Credit unions are member-owned and member-governed financial cooperatives. The first financial cooperatives were established in Europe in the mid-1800s and spread to North America at the beginning of the 20th century. In Canada, Alphonse Desjardins is recognized for launching the first credit union in Quebec. Desjardins was also instrumental in establishing the first U.S. credit union in Manchester, New Hampshire, in 1908. Twenty-six years after creating the first U.S. credit union, the U.S. Federal Credit Union Act was passed, which was instrumental in providing structure around the credit union movement.

As of the end of 2020, according to the National Credit Union Administration (NCUA), U.S. credit unions had 124.3 million members across 5,099 federally insured credit unions. Despite the total number of members with a credit union relationship, their deposits are negligible compared to their banking counterparts. For example, data released by the Federal Reserve shows JPMorgan Chase Bank holding domestic assets above $2.2 trillion as of September 2020. Conversely, as reported by NCUA, federally insured credit unions had a combined $1.85 trillion of assets.

Better Service & Better Borrowing Rates

Banks' overall prominence is surprising given that credit unions are generally regarded as providing better support for their members than banks do for their customers. In addition to having the upper hand on customer service, credit unions generally pay more on member deposits and charge less when members borrow than traditional banks. For example, quarterly data provided by the NCUA examines the national average rate of credit unions versus banks in 23 different product categories ranging from CDs to car loans. In over 90% of the categories, credit unions beat banks. Based on this simple comparison alone, it is surprising why consumers would choose a bank over a credit union.

One of the first financial accounts a consumer opens is a checking account. From there, it is common for an individual to put some of their excess in a savings account for an emergency fund or future purchase. For many Americans, a CD is a first "investment." Based on the data from NCUA, if you assume a five basis point delta between credit union deposits and banks, and you compare domestic deposits of the three largest U.S. banks against the deposits of all credit unions, a seemingly insignificant delta becomes meaningful. On average, the top three banks together keep an extra $3 billion per year that if on deposit with a credit union would go directly to a member.

A car purchase is another area where consumers interact with their financial institution. For many individuals, a car provides the necessary transportation to a first job, in addition to the ability to get out of town to explore another part of the city or state. Most individuals finance a car purchase through a bank or credit union. In this particular category, the benefits of credit unions are even more apparent, with an average rate difference of about 1.97%.

Members get stronger together

So how are credit unions able to offer such a rate advantage on both deposit and lending products? Part of the answer resides in the unique structure of credit unions. First, credit unions are owned by their members, not shareholders. Therefore, the interests of the owners (the members) are aligned with the interests of the members (the owners). Member owners do not want to charge themselves more than is necessary to cover the cost of the product and the operation of the institution. Another reason credit unions can offer products and services that are more beneficial than banks is they are tax-exempt entities. That's right, under IRS rules, federal credit unions are tax-exempt under section 501(c)(1), and state credit unions are exempt under section 501(c)(14)(A). This allows credit unions a lower cost structure than most banks and allows credit unions to recycle profits to lower rates on loans and higher rates on deposits.

Despite the large number of Americans with a credit union relationship, banks dominate the wallet of U.S. households. This is surprising given credit unions' upper hand in offering members better rates for deposits and loans. One of the many reasons credit unions can offer better rates on consumer deposits and lower fees when borrowing is that 1) members are also owners, and 2) credit unions are tax-exempt organizations. The choice between a bank or credit union is a significant one given the potential economic loss associated with one, versus the financial gain related to the other.

This article was originally published on Forbes on June 10, 2021.

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Seeing losses in your portfolio during market volatility may be disheartening. Utilizing those losses through a process called tax loss harvesting affords the opportunity to have your taxes benefit from those losses. Rather than selling stock due to inferior performance and shifting the allocations in your portfolio, you can lock in those losses while keeping your portfolio performance the same.

What is tax loss harvesting? Why should I utilize it?

Tax loss harvesting is when you realize, or “lock in,” the losses of your investments by selling the investment. Say you bought stock A at $150 per share, and that investment is now valued at $120 per share (or a $30 per share unrealized loss). You may lock in the loss of an investment by selling some or all of your shares. This is known as “realizing” your losses.

You can then use these losses to lower your tax bill in three ways:

1. Offsetting your realized gains from other investments sold

2. Offsetting capital gains generated from other activities such as a home sale, business sale, or collectibles

3. Offsetting up to $3,000 of your ordinary income

Tax loss harvesting is typically recommended for clients whose tax liabilities require year-round attention. We implement tax loss when positions we manage to hit a certain loss percentage. Toward the end of the year, we perform "tax-gain harvesting" where we look to sell positions with very high gains to ensure we are not generating a net gain for clients.

The “Wash Sale” Rule that minimizes loopholes

Unfortunately, you are not allowed to sell a stock and immediately repurchase it to recognize the losses. If you decide to sell an investment position at a loss, you may not purchase that same investment or a “substantially identical” investment 30 days before or after the sale at a loss. This is to avoid a “wash sale” rule violation. This rule applies to all investment accounts associated with your household and on your tax returns. If a wash sale rule violation happens, the IRS will not allow you to use the loss to offset your gains. The cost basis of your investment will also change as the disallowed loss is added to the cost basis of the new, "substantially identical" investment you purchased. Click here for more information on the wash sale rule.

