Q: With inflation readings spiking in recent months, we’re starting to worry about its long-term effects on our portfolio. We remember the 70’s and runaway inflation has been a concern of ours for some time. Should we be this worried?

A: Inflation’s impact on your wealth is not unimportant. In the end, wealth is defined by how much you can buy with your money. Inflation can be an invisible threat. Sometimes, like the 1970’s, it can feel more than obvious. Lately, the recent attention-grabbing headlines reflect the fact that inflation has been on the rise.

But, I think it’s very important to note that today’s inflation readings are a direct result of a drop in prices from March to July of last year. The effects of the shutdown during the pandemic’s early days has thrown the inflation data for a serious loop.

While not a perfect analogy, it’s a lot like comparing the weather last June to the sweltering heat we’ve experienced this year. For the first ten days of June in 2020, the average high was about 67 degrees. In comparison, this June has averaged a high temperature of about 86. I wouldn’t read a lot into that trend when trying to guess about the weather for the rest of this summer.

To smooth out the pandemic’s impact on prices from last spring, it might help to compare today’s prices to 2019 or even 2018. Instead of seeing inflation rate readings of 4% and 5%, the annualized inflation rate over the past two or three years is sitting at about 2% or so. The dip in prices last year, like the cooler start of June of 2020, is undoubtedly distorting today’s inflation data.

Like the Fed, I think the next six-to-twelve months will smooth out the pandemic’s unusual effects and there certainly have been a few!

Q: I couldn’t help but notice that Bitcoin and other crypto-currencies have declined a lot in just the last few weeks. Do you think they are “ready for primetime” as a true investment vehicle for regular people, like me?

A: You’re right, Bitcoin took a 40% nosedive from mid-April to late-May. Ethereum, the other major crypto-currency of note, also crashed about 50% over just twelve days from mid- to late-May. Those are some wild swings.

In my view, crypto-currencies are not even close to being “investable” assets for regular people. They’ve become trading vehicles for those willing to gamble with their money. For those who choose investments based on some measure of fundamental value, this digital currency game is something to safely ignore.

Frankly, I’d lump the current obsession with crypto-currencies with the equally crazy trading of “meme” stocks like Gamestop, AMC Entertainment, and now, Clover Health. The financial media loves to talk about this stuff, that’s for sure. It catches eyeballs. Ultimately, advertising revenue follows. While it might be fun to gawk at it all, it shouldn’t be confused with investing in any traditional sense.

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Tax time has come and gone. Even with the delayed tax deadline, I suspect procrastination was still the order of the day. Understandable? Yes. Costly? Maybe.

With my normal review of tax returns for clients, I spot an error every so often. But, I can tell you tax preparers do their best in the very limited time they’re given. Imagine having a client drop a pile of papers on your desk with their half-completed tax organizer sitting on top. From my vantage point, it’s not an easy job.

Now, imagine if the government adds to the complexity and confusion? Let me highlight one example.

When you reach 70 ½, you can start using your IRA as a tax-smart charitable tool. When you donate to charities out of your IRA, those distributions aren’t considered taxable income. This stands in stark contrast to IRA withdrawals that you use for your normal life expenses.

Remember, your IRA money has never been taxed. You were given a tax break when you contributed to your IRA. You then invested that money, possibly for decades, without paying any tax on the income you earned. When you do eventually withdraw money from your IRA, you finally have to pay tax on it. That is, except when you give money directly to charity. Those donated distributions don’t count as taxable income.

Even better, the amount you give to charity from your IRA helps to satisfy your required minimum distribution (RMD) for the year. In other words, what you give to charity from your IRA can help to lower your taxable income. Doesn’t that sound suspiciously similar to getting a charitable deduction? It certainly does and it’s a very nice tax break (for those age 70 ½ or older) who take the standard deduction and would otherwise lose out on deducting their charitable donations.

Unfortunately, things can and do go wrong with this tool.

