Nerd's Eye View blog

Overcoming Clients’ Behavioral Biases Using Nudges, Smart Heuristics, And Behavioral Coaching

March 24, 2021 07:04 am 1 Comment CATEGORY: Client Trust & Communication

Even though clients seek out and hire a financial advisor to obtain recommendations they can implement to achieve their financial goals, in practice clients often get stuck and resist taking action or making a change when the time comes. Sometimes the resistance might be based on cognitive or emotional biases, and other times it can be due to a lack of understanding or education about why the change is actually necessary or appropriate. Though in practice, with the range of potential reasons for clients to be resistant – despite having hired the advisor for advice in the first place – it can be confusing and difficult for financial advisors to know what to do to actually help the client move forward.

To help clients get over their resistance, advisors can use methods such as nudges, smart heuristics, and behavioral coaching. These methods have been designed not only to help advisors understand the client’s resistance but also to give them options for addressing the many reasons for the resistance, in a manner that aligns with both the client’s needs (as not everyone may need – or even want – behavioral coaching) and the advisor’s own capacity (advisors may not feel comfortable engaging with all of the available methods, and the time it can take in client meetings to do so).

Nudges are used to help automate processes and tasks for clients (e.g., those that clients must implement on an ongoing basis, such as automating monthly savings with a “pay yourself first” approach). They work best with clients who agree that the action is important and necessary, but who may simply need or want reminders or other mechanisms to help ensure the tasks get done. For clients who aren’t yet sure how to assess whether an action is necessary or important, advisors can use strategies involving smart heuristics, which are less about completing tasks and more about helping clients understand the issue so that they have the ability to engage in meaningful discussions with their advisor. Smart heuristics rely on ‘just-in-time’ teaching, which offers education on topics that the client is currently considering, and thus may find more relevant and meaningful.

For clients who have issues with resistance that stem beyond motivation or understanding, such as emotional biases or personal feelings, advisors can consider using an approach that involves behavioral coaching. Behavioral coaching helps the advisor guide the client to examine how their own emotions and thought processes impact their decision-making. For instance, many clients may be afraid to take action on their financial plan for fear of making a mistake. Accordingly, it is normal for them to hesitate out of fear, anxiety, or ambivalence when making financial decisions. Behavioral coaching can help clients overcome these roadblocks by slowing down to discuss the client’s hopes, dreams, fears, and concerns to ensure their plans are well-rounded and suitable for them. Because while it is important for a plan to be based on technically sound recommendations, the client needs to feel good about the plan and be on board with the recommendations in order for it to matter in the first place.

In order for advisors to choose which strategy to use with clients and when each strategy would be most effective, advisors can turn to a ‘decision tree’ model developed by Sarah Newcomb and Richard Cummings. The decision tree organizes nudges, smart heuristics, and behavioral coaching into a hierarchy that can be applied to each client’s circumstances, and sheds light on when to use one strategy over another. While nudges are helpful to simply remind clients that something needs to be done, smart heuristics can help clients understand an issue so that they can decide for themselves whether they want to take action. If neither a nudge nor a smart heuristic is sufficient to address the client’s resistance, behavioral coaching can help the client understand and work through deeper personal roadblocks.

Ultimately, the key point is that advisors have an arsenal of tools to help them work with clients who are struggling with resistance – stemming from a range of sources – that impede their progress in achieving their financial goals. By developing a plan of action implementing these tools with their clients, advisors can shed light on interesting and insightful details that can potentially result not only in the advisor creating an outstanding financial plan suitable for the client, but also in the client taking ownership over their plan and achieving their financial goals!

#FASuccess Ep 221: Earning More Client Referrals By Cultivating Community Through Client Events, With Miye Wire

March 23, 2021 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 221st episode of the Financial Advisor Success podcast!

My guest on today’s podcast is Miye Wire. Miye is the founder of her eponymous hybrid RIA based in Reston, Virginia, that manages $200m for about 250 young professional families.

