independent Contractor Statute, Mass. Gen. L. c. 149, s 148B, plays a vital role in defining the working relationship between businesses and workers in the state. Its implementation through the ABC Test ensures that workers are correctly classified, granting them the appropriate benefits and protections. Businesses must be diligent in understanding and adhering to the statute's requirements to avoid legal consequences, while workers should be aware of their classification to assert their rights effectively. As the world of work continues to evolve, the statute's significance remains undeniable in maintaining a fair and balanced labor landscape.