Brokerage firms, such as Schwab, Fidelity and Vanguard, are tasked with sending out a tax report – called Form 1099-R – to both you and to the IRS. Form 1099-R lets everyone know how much you took out of your IRA. However, there is no breakdown of the amount you used for yourself and the money you gave to charity. Instead, they just report to the IRS the full amount that exited your IRA. The IRS doesn’t even require brokerage firms to remind everyone that some of your withdrawals possibly went to charities and, therefore, shouldn’t be considered taxable income.

Unwittingly, many taxpayers who wisely make charitable donations directly from their IRA may be paying tax on the money they’ve given to charities. So, if you only do one thing today, pull out your old tax returns to see if an amended tax return is in your future. Just when you thought tax season was over!

Like clockwork, I once again spent a good chunk of this past weekend watching the Berkshire Hathaway annual meeting. It might sound terribly boring to some, I know. Since my first father-and-son trip to Omaha over twenty years ago, Warren Buffett and his long-time sidekick, Charlie Munger, manage to get my attention during the first week of May. At age 90 and age 97, respectively, I suspect this tradition will only last a few more years.

In a world infatuated with shiny objects, the annual Buffett and Munger show has surprisingly maintained its relevance. We should all be so lucky to have such command of our wits at their age. Remarkably, they manage to match their wits with more than a dollop of wisdom. Right along with their billions, after nearly seven decades of investing, their collective wisdom is still piling up. They’ve seen it all. Well, almost.

Throughout the years, the Berkshire Hathaway meeting has offered an annual check-up on the ever-changing investment environment. Back in 2000, the tech-stock bubble was finally bursting. In 2006, the crazed housing market was starting to roll over. By 2009, the Fed dove headfirst into its zero interest rate policy. Each year’s meeting has offered a chance for Buffett and Munger to share their insights for hours on end.

This year, what caught my ear was their fascination with how our current economic “movie” will play out. While they didn’t share the name of the movie they’re watching, for years now I’ve felt we’re deep in Wonderland, walking shoulder-to-shoulder with Alice herself!

At the center of their curiosity is the conundrum of super-low interest rates. It certainly has been my obsession. Will interest rates stay this low? Have they permanently elevated stock prices? Do bonds still have a rightful place in conservative portfolios? Can we really print trillions without major consequences? Seeking answers to these important questions, and many more, will lead you right down the rabbit hole, of course. As enticing as it is, just throwing up your hands doesn’t really seem like a viable option.

For Buffett and Munger, the current movie inevitably inches closer to their final scene. I imagine their calm sense of wonder at this year’s meeting reflects their own demographic reality (and their unimaginable personal wealth is possibly a contributing factor!) For me, however, today’s environment is just one more fascinating scene in a story that’s still very far from complete. Calm wonder, I’m afraid, feels like a luxury. Embracing a little bit of their attitude, though, might in fact be the only rational way to manage through it.

As I reflect on this year’s meeting, the lesson from Buffett and Munger certainly wasn’t about the nuts-and-bolts of investing. Rather, I think this year’s lasting lesson is to always stay curious. After all, in a world that seems about as mad as the one Alice tumbled into, things are bound to get curiouser and curiouser!

Q: I heard that the government is going to start sending monthly payments to families with children. Is this really true?

A: Yes, it is true. With the recent passage of the American Rescue Act, Congress instructed the IRS to begin sending “advanced” child tax credits every month to qualifying parents. Similar to the three stimulus payments, most families with children will begin seeing automatic direct deposits into their checkbooks.

In the past, parents had to wait until they filed their taxes to claim their child tax credits. Starting in late July, they will now get this money in advance for the six months of 2021. The other half of the child tax credit will arrive in the normal way, by claiming the benefit on their tax return. If parents prefer to receive all of their child tax credits in one fell swoop at tax time, they will be able to opt-out of these monthly payments.