What’s unique about Miye, though, is how she’s developed a referral engine around her work with Microsoft employees, hosting several unique and memorable client events throughout the year to instill a sense of community amongst her niche client base, and how that also ends out driving even more referrals from clients who are excited to share that they’re a part of Miye’s community.

In this episode, we talk in-depth about how Miye has become the go-to benefits and equity compensation expert for Microsoft employees at their hub in Reston (and even gets to provide benefits training for their new hires who have recently graduated from college), how Miye’s clients’ challenges in finding the bandwidth to manage their nearly monthly Microsoft stock events has led her to make her own main client deliverable a simple one-page financial planning summary that just lets her clients know where they stand in relation to their goals and includes her planning recommendations, and why Miye structures those recommendations to be so detailed that clients could even implement them themselves if they wanted (although most have still hired her to do it for them).

We also talk about how Miye structures her fees, starting with a $300/hour fee for creating an initial financial plan for new clients (and how she communicates that fee so clients don’t feel like they’re “on the clock” during the process), why Miye feels that structuring her business as a hybrid-RIA on the AUM model allows her to best serve her clients (even though less than 5% of her revenues are generated from commissions), and how Miye ensures that all client-initiated communication gets a prompt reply from her team by setting up a catch-all “Team” email address that goes to everyone’s inbox at once.

And be certain to listen to the end, where Miye shares the mindset shift early on in her career that helped her to stop worrying about trying to “fit the mold” of a “typical” financial advisor, the key insight around what her value was as an advisor that prompted her to outsource many of her firm’s back-office functions in order to spend more time on client-facing activities, and her ongoing recognition of (and appreciation for) how the hard work that she put in the early stage of building her practice has had a tremendous compounding effect that is now paying real dividends.

So whether you’re interested in learning how Miye has developed a niche of working with Microsoft employees, how operating as a hybrid-RIA allows her to run her business more efficiently and do more for her clients, or how she fosters a sense of community amongst her clients, then I hope you enjoy this episode of the Financial Advisor Success podcast with Miye Wire.

Updating Advisor Marketing For A New Niche Without Alienating Existing Clients

March 22, 2021 07:05 am 5 Comments CATEGORY: Practice Management

Historically, financial advisors have worked with any and every client they could (or at least, any client who was interested in buying their company’s products or could afford to pay their fees), and in turn, advisor websites (and other marketing collateral) were developed to be appealing to anyone and everyone. The caveat, though, is that in an increasingly competitive advisor landscape, it is more and more difficult for advisors to differentiate themselves amongst a sea of sameness, leading to an increasing focus on developing niches and specializations as a way to stand out and attract ideal clients. Except for advisory firms that have already built a broad-based “generalist” clientele, creating a more focused niche offering – and updating the advisor’s website and other marketing materials accordingly – can make existing clients who may not fit the advisor’s more specialized future question their own fit with the firm today. Which raises the question: how exactly can an advisory firm start to focus more on their niche specialization of the future, without alienating existing clients in the process?

The starting point of making a firm’s marketing more niche-focused – without alienating existing clients – is simply to recognize how ineffective most generalist-based advisor marketing is today. Because in practice, most advisory firms struggle to get more than a few hundred visitors to their website each month, and even amongst those visitors, few get more than 1-2 prospects per month from their website (and many get none at all!). Which means, ironically, that by trying to avoid alienating any existing clients or prospects by being so broad-based, the firm is already losing out on most or all prospects who visit their website. By contrast, “just” having a message that connects with a mere 1% of prospects – with several hundred website visitors each month – could actually produce 3 qualified leads every month. Which means the approach doesn’t alienate… it’s actually a significant improvement from the status quo!

In the process of actually becoming more niche with an advisor’s marketing, there are several factors to consider, depending primarily on the size of the existing firm, how many advisors it has, and how focused it already is (or not). For solo advisory firms, the reality is that once the founder/owner/advisor decides to go niche, that’s all the buy-in it takes, and solo advisors who want to get started simply have to choose whether they want to rebuild their current website into their new niche, or alternatively create a “microsite” that is separate from their existing website, target that very specifically to their niche, and over time as their new niche grows, shift to make the new niche-focused site their primary business website over time (while keeping their existing website to avoid making existing clients feel alienated).