Will I miss out on my investment returns by doing this?

While there is no guarantee that the original investment sold to harvest losses will stay valued at or lower than the price you sold it for, you can buy similar positions to maintain the allocation and expected rate of return in your investment portfolio.

For example, you sell your Apple stock (AAPL) and are looking for a replacement, so you decide to use a large-cap growth index fund. Large-cap growth index funds are funds that invest in various stocks/companies that are classified as "large-cap," meaning they are valued at a market capitalization of $10+ billion. The growth piece implies that the fund managers see that the companies offer strong earnings growth and are undervalued in the stock market. Using a large-cap growth index fund gives your portfolio continued exposure to the large-cap growth sector of the market during the time period you are not allowed to buy AAPL stock.

See tax loss harvesting in action.

Say you bought some AAPL stock at $10,000, and the stock is now valued at $7,500. If you were to decide to sell it, you would then realize a loss of $2,500. Then, you have another stock, MSFT, that you bought for $5,000 and is now valued at $9,000. You sell that stock and realize a gain of $4,000. Since you can use the losses generated to offset your gains, you would have a net $1,500 of capital gains to pay taxes on, rather than the original $4,000!

Human Investing is here to help.

Tax loss harvesting is done as part of our portfolio management services. We also offer tax planning as a part of our services, helping to ensure you receive comprehensive financial planning where you need it most. If you are interested, please reach out to us at 503-905-3100 or hi@humaninvesting.com.

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If you are a recent grad, you have likely fantasized about making career moves, moving to a new city, or maybe even getting your own pots and pans. Instead, you might be moving in with your parents. According to Forbes, 50% of Millennials and Gen Z plan to move back in with their parents after graduating college. Whatever steered you to decide to move back in with your parents, hopefully this post gives you some confidence about your decision.

Some of you may choose to live at home, but many of you have no other option. Do you find yourself hesitating about moving back home? Or maybe you are considering spending your savings just to get some space from your family? Regardless of the specifics, have you thought about the impact saving money on rent can have on your future?

This is an excellent opportunity to start saving like a millionaire.

For illustrative purposes, let’s consider Sophia, a fictitious 23-year-old. She had other plans for herself, but she is living at home for various reasons. She wakes up grateful for safety and shelter, but she is also human and feels a little nostalgia for what this year could have been. Let’s run some numbers on the potential financial benefit of living at home to make her day a little brighter.

Doodle credit: Rachelle Locey

LET THE SAVINGS BEGIN

If Sophia were not living at home, she would be spending $1,100 a month in housing expenses. After 12 months of living at home, she could save $13,200 that would have ‘normally’ been spent on her rent, wifi, utilities, and parking.

WHERE SHOULD SHE PUT THIS EXTRA CASH?

Sophia is comforted by these additional savings in her bank account today. She remembers her economics teacher explain inflation, the stock market, and compounding interest. Now what is a girl to do?

Here’s her 5 step game plan

One year of savings, Thirty years later

**This chart assumes a 7% annualized growth for her investment over time. The 7% is based on historical data of S&P500 returns. **

By living at home, Sophia has safety, shelter, and savings. She also has significant savings for not only today, but also for the future. If you are living at home, please be thankful for your dishwasher and applaud your future self because the financial trade-off is immense.

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One of my favorite market commentators is Dr. David Kelly, an economist whose research focuses on the investment implications of an evolving economic environment. His insights are rooted in theory and application, which help make the work he publishes comprehensive and practical. In his most recent article, he notes the following:

“As America emerges from the pandemic, there are still serious health concerns, a yawning political divide, rising autocracy around the world, a brutal war in Europe and the highest inflation in 40 years. Moreover, anxiety triggered by these genuine problems is being amplified by cable channels and social media which ever more efficiently gather their audience by appealing to fear and outrage.[1]”

— DR. DAVID KELLY

With this backdrop, I will try to share my thoughts on the market, economy, and implications for investors.  

Market declines: We’ve been here before.

Whether looking at the stock market, bond market, or commercial and residential real estate markets (to name a few), all are down for the year. With widespread asset price declines, renewed volatility is unnerving for many of us. These are challenging times to have capital deployed into the market. However, volatility and risk are the primary reasons investors in the market have achieved meaningfully better returns than cash over most market cycles.

The narrative surrounding this market cycle continues to evolve—the reasons "why" we are experiencing market gyrations and asset declines today differ from past times. However, I have great hope and confidence markets will normalize and begin their next run higher—in the same way they have done following each of the last downturns dating back to 1825. [2] In my 25+ years advising clients, I have experienced managing assets through significant market declines, with the most recent being Q1 2020, and most memorable 2007-2009, and 2000-2002. The cause for these markets was different, but the result was the same for those who managed their emotions through turbulence.

How is the economy responding to the current market?

Economic activity is beginning to slow. The most notable remark came from Fed-Ex, which reported a slowdown in shipments—a real-time data point highlighting growing constraints from corporations and consumers alike. Although the Fed-Ex announcement is one observation, it is congruent with analysis conducted by Dr. Kelly and others, highlighting a slowing economy domestically and abroad.

The Federal Reserve (the Fed) job is exceedingly tricky, given that inflation affects everyone and the primary defense for rising prices is interest rate hikes. At the same time, if interest rate increases are applied excessively, they stand to constrain the economy, which in turn could inflict pain on households through job loss and a decline in asset prices. Concern over Federal Reserve policy mistakes has begun to capture the headlines, with notable economists Mohamed El-Erian and Jeremy Siegel blasting the Fed for raising interest rates too aggressively.

The tension between the actions of the Fed and prominent economists may cause the Fed to exercise more constraints when deciding on interest rate policy in the future. Ultimately, we hope Fed Chairman Powell and his colleagues around the country can orchestrate a soft landing for the economy—which involves moderating rate hikes and extinguishing inflation while maintaining reasonable economic growth.

Our financial plans factor in these conditions.

Financial planning is essential to helping to create positive customer outcomes and providing wise counsel in all market and economic conditions. Recently, a retired client and friend called concerned about the market. They asked if they should reduce their overall risk and sell a portion of their equities. After a review of their financial plan, it was determined that despite the market decline, they were on target to maintain their spending goals; therefore, no immediate action was needed.

Our recommendation for this client included a study on their financial plan's probability of success. The probability analysis simulates their plan's likely outcomes based on good and bad markets. When coupling their planning inputs with their probability analysis and considering their cash and bond holdings, it is easier to look past the market and focus on their plan, including simulations for markets like we are in now.

Please know we understand how unnerving it is to see account balances drop and to feel that the world is unraveling. However, it is imperative that we remain objective and focused on our disciplined approach to both planning and investing. When speaking with your advisor, their answer may be "stay the course." This is our way of saying we have looked at your plan and are prepared for times such as these. Attempting to control the market or predict capital market outcomes sets us up for failure. However, focusing on what we can control, utilizing industry-leading technology, and leveraging a team of experienced credentialed experts are the best approaches with the highest probability of success for our clients and their plans. [3]

As has been the case since hiring Marc Kadomatsu, CFP to Human Investing, financial advice dispensed through the lens of financial planning has been the cornerstone of our service offering at Human Investing. Marc previously served as the head of the Financial Planning Association for Oregon and SW Washington. We have added to his team the recent promotion of Will Kellar, CFP, to Partner. Will has tremendous experience in advising clients through a planning lens. Moreover, Will is responsible for training the next generation of financial planners as he currently serves on the faculty of Oregon's only accredited financial planning program at George Fox University. 

Diversification may be the key to your peace of mind.

Emotion management is complicated—particularly for those whose primary source of income is their investment portfolio. To help manage the anxiousness that may accompany turbulent markets, please consider the concept of diversification. The term "diversification" means we don't put all your eggs in one basket. Although you have one account statement from your primary brokerage affiliation (Schwab, Fidelity, Betterment, etc.), you have various investments. Each investment serves a purpose in helping you achieve your goals. Some investments like cash and short-term bonds are what we tap into to provide necessary liquidity without having to sell at a significant loss. At the same time, equities are for longer-term appreciation to help your portfolio generate returns that outpace inflation and taxes.

Although your portfolio performance and holdings are aggregated into a single statement, we ensure that customers are adequately diversified into many different holdings. That way, when it's time to take a necessary withdrawal, we have many options for where we can go for the cash. There is no easy way to manage emotions in volatile markets. However, knowing ample investments can be accessed to provide the needed financial resources is something to consider when looking at the portfolio as a whole.

Markets of all kinds experience ups and downs—which has been my experience since 1996. The current downturn has several major markets down in excess of twenty percent year-to-date. Countries and regions go through economic cycles for various reasons and durations. The economy is showing signs of a slowdown, which could negatively impact consumers and businesses alike. With both the market and the economy on edge, we believe it is paramount for investors to stay disciplined, avoid acting on emotion and lean on their financial plan and advisor to help them make informed financial decisions.

[1] Kelly, D. (2022, September 19). Why the Fed should worry less about sticky inflation (but probably won't). Notes on the Week Ahead, JP Morgan Asset Management.

[2] Gladhill, A. (2019, September 12). Return histogram: Stock market annual returns 1825-2017. Investment Committee Q32019, Human Investing.

[3] Bennyhoff, D. G., & Kinniry Jr, F. M. (2016). Vanguard Advisor's Alpha®. Vanguard, June, http://bit. ly/2gXMDCs.

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Many people dream of one day receiving a considerable sum of money, whether through a large inheritance, winning the lottery, or selling their business or home. Whether the windfall is expected or not, without a plan, coming into a lump sum of money can be overwhelming at first and emotionally draining once the dust settles.

We’ve all read or heard stories of lottery winners who went from rags to riches to rags again, ending in bankruptcy. [1] While most of us may not win the lottery, we may receive money from an inheritance or a gift we weren’t expecting. This news will undoubtedly stir up thoughts of grandeur on how to spend it or for those more practical, how to best protect it. Not to mention, there are also taxes to consider. It can be exciting and scary at the same time.

For these reasons and more, building a financial plan may help you avoid the pitfalls of emotional or poor decision-making by creating a roadmap. This roadmap will act as your guide, helping you stay on track and get the most out of your new-found wealth. By creating a plan, you will cover many topics that matter most to you, such as:

Assessing your short-term goals.