When it comes to larger multi-advisor firms going niche, though, determining a niche often requires consensus from multiple advisors willing to narrow their focus and excel in one area. If the multi-advisor firm can come to a consensus, the firm can begin to rebrand accordingly. More often, though, multi-advisor firms end out with multiple niches – rather than choosing just one – which requires the firm to adopt an approach more akin to regional law or accounting firms, which create “Practice Leaders” to lead each niche within the firm, and the firm’s website then highlights its list of specialized “Practice Areas” (not just a list of all types of clients, but a menu of dedicated services each specifically crafted for a particular type of client, with a dedicated Practice Leader with specialized expertise to lead it). Alternatively, for firms that can’t even decide or commit to a particular group of niches – or even whether to niche, because some advisors wish to and others don’t – a multi-microsite approach is more effective, where each advisor specialization creates its own microsite targeted to its own clientele, as a standalone offering “Powered By” the parent firm.

Ultimately, the strategic shift of becoming niche is not an easy or simple one—gaining marketing momentum, experience, and trust takes time. However, transitioning into a niche can – and often is –accomplished incrementally anyway, precisely because it takes time to be known, liked, and trusted in a new area of specialization. And the framework of developing Practice Areas and/or microsites allows advisory firms to make the transition as gradually as they want or need to. Though ironically, the reality is that for firms that already serve their clients well, the risk of alienating existing clients with a new niche focus is low, as in practice it’s more often the clients who are concerned about whether they will be rejected by the firm, and upon being told of the new niche focus, won’t declare they’re leaving and instead will simply ask “will we still be allowed to keep working together, too?”

Weekend Reading for Financial Planners (Mar 20-21)

March 19, 2021 03:00 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the big tax planning news that the IRS is delaying the standard April 15th tax filing deadline until Monday May 17th instead... providing some welcome relief to tax filing deadlines, and more time to implement recent tax law changes (from Recovery Rebate checks to non-taxable unemployment insurance), and creating a quagmire of misaligned deadlines as Q1 2021 estimated tax payments (and many state tax return deadlines) remain with the original April 15th deadline!

Also in the news this week are a few other industry headlines, including:

Sorting through the confusion of how RMDs will work in 2021, between the 2020 suspension of RMDs under the CARES Act, new life expectancy tables taking effect in 2022, and the new age 72 onset of RMDs under the SECURE Act
The ongoing rise of state fiduciary rules is creating a growing patchwork of dissimilar regulations troubling both small firms with clients across state lines and large firms with entire branches that span multiple states

From there, we have several articles on personal and team productivity:

How real productivity is not about getting 'more efficient' with your time, but getting clearer about what the Most Important Thing (M.I.T.) is to be doing with the limited time you have
The results of one company that has been testing out a 5-hour workday to balance productivity and employee satisfaction
How author John Steinbeck achieved epic levels of productivity (including 33 books and a Nobel Prize) by staying largely inactive most of every day

We've also included a number of articles focused on personal finance tips:

The most popular Password Managers to use to keep financial (and other) accounts in good order
Tips on what to keep, shred, or scan as financial records increasingly move online
A profile of Mint.com and how it has unfortunately languished in recent years of non-development (yet remains astonishingly popular)

We wrap up with three final articles, all around the theme of what it takes to become and remain "rich":

How often the pathway to becoming rich involves taking concentrated risks but staying rich is almost always about diversifying away from them
Why being "rich" is a relative phenomenon that's all about comparing who you spend time with (making most of us feel not-rich even if we are!)
The difference between being "rich" and being "wealthy" (and why it takes different skills for the latter than the former)

Enjoy the 'light' reading!