Has there been anything on your to-do list that you would like to check off within the next few years? Buy a more reliable car, take care of house projects, or bolster your emergency savings fund? It’s vital to assess these needs before you consider investing, as the funds necessary to cover the costs of these goals may need to remain in cash.

Paying off high-interest debt.

Do you have any debt? Our team defines high-interest debt as any loan with an interest rate of 6-8%. This is typically found in credit card debt, some student loan debt, and personal loans. It is important to aggressively pay down high-interest debt, and receiving a lump sum just might provide you with the opportunity to do so!

Building an investment plan.

Analysis paralysis can sometimes lead someone to leave their windfall as cash. Building a personalized investment plan that aligns with your goals and timeline is essential to avoid the permanent risk of holding cash. This step is one where an advisor is especially valuable to provide expertise and advice.

Treating yourself.

Receiving a windfall should not feel like a chore. As your financial plan is being built, it’s okay to add room for things like gift and travel. Not only will it make you feel good that it’s in the budget, but it will give you something to look forward to. Considering even small treats is good to do as it will help you plan to budget for bigger things like travel. According to a survey by the Harvard Business Review, 80% of people derive a greater level of happiness when spending money on experiences rather than buying material things.

You can certainly create a basic goals-based plan on your own, or you could look to hire an expert to help you with comprehensive planning. Here are three ways an advisor can help you:

1. Discuss what may be the highest and best use of your dollars.

An advisor will help you prioritize your needs and wants. While it may seem like you are set for life, without proper planning, the money can disappear fast.

2. Help decipher what is important to you.

For many, coming into a lump sum of money can be partnered with heartbreak from losing a loved one or the pain from a legal settlement. Having a discussion measuring both objective and subjective factors is essential.

3. Partner with you to help keep you accountable for your goals.

Many come into money with great intentions but fail in the execution due to a lack of responsibility, intentional or not.

See The Value of Hiring Human Investing for additional information about the advantages of having an advisor.

As always, our team is here to help. We believe receiving a lump sum requires deep consideration and understanding as it relates to your overall financial well-being. If you would like to connect with a dedicated team member to go over your options, please use this link.

[1] The Ticket to Easy Street? The Financial Consequences of Winning the Lottery

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Starting From Square One (Or $20 in my bank account)

Picture this: You’ve just graduated college and received your first '“big-kid” job. You have about $20 in your name. Although it is a new concept, with a new job comes new responsibility, and you decide you should probably be more mindful about your spending (and saving) habits. But how do you start?

I had the unique privilege of beginning my career at Human Investing shortly after I graduated. As you can imagine, working at a financial advisory firm meant that before I started contributing to the company’s 401(k) plan, I was given a beginner’s course in investing.

AN ENDLESS MAZE OF DECISIONS

Like many people who join corporate America, I opted into its retirement plan because it was a free benefit I received. I knew saving for retirement was important, and the investment options available to me would benefit my long-term financial plan.

When I received my first paycheck, I learned the importance of contributing to my 401(k), but in a way that was compatible with my cash flow.

A common rule of thumb is to contribute 10-15% of your gross salary to your retirement account if you can (this includes the employer contribution/match). After learning this, I was eager to invest 15% into my 401(k). However, I did not consider other key factors that made up a healthy and holistic financial plan, like funding an emergency savings account or considering other short-term goals (ex: continuing education or buying a home). Although I was so eager to contribute as much as I could to my retirement plan, I ended up contributing much less than expected after assessing my current financial situation.

Unpacking where to start

I share this story because, like most people new to the financial scene, I wanted to manage my money well, and I figured investing all of my excess income would equate to successful money management. What I didn’t do was take a step back and assess my entire financial landscape. Thankfully, Human Investing was there to provide some guidance. That’s why we made this visual. We call it “The Pyramid to Financial Wellness.” Use the visual as a map; start at the foundation and then work your way up. Before continuing, please know that we all have unique financial situations, and not every block may apply to your situation.

LEVEL 1: Build a Foundation

Build a Budget to understand your monthly cash flow: If you’re looking to invest dollars from your paycheck, you need to know how much bandwidth you have at the end of each month. If you don’t currently have any excess dollars, try to get creative. Look at your current spending habits and see if you need to minimize spending in a certain area. Don’t be afraid to rely on savings apps for help. We generally recommend Mint or Digit.

Pay off High-Interest Debt: Focus on higher interest, non-deductible loans first, such as credit card loans. Consider refinancing your loans or reconsolidating your debt to make payments more manageable.

Contribute to your Company-Sponsored Retirement Account: If applicable, contribute enough to receive the employer match. For example, if your employer matches up to 6% of your contribution, try to meet the 6% savings rate.

Build an emergency fund: If something unpredictable happens, make sure you’re prepared. Click here to learn how to build an emergency savings fund.

Level 2: Plant Long-term Seeds

Open a Retirement Account for future savings: Based on your age and tax bracket, start contributing to either an IRA or a Roth IRA. Click here to see if a Roth IRA account is the right account for you.

Continue paying down student loans: If student loan payments are on your horizon, don’t delay! Try to pay off what you can now. Consider refinancing your loans in order to make regular payments more manageable.

Save for a Home: If this is a goal of yours, start saving. Depending on your timeline, try to save in either a High Yield Savings Account (Short-term goal) or a Roth IRA (Longer-term goal).

Level 3: Hone your Monthly Budget

Open up a 529 account for a child or grandchild: If you are hoping or planning to fund your child’s college education, utilizing a 529 account can protect your purchasing power. The same rules that apply when flying apply here too. Put your mask on before taking care of others.

Pay down your mortgage: Target additional mortgage payments if you are able. Consider refinancing your mortgage to possibly find greater savings with lower interest rates.

Save for Short-term and Mid-term goals: Short-term goals include immediate expenses, paying down debt, having an emergency savings fund, etc. Mid-term goals are big purchases that you plan to make before you retire. This includes saving for a house or a car. Avoid borrowing and start planning to save. If you’ve exhausted other savings vehicles (like your 401K and Roth IRA), consider opening a brokerage account.

If you have any questions about how investing can fit into your financial plan, contact us! We are here for you and are excited to cheer you on as you learn to manage your money well.

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On Wednesday, August 24th, President Biden announced his administration’s Student Loan Debt Plan. This news may bring up questions for you, and we are here to answer them.

Here are the Details you Need:

Who qualifies for loan forgiveness?

• Federal student loan borrowers who earn less than $125,000 per year or married couples who make less than $250,000 per year on their 2020 or 2021 tax return.

• Private and Federal loans taken after June 30th, 2022, are not eligible.

How much will be forgiven?

• $10,000 of student loan debt is canceled for all federal student loan borrowers. 

• An additional $10,000 ($20,000 total) of student loan debt is canceled for those who received Pell grants. 

How can you ensure you receive forgiveness if you qualify?

Borrowers who are already on income-driven repayment plans will automatically receive forgiveness. The Department of Education will make an application available during the month of October. Due to high-volume traffic, the application and income verification process will likely take time.

Borrowers can sign up for updates from the US Department of Education to be notified when the application becomes available by clicking here.  

Other key dates to remember:

• November 15th The deadline to apply to receive debt cancellation by the time the payment pause expires at the end of the year. Your application must be submitted by November 15th.

• January 1, 2023: If you didn’t receive total forgiveness, payments will start back up and interest will begin accruing on the balance on January 1, 2023.

• December 31, 2023: The final deadline to apply for student loan forgiveness.

Forbearance extension

Biden also extended the pandemic student loan forbearance that was set to expire on August 31st to the end of the year. This will benefit those who won’t qualify for forgiveness and those who will still have a balance remaining after forgiveness.

Proposed change of repayment based on income: Those with undergraduate loans who are on income-driven payment plans, may be able to cap repayment at 5% of their monthly income. This is half of the current rate most borrowers pay now.

How does this affect Your current financial situation? 

This news will likely create further questions regarding your specific financial landscape. Here are a few examples of how this change is applied to everyday people:  

MARIA, AGE 25

Maria graduated in 2019 with $25,000 in student loan debt and currently makes $44,000 per year. One of the loans she received was a Pell Grant. According to Biden’s plan, Maria will only have $5,000 left to repay starting in January 2023.

ANDREW & MONICA, AGE 43

Andrew and Monica are a married couple. Together, they carry $40,000 in student loan debt and make a combined income of $260,000 per year. Due to their income, they are ineligible to receive student loan debt forgiveness and will need to resume their repayments starting in January 2023.  

SEAN, AGE 35

Sean graduated in 2017 with $8,000 in student loan debt and currently makes $75,000 per year. All of Sean’s student loans are canceled, with no repayments resuming in January 2023.

How Should You Adjust Your Financial Plan?

However you are receiving this news, you should use this opportunity to assess your finances and take action to get closer to your long-term goals. Here are a few tips:  

If your student loan debt has been altogether canceled:  

• Take some time to reassess your spending and saving habits – create a budget.  

• Bolster your emergency savings fund: Make sure you have 3-6 months of expenses saved.

• Use the extra cash to pay off any consumer debt.

• If you have no consumer debt and have extra cash, consider redirecting those repayments to funding a Roth IRA. (Up to $6,000, or $7,000 if you are aged 50+).

• Reconsider short-term and long-term goals.

If your student loan debt repayments are resuming in January 2023:

• Edit your budget to include these payments.

• Consider restarting your monthly payment schedule. This will save you money in accrued interest by paying down the principal during the payment pause.

As always, our team at Human Investing is here to help should you have any further questions. If you would like to talk with an advisor, call 503-905-3100.

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Due to the newly proposed legislation (Inflation Reduction Act), if you are in the market for a new electric vehicle, you may want to rush to the dealership today (August 11th)!  In the proposed legislation, Congress extended the electric vehicle credit but has added new restrictions which will make qualifying for the credit more difficult.

Here is a list of the new limitations proposed for Electric Vehicles delivered in 2023:

1. 40% of the Battery must have been made in a country in which the US has a free trade agreement.

2. MSRP must be under $55,000 for sedans and $80,000 for vans and SUV’s.

3. Modified Adjusted Gross Income must be less than $300,000 for married joint returns and $150,000 for others.

4. On a positive note, the $200,000 sales limitation that has kept Tesla and a few other manufacturers from qualifying for electric vehicle credit will be removed. So if you are thinking about getting one of these models, you may want to wait until next year to see if these manufacturers can meet the above qualifications.