Claiming The Home Office Deduction After A Work-From-Home Pandemic Year

March 17, 2021 07:04 am 1 Comment CATEGORY: Taxes

Financial advisors have used the home office deduction as a valuable tax-reducing tool for qualifying clients with home offices, allowing them to deduct certain work-related home expenses on their tax returns. However, as COVID-19 has led to a dramatic increase in the number of individuals working from home, client questions about the home office deduction have become more common than ever before. Accordingly, advisors should have conversations with clients who work from home to ensure they understand (and make proper use of!) the home office deduction rules.

In order to claim the deduction, a home office must generally pass three key tests. The first is the Exclusive Use Test, which requires that the portion of the home used as the home office is used exclusively for business purposes… 100% of the time; the second is the Regular Use Test, which requires the home office to be used on a regular, ongoing basis; and the third is the Principal Place of Business Test, which requires the home office to be the taxpayer’s principal place of business.

While employees are never allowed to claim the home office deduction, self-employed taxpayers can claim the deduction subject to certain Net Operating Loss (NOL) limitations, provided they pass the three requisite tests. Partners can also benefit from a home office deduction by claiming Unreimbursed Partner Expenses (UPEs) on Schedule E of Form 1040. However, partners seeking to do this should ensure that their partnership agreement expressly states that they are personally responsible for the payment of such expenses.

And while employees per se can’t claim the home office deduction, taxpayers who are both the owner and an employee of the same corporation can instead use Accountable Plans to shift what would otherwise be non-deductible (unreimbursed) employee expenses (e.g., expenses related to a home office) into expenses that can be deducted by the corporation at the entity level.

To calculate the home office deduction, qualifying taxpayers can use either the Regular (Actual Expense) Method or the Simplified Method. With the Regular (or Actual Expense) method, taxpayers eligible for the deduction can claim 100% of the actual cost of direct expenses (i.e., expenses entirely attributable to the home office) and a ratable amount of indirect expenses (i.e., expenses attributable to both the home office and personal, non-home office portions of the home such as taxes, rent, and utilities) associated with the home office. Alternatively, the Simplified Method allows taxpayers simply to deduct $5 for each square foot of the Home Office, up to a maximum of $1,500.

Ultimately, the key point is that financial advisors with clients who are self-employed (or who are partners of a partnership) can determine if those clients qualify for the home office deduction (by passing the three requisite home office deduction tests) and whether they have eligible expenses to claim (and if so, how much of those expenses can be claimed). And given the effect of COVID-19 on taxpayers who have adapted to a work-from-home environment, questions about the home office deduction have become increasingly prevalent. Financial advisors who understand how the home office deduction works can help eligible clients make use of a valuable tax break – potentially freeing up resources for those clients to use towards more enjoyable goals!

#FASuccess Ep 220: Taking A Tech Startup Approach To Building And Pivoting Your Advisory Firm, With Shane Mason

March 16, 2021 07:04 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 220th episode of the Financial Advisor Success podcast!

My guest on today’s podcast is Shane Mason. Shane is the co-founder of Brooklyn FI, a fee-only RIA that Shane and his partner AJ founded in 2018 in Brooklyn, NY (but has since shifted to being fully virtual), that serves 159 next-generation clients charging a monthly subscription fee of almost $500 per month for their ongoing financial planning services.

What’s unique about Shane, though, is how he and his partner have intentionally built their advisory business in the style of a tech startup, acting as de facto product managers within their advisory firm... where their financial advice service offering is a product unto itself, and they continually iterate on that advice product to quickly respond to new client opportunities in the marketplace.

In this episode, we talk in-depth about how Shane and Brooklyn FI first launched into a niche of serving successful creatives operating as high-income sole proprietors, why they decided to pivot away from the creatives niche to a focus on people who work in the tech industry and have complex equity compensation planning needs, how almost all of Brooklyn FI’s new clients are referrals from tech industry Slack channels and message boards, and why Brooklyn FI has been especially successful by publishing their fees right on their website to maximize the accessibility of their highly specialized expertise to the most highly motivated time-sensitive clients.