To use the old credit, you must take delivery of the car in 2022 or have a binding contract to purchase before the bill is signed into law. The bill has already been approved by the Senate and will head to the House for a vote on Friday, August 12. 

Which cars are still eligible for the old credit?

If you want to act quickly, this link contains a list of cars that are still eligible for the old credit.  Please note that Tesla and some other dealers are not eligible for the old credit, but may be eligible for the new credit given they comply with the limitations above. 

As always, we are here to help. Please reach out to your advisor team or email luke@humaninvesting.com if you have any questions.

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Summertime in full swing often means summer jobs for many young people, especially high school and college-age students. Earned income can provide a terrific opportunity for young people to save, think about their future, and begin practicing financial independence.

High school and college students motivated to save and invest can utilize Roth IRA accounts to get the most out of their dollars. Compound interest in action is a pretty magical thing to behold, and the earlier you can earn compound interest working for you, the better! Compound interest, tax benefits, and learning lifelong financial lessons can make for an incredible summer job experience.

Here is why opening a Roth IRA account is an excellent option for those spending their summer working as a high school or college student. 

Tax-Free Benefits

We are big fans of Roth IRAs here at Human Investing. Because the money used to contribute is after-tax dollars, it grows tax free and is not taxed down the road when you take it out…..We love this!

The younger your child starts a Roth IRA account, the more time their tax-free dollar amount in the account has to grow.

Compound Interest Growth

Youth isn’t wasted on the young. In Beth Kobliner’s book Make Your Kid a Money Genius (Even If You're Not): A Parents' Guide for Kids 3 to 23, she uses the following example:  

“Let's say [your teen] puts $1,000 of his summer earnings into a Roth IRA for each of the four years from age 15 to age 18. If he stops and never puts in another penny, but lets the money grow, by age 65 he'll have about $107,000, if the money earns 7% a year. 

But if your kid waits until age 25 and then puts away $1,000 for each of the four years until age 28 and stops, that account will only be worth a little over $50,000 by age 65.”

By taking advantage of a Roth IRA early on (in this example, ages 15-18), you can double your money compared to starting in your twenties. 

Roth IRA Specifics

In 2022, the maximum annual Roth IRA contribution is $6,000 a person for those under 50 years old who are single and making under $129,000 a year.

For those under 18 years old:

For children under the age of 18, they would need to open a Minor or Custodial Roth IRA account. 

Money put in this account must be earned, not gifted (this includes birthday and graduation gifts), and the adult who opens this account for the minor controls the assets until the minor reaches the age of majority (which is 18). 

Adults can also contribute. If your teen earns $3,000 at their summer job, you could either contribute the full amount they earned and let them spend their money, or you could contribute a percentage of your teen’s earnings (like 50%). 

It’s important to note that parents can contribute the money to a teen’s Roth IRA if their teen earned at least that amount. For example, if your teen made $2000, the most that could be contributed to the Roth IRA is $2000 total.

More info here: https://www.schwab.com/ira/custodial-ira 

For those over 18 years old:

For children 18 years or older, their Roth IRA account is now no different than the Roth IRA their parents might have. This account has the same requirements and restrictions as any other non-minor Roth IRA.

Building habits for the long-term

Here are a few ideas from parents on our team about approaching this opportunity with your child who has a summer job. 

As tempting as it is to spend those paychecks on something more tangible (a car, clothes, trips with friends), our children will need to understand the importance of financial independence, hard work, and investing for the future. Old habits die hard, so the earlier they learn these lessons, the better off they will be in the long run! 

You can incentivize your child’s savings by matching their Roth IRA contribution (up to their contribution limit). You can also lead by example. Share with your child why you save and what your financial “why” is. Share your hopes and dreams for their financial future and how their Roth IRA can be a means to this end. 

If you want to read more about Roth IRAs, check out our other blog post by fellow HI team member Nicole: Is a Roth IRA the Right Account for you?

Feel free to reach out to our Human Investing team if you would like more information about Roth IRA accounts. 

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Home prices and home equity have increased substantially over the last few years, which may leave you wondering if you should sell your home. Wouldn’t selling your home be even more tempting if buying another home wasn’t so difficult?

If you are thinking about selling a home, then you are probably focused on market timing, payments, moving and lifestyle changes. One thing you may have overlooked are the tax considerations of selling a home.

You may be thinking, “wait, isn’t the sale of my main home tax free?”  

It depends.

Primary homes are considered capital assets, like investments such as stocks and bonds. Capital assets are normally subject to capital gains taxes when they are sold. However, primary homes may qualify for a favorable capital gains treatment called the Section 121 exclusion.

For most homeowners, the Section 121 exclusion is one of the greatest benefits of the current tax code. Are you aware of how this exclusion works and how to ensure you qualify?

Start With your Capital Gains

Before making the decision to sell your home, start by calculating your capital gains. A gain on the sale of a primary residence is calculated as such:

Sale price - (Purchase price + Improvements) = Capital Gain

Breaking Down the Section 121 Capital Gain Exclusion and its Qualifications

The 2-out-of-5 year capital gain exemption is crucial for homeowners to understand.