We also talk about Shane’s early career as a CPA, and the path he took that eventually led him to decide to launch an independent RIA, why (after long consideration) he and AJ intentionally structured Brooklyn FI as a 50/50 partnership from the start despite the fact that he was the only one bringing existing clients and revenue (and how that partnership has turned out to be the “secret sauce” behind the rapid growth of their firm), and how Brooklyn FI communicates with legacy clients in the niche that Brooklyn FI no longer focuses on and who aren't a good fit for the firm anymore,

And be sure to listen to the end, where we talk about how Shane has moved away from actively seeing clients in order to focus on broader business opportunities that the rapid growth of the firm has created, the firm’s internal initiatives to expand its structure to support more scalable growth in the future, and the key lesson that Shane shares around getting comfortable delegating the things that he’s already mastered.

So, whether you're interested in how Brooklyn FI has grown so quickly since launching in 2018, why equity compensation planning is such a ripe opportunity for advisors, or why Shane and AJ structured their firm as a 50/50 partnership from the start, then we hope you enjoy this episode of the Financial Advisor Success podcast.

Announcing The New Kitces Research Study On Advisor Technology

March 15, 2021 07:07 am 3 Comments CATEGORY: Technology & Advisor FinTech

Ten years ago, when robo-advisors exploded onto the scene, their prediction was that they could do what financial advisors do at a fraction of the cost, and put the humans out of business. A decade later, though, the reality is that human financial advisors are still surviving and even thriving, increasingly leveraging “robo” tools and business process automation to make our own advisory firms more efficient. In fact, the irony is that the ongoing rise of technology in financial advisory firms isn’t putting financial advisors out of jobs; instead, it’s replacing back-office jobs with technology and actually elevating the role of the financial advisor within the firm in providing that proverbial “last mile” of service, support, and most importantly advice, to the end client.

At the same time, though, technology itself is taking on an increasingly central role in the advisory firm, making the business more reliant than ever on finding the best and right technology solution to help the firm achieve its own business goals. Which is no small feat, given what are now more than 300 independent advisor technology solutions tracked by Kitces Research across the AdvisorTech landscape, deployed across a wide range of industry channels (from RIAs to broker-dealers, insurance companies to bank and trust companies) and business models (from commissions to AUM fees to monthly subscriptions and other fee-for-service models).

Over the years, industry surveys have attempted to get a handle on trends in advisor technology adoption, exploring the most popular and well-rated solutions. Except most advisor technology surveys in the industry are either too small to form a sufficient sample, unwittingly biased towards some industry channels over others, or implemented via open survey links that anyone can take (which in turn are distributed by the technology vendors themselves and distort the results by whichever companies do the best job at turning out their own power users to participate).

In this context, we’re excited to announce the launch of the latest Kitces Research study, on Advisor Technology. Leveraging our own core strengths – a team of nerdy PhDs trained in research methods and survey methodology – this latest Kitces Research study will be unique in that there will be no open survey links distributed via this blog, social media, or industry technology vendors. Instead, participation in this latest Kitces Research study will be “by invitation only”, through a combination of emails, telephone calls, and even snail mail (yes, really!), in an attempt to gather together the most representative sampling of the true trends in advisor technology across the advisor ecosystem.

Ultimately, our goal is simply to answer the questions most relevant to financial advisors – from solo firms to large-scale enterprises – trying to make their own technology decisions, who want to understand what other firms are really using (or not), and what is actually well-rated amongst advisors (or not) – as well as to glean the trends of what’s becoming more and less popular, where should firms consider developing their own solutions instead of going with what’s available in the marketplace, where might venture capital and private equity firms deploy their own dollars to pursue the biggest opportunities for impact in the advisor marketplace, and what parts of the advisor technology stack are most ripe for innovation and prone to disruption.

In the meantime… please stay tuned for your potential invitation to participate in the Kitces Research study on Advisor Technology!

Weekend Reading for Financial Planners (Mar 13-14)

March 12, 2021 02:59 pm 4 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the industry news that the SEC's new Marketing Rule has officially hit the Federal Register, which means it will not be paused or rolled back and is going live (with an effective date of May 4th, and a compliance date of November 4th in 2022), ushering in a new era of social/digital marketing and what is anticipated to be a rapid rise of the use of client testimonials and the emergence of third-party review sites for financial advisors.