The IRS allows homeowners to exclude part of your home sale from capital gain taxes if you’ve owned your home and lived in it as your primary residence for two of the past five years. The 24 months do not have to be consecutive months, but rather a total of 24 months within a 5-year period. If you qualify for the 2-out-of-5 year rule, then you have the following gain exclusion when selling your home:

The profit mentioned above does not include outstanding mortgage. If there is an outstanding mortgage on the home, this will not impact the Section 121 capital gain exclusion amount. Please read example #1 below to see how mortgages do not impact the overall capital gain.

Partial Gain Exclusions and Benefit Timing

Even if you haven’t lived in your home two out of five of the years prior to selling the home, there may be a way to qualify for a partial gain exclusion. For example, you could be eligible for a partial gain exclusion if you had to move due to work-related reasons, health-related reasons, or for unforeseen circumstances such as divorce or giving birth to two or more children from the same pregnancy.

Homeowners can benefit from this Section 121 capital gain exclusion once every two years. For example, if you have two homes and lived in both for at least two of the past 5 years, both homes are not eligible for the capital gains exclusion at the same time.

Four Examples of the Section 121 exclusion

EXAMPLE #1: SINGLE-FILING TAXPAYER

Jordan purchased a home in 2016 for $350,000 and sold it in 2022 for $560,000.

Jordan lived in her home for these 6 consecutive years. When she listed her home for sale, Jordan still had an outstanding mortgage of $75,000 on her home. As mentioned above, mortgages are not part of calculating the total Section 121 gain exclusion. Jordan has a total gain of $210,000 ($560,000 sale price - $350,000 purchase price). For a single taxpayer, none of this gain is subject to taxes because it is less than the exclusion amount of $250,000. Time for Jordan to enjoy her celebration of choice.

EXAMPLE #2: COUPLE FILING TAXES JOINTLY

Marta and Paul purchased a home in 1999 for $350,000 and sold it in 2022 for $1,000,000.

Marta and Paul raised their children in this home for the past 23 years, except for in 2006 when they rented their home for a sabbatical year. The total gain on the sale of the home is $650,000. They will only pay capital gains on $150,000, since $500,000 is subject to the Section 121 gain exclusion.

EXAMPLE #3: VACATION HOME TURNED TO A PRIMARY RESIDENCE

Samuel and Taylor bought a vacation home on the coast in 2010 for $300,000. They used the home as a vacation home for the first 10 years, and then converted it to their primary residence in 2020. Samuel and Taylor would like to sell their home at some point in 2022 for $500,000.

The first 10 years of ownership are considered non-qualified use. Non-qualified use is any period after 2008 when the home was not used as a primary residence. Examples of non-qualified use are vacation homes, rental properties, investment properties, or homes used in a trade of business. Homeowners cannot take the full tax-free exclusion under Section 121 if a property was held and used for non-qualified use prior to it being held as a primary residence (qualified use).

In this example, 2/12ths of the total $200,000 of capital gain can be excluded from taxable income ($33,333) as qualified under Section 121 and 10/12ths ($167,666) of the total capital gain must be included in taxable income as non-qualified use under Section 121.

*There are some exceptions to non-qualified use. They are listed under the Business or Rental Use of Home section.

EXAMPLE #4: HOMEOWNERS TURNED TO LANDLORDS

Miguel and Jasmine purchased their primary home in 2012 for $500,000. They moved out of the home and started renting it in 2020. They sold their home for $1,000,000 in 2022.

Since they wanted to utilize the Section 121 gain exclusion, they had to sell the home in 2022. To articulate the importance this sale timing, here is a detailed timeline:

2018 – home used as their primary home

2019 – home used as their primary home

2020 – home used as a rental home

2021 – home used as a rental home

2022 – home used as a rental home for most of the year and sold for $1,000,000 on May 15, 2022

Since they sold this home during 2022, which meets the 2-out-of-5 year exclusion rule, they can utilize the full tax-free exclusion on the $500,000 gain. ** They may owe tax on the depreciation recapture.

However, if they waited to sell their home until 2023, Miguel and Jasmine would pay capital gains tax on the entire $500,000 gain since they wouldn’t have qualified for the 2-out-of-5 year exclusion rule in this case. As this example illustrates, being mindful of your timeline for selling a home is critical.

Tax Planning for your Home(s) IS CRUCIAL IN MAXIMIZING WHAT YOU CAN POCKET

As you may have gathered from this blog post, buying and selling homes may involve complicated tax planning. Given the prolonged seller’s market, our team has worked on several tax planning scenarios and strategies for different clients. If you would like to speak to us about your own unique scenario, please reach out to us at hi@humaninvesting.com or 503-905-3100.

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Cash has its place in any financial plan. However, holding too much cash or cash-like investments like a CD or a Money Market account can be one of the most overlooked risks when it comes to long-term planning. 

Inflation Creates Permanent Loss  

Traditional wisdom says if you want to preserve your dollars, keep them as cash. Yes, this level of caution can help reduce short-term volatility or loss of capital. Unfortunately, unbeknownst to many investors, cash is not as risk-free as it seems. Holding too much cash long-term can come at a high price. 

 Inflation is defined by the Federal Reserve as "the increase in the prices of goods and services over time.”[1] For investors, inflation is a silent killer that, if unchecked, can permanently deteriorate their purchasing power. To stress this, see how quickly your money can be cut in half based on different inflation rates.   

View fullsize

Table 1

Source: Ycharts

Build a Diversified Plan  

Inflation requires investors to think long-term. Balancing temporary risks with combating inflation is an essential element of building a successful financial plan. 

Long-term investors who want to combat rising costs due to inflation should look to build a diversified investment strategy with an appropriate amount of stocks. While the stock market entails short-term volatility, it has never experienced a total and permanent loss. In fact, stocks have done just the opposite.  

Table 2

This graph is for illustrative purposes only. Past performance is no guarantee of future results. Data sources: Health care costs, CMS.gov; Portfolio returns, CFA Institute (SBBI®)

When Should I Hold Cash?

This is not to say someone ought to avoid holding cash altogether. Strategic cash cushions do have a significant place in a financial plan when considering both short-term and long-term financial decisions (see the barbell approach). There is no one size fits all plan. The amount someone should keep on hand should correspond with their living expenses, instability of income, stage of life, risk tolerance, etc. This amount is typically 3 to 12 months of living expenses. However, the permanent risk associated with holding too much should be evaluated, and if possible, mitigated. This starts with a deliberate and personalized plan concerning how much to hold and where to keep it. 

Decisions around cash are just as psychological as they are financial. For this reason, it can be helpful to enlist the help of a trusted partner like Human Investing who has your best interest in mind.   

Sources

[1] Federal Reserve (2016). What is inflation and how does the Federal Reserve evaluate changes in the rate of inflation?

[2] Inflation Data source from 1/1/1926-12/31/2021: Ycharts.

[3] U.S. Centers for Medicare & Medicaid Services. “Projected | CMS.”

[4] CFA Institute (2021). Stocks, Bonds, Bills, and Inflation (SSBI®) Data.

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Your bonus is not taxed more than regular income.

Have you ever noticed the discrepancy between the bonus payment that was communicated to you and the actual bonus payout? As an example, let’s say your employer announced that you will get a $5,000 bonus, but the upcoming paycheck is only $3,500. What happened?! The common and incorrect narrative is something along the lines of “Bonuses are taxed more than regular income!”

This is not true. Bonuses are taxed at the same rate as your regular income. Please keep reading if you would like to see an example.

Why do we think that bonuses are taxed more than regular income?

Probably because bonus payments are treated by the IRS as ‘supplemental income’, whereas your regular income is treated as ‘ordinary income’ by the IRS.

Supplement and ordinary income are taxed at the same rate. However, supplemental income (like bonuses, overtime pay, severance, and tips) require employers to withhold more taxes. Due to the tax withholding, it feels like bonuses are taxed more than regular pay. And yes, they do have more taxes withheld up front so it does impact your cash-flow.

Because we love round numbers, let’s look at an example of for someone that normally receives a $2,000 paycheck and a one-time $10,000 bonus.

$10,000 bonus example

January 5, 2022: Your employer informs you that you will receive a $10,000 bonus.

January 10, 2022: You receive your paycheck that includes your typical income and the bonus payment.

Your regular income of $2,000 was subject to the following tax withholdings:

15% - federal withholding selected on your W4 Form

8% - state of Oregon withholding tax

23% - total withholding (federal + Oregon)

Your take-home pay is $1,540.

Your bonus paycheck was subject to the following tax withholdings:

22% - federal requirement for ‘supplemental income’

8% - state of Oregon withholding tax

30% - total withholding (federal + Oregon)

Your take-home bonus payment is $7,000. As you can see in this example, the total tax withholding for the bonus payment is greater than the tax withholdings for typical paychecks.

Your tax withholdings are not the same thing as your tax payments.

As shown in the example above, $3,000 was withheld from the bonus payment. This is an upfront payment to the IRS, but it doesn’t mean that this person will actually pay $3,000 in taxes for this bonus At the time of filing their tax return, they may receive some of that money back (a tax refund) or they could end up owing more taxes if they have significant income during the year.

As illustrated above, supplemental income has a 22% tax withholding rate. However, most taxpayers have a lower effective tax rate than that which means they will receive money back from the IRS once they have filed their taxes. We have included an example below to help clarify this concept.

The taxes paid on bonuses are the same as taxes paid on ordinary income.

While tax withholdings are different for regular income and bonus payments, the actual tax rate you pay is the same. Once you file your tax return the actual taxes paid are trued up.

Here is an example of a single tax-payer making a salary of $48,000 a year and a $10,000 bonus. They would see $58,000 appear in box 1 of their W2 Form issued by their employer. The total combined income of $58,000 is then subject to income tax brackets.

The key point is their entire income of $58,000 is subject to the same income tax brackets and end up with the same tax treatment. The difference is only the amount withheld when the bonus is paid out. We know that the $10,000 bonus had 22% in federal tax withholdings, but we can also infer that this person’s effective tax rate is probably lower based on the progressive tax brackets shown in this image.

To be clear, the first $10,275 gets taxed at 10%. The next $31,500 (range is dollars above $10,276 and below $41,775) get taxed at 12%. The remaining $16,225 is taxed at 22%. I encourage you to read the blog post titled 2022 Tax Updates and A Refresh On How Tax Brackets Work if you want a detailed explanation of our progressive tax brackets.

Whether or not this person will receive a tax refund or owes more taxes at the time of filing their tax return depends on the rest of their financial landscape. We can save that information for another blog post!

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