Also in the news this week are a few other industry headlines, including:

FINRA is proposing a new rule to help it better clean up "bad actors" after reports continue to emerge of brokers who are even in jail awaiting trial for murder or fraud but still don't have their indictments showing on FINRA BrokerCheck
How the shift to virtual is expected to create a new boom in the move to independence as more advisors seek to capitalize on the flexibility that virtual advisory firms allow

From there, we have several articles on the recent phenomenon of NFTs (Non-Fungible Tokens):

An explainer on what an NFT actually is and how they work
How NFTs allow creatives to monetize their audience and fans in a way that wasn't possible in the past
Why NFTs may be here to stay as a collectible but still aren't necessarily good to view as an investment

We've also included a number of articles focused on practice management and hiring:

Best practices in hiring remote virtual employees (or more generally, the first time the firm hires a new employee in a new state!)
Tips for writing an effective job description to attract good talent
Research on what it really takes to improve the industry's gender diversity (hint: it starts with how firms promote new job openings in the first place)

We wrap up with three final articles, all around the theme of finding more success:

Why it's important to build skills over just looking for "hacks"
How having too many priorities really means having no priorities at all
How the "Common Denominator Of Success" is in making a habit of doing the things that other people don't want to do

Enjoy the 'light' reading!

Kitces & Carl Ep 55: Implementing A Waiting List Or Just Referring Clients Out When Hitting The Capacity Wall

March 11, 2021 07:02 am 2 Comments CATEGORY: Kitces & Carl Podcast

For most of its history, the financial advice industry has been almost exclusively transactional in nature, which meant that advisors would usually interact with clients only when there was a new sales opportunity. The need for interaction only once every few years meant that advisors could have literally hundreds of clients, and it was virtually unthinkable that an advisor would ever choose to or have to turn anyone away. But, as the industry has shifted towards a more ongoing, relationship-driven model, it’s become increasingly common for advisors to find that they’ve hit a capacity wall and simply can’t take on more clients. And once at capacity, many advisors have either raised their fees (so that more prospective clients self-select out of the engagement process before ever reaching out) and/or sought to add capacity (by bringing in additional advisors and staff).

However, for those advisors who aren’t interested in increasing headcount (because they aren’t keen on managing people) or don’t want to raise fees (because their current pricing works for the particular niche they’re targeting), many have turned to implementing waitlists as a way to manage their capacity, at least in the short-term. Which, in turn, raises the question: is implementing a waitlist really the best way to handle capacity limitations, or is there a better alternative?

In our 55th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards discuss the motivations that might drive an advisor to implement a waitlist in their practice, the unintended consequences of a waitlist, and a key mindset shift that advisors can make when thinking about their desire to manage their limited capacity with a waitlist.

As a starting point, it’s important to distinguish amongst a couple of different circumstances behind the use of a waitlist. On the one hand, for the advisor who is actively expanding their capacity by hiring more staff, a short waitlist might be unavoidable if there’s been a sudden influx of new clients, and it’s logistically impossible to onboard everyone all at once. On the other hand, some advisors have intentionally capped their growth pace, and implement a waitlist that (in some cases) might be up to 18 months.

For that second subset of advisors, it’s important to recognize that their decision to put prospective clients on a waitlist comes from a deep desire to help, while realizing that it’s impossible to help everyone (because an advisor who says “yes” to more professional opportunities than they can handle is also actively saying “no” to other things in their life). Unfortunately, though, that decision comes along with some unintended consequences, as people who reach out to financial advisors invariably do so when they have an acute pain point that they need help with right away, and telling those people, “yes, but” means that they often aren’t getting the help they need when they need it (and will just go elsewhere anyway). Instead, it’s perhaps the better response for advisors to simply say they aren’t accepting new clients at the moment and (as an alternative) recommend those prospects out to other advisors who do have the capacity to offer the immediate help the prospective client is seeking.

Ultimately, the key point is that, while it may make sense to implement a waitlist as a way to manage growth and capacity, the reality is that the longer the waitlist gets, the more the risk that advisors end out rejecting clients who, not knowing where to turn, may not get the help they need (or worse, seek it from an advisor who doesn’t do a good job for them). And while some advisors may worry that referring potential clients out will empty out their pipeline and leave them without prospects when spots do open up, it’s important to realize that simply getting to a point where there isn’t room for more clients means that the advisor must be doing something right, and can move away from the scarcity mentality all advisors have as they build their businesses. Because advisors who are at capacity and choose to refer prospective clients to good advisors, at the end of the day, are actively helping those people and moving the profession forward.
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The American Rescue Plan Act Of 2021: Tax Credits, Stimulus Checks, And More That Advisors Need To Know!

March 10, 2021 07:05 am 58 Comments CATEGORY: Taxes

As is often common after a national election, a new administration brings a new set of priorities, resulting in new legislation to implement those priorities… for which the Internal Revenue Code is still one of the most common ways for government policy to be implemented. And so, as the Biden administration closes out its second month, this week ushers in its first major piece of tax legislation: the American Rescue Plan of 2021, intended to drive $1.9T economic stimulus and provide fiscal relief in response to the ongoing COVID-19 pandemic.

The lead of the American Rescue Plan is another (third) round of so-called “Stimulus Checks”, in an amount of $1,400 per eligible individual. Though notably, eligibility in this cycle has been expanded from including ‘just’ children under the age of 17 to all dependents in the household (which can include children in the later years of high school, or in college still claimed as dependents, as well as parents who are claimed as dependents). At the same time, though, the phaseout limitations of the new stimulus checks are more restrictive, with a near-cliff-style phaseout (starting at $75,000 for individuals and $150,000 for married couples) so sharp that some families could see marginal tax rates in excess of 100% through the phaseout range! Which in turn, will require a special focus on navigating a series of three checkpoints that households can pass through to potentially be eligible (based on their 2019, 2020, or 2021 tax returns).

In addition to stimulus checks, the American Rescue Plan also significantly expands the Child Tax Credit, from $2,000 to $3,000 (and up to $3,600 for children under the age of 6), a slightly higher age threshold that will allow 17-year-old children to qualify in 2021, a new system that will pay a portion of the Child Tax Credit in advance over the last 6 months of the year… and yet another set of phaseout thresholds (again at $75,000 for individuals and $150,000 for married couples) for the new Child Tax Credit amount (while the original $2,000 base amount of the Child Tax Credit still phases out at higher thresholds of $200,000 and $400,000, respectively).

Other notable aspects of the American Rescue Plan include a significant increase in the Dependent and Child Care Credit (including higher eligible expense limits and Applicable Percentage amounts that be claimed); new extensions on various Unemployment Compensation benefits that were otherwise set to expire; increases in the Premium Assistance Tax Credit for households buying health insurance from the state exchanges (including coverage down to the first dollar for lower-income households below 150% of the Federal poverty level, and new eligibility for the tax credit for households with income above 400% of the Federal Poverty Level if health insurance exceeds 8.5% of their AGI); a new provision that provides a 100%(!) tax credit to employers to offset the cost of COBRA coverage for 3 months for any employees who are involuntarily unemployed; and a provision that will make student loan debt forgiveness tax-free in the future (albeit without including any actual provisions for student loan forgiveness in this legislation). On the other hand, the popular provision of RMD relief was not included in the final legislation (nor was the widely debated increase in the Federal minimum wage to $15/hour).

Notably, most of the new provisions under the American Rescue Plan are for 2021 only (or in limited cases, until 2022 as well), making them only “temporary” relief. However, the potential remains for additional tax legislation in the coming months as well, raising the question of whether some of the changes – particularly to the Child Tax Credit – may become a permanent feature of tax law in the future, and what else (e.g., student loan forgiveness) may still be on the horizon. Which means the potential for even more legislation-driven tax planning opportunities for clients likely through the remainder of 2021!