The American Rescue Act’s new child tax credit for 2021 was increased by $1,000 per child, moving up from $2,000 to $3,000 per child between the ages of 6 and 17 ($250 per month.) For children under the age of 6, the tax credit was boosted by $1,600 to a new level of $3,600 per year ($300 per month.)

These new monthly payments will feel significant for many households. For example, a qualifying family with three children will begin to receive $750 to $900 per month.

These enhanced child tax credits only go to those who earn under certain income thresholds. Married couples with adjusted gross income of less than $150,000 ($75,000 for single parents) will now get these enhanced amounts. The regular, lower child tax credit amount of $2,000 per child will still go to married couples with adjusted gross income of less than $400,000 ($200,000 for single parents.) The enhanced and regular child tax credit are subject to phaseouts above these income levels.

Importantly, the new child tax credit for 2021 was also made “fully refundable.” This means qualifying parents – and over 90% of parents qualify – will now get a tax credit for the full amount, even if they don’t pay any federal income taxes. Prior to the new law, the tax credit was reduced to $1,400 per child for non-taxpayers. Ironically, those most in need received $600 less per child because they didn’t earn enough.

According to some analyses, the switch to the enhanced, and now fully refundable, child tax credit will lift around four million children above the poverty line. An estimated six million additional children will be lifted closer to the poverty line. This equates to about one in seven children in the US.

The changes to the child tax credit only apply to tax year 2021. Without new legislation, most families with children will cease receiving these monthly payments starting in January 2022. With the looming kick-off of the midterm election cycle, we’ll be hearing a lot more about this issue.

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

The obsession with Bitcoin is bonkers. But, a ten-fold return in only a year’s time has a way of grabbing attention.

Back in 2009, Bitcoin was invented by a still-unidentified person named Satoshi Nakamoto who wrote a short paper describing a new “peer-to-peer electronic cash system.” Mr. Nakamoto simply described an idea, published some basic software and registered a website. He then abruptly handed it over to his fellow enthusiasts and mysteriously stepped back into the shadows. It’s an origin story fit for a superhero.

At its heart, Bitcoin is just a secure, electronic ledger of transactions using a completely made-up and purely digital currency. There are no banks and no middlemen involved. There is simply a collective of non-owner stewards running the system.

Imagine I’m Mr. Nakamoto and I created the first 1,000 Bitcoins out of thin air. And, let’s further imagine I convince you that each of my Bitcoins is worth $0.10. With my new $100 in Bitcoin “wealth”, you kindly agree to sell me ten delicious pizzas. You then quickly turn around and convince your neighbor to accept your 1,000 Bitcoins in exchange for a $110 used bike. And, your neighbor then spends her 1,000 Bitcoins to buy a $120 painting from a local artist.

To make this transaction history official, this very first “block” of Bitcoin transactions needs to get securely recorded somewhere. After all, we need to have a record of the changing ownership of every Bitcoin in existence.

Remember, unlike carrying around traditional bills or coins or gold, Bitcoin is a purely digital thing. In the absence of something tangible to convincingly demonstrate true ownership, the entire system depends on the existence of a trusted ledger. To ensure the Bitcoin ledger’s security and legitimacy, Nakamoto’s moment of genius was arguably his creation of the “blockchain.”

Now, to permanently cement the addition of each new block of Bitcoin transactions to the official ledger – the process of “chaining” one block of transactions to the next block – Nakamoto’s system calls on millions of computers to solve a mathematical puzzle. The fastest computer to solve the puzzle is declared the winner. This winner then gets to officially add the newest block of transactions to the old ledger. The previous version of the ledger is destroyed and the brand new, official ledger is immediately distributed across the globe and is stored on an untold number of independent computers. This process is repeated every ten minutes with each new added block of transactions.

Like mining for gold, in return for their successful effort, the winner is awarded some newly-created Bitcoin. By its very design, a declining number of new Bitcoins will be awarded to the winning “miner” until exactly 21 million of them are in circulation. Supposedly, this limit will be reached in about 100 years.

In the face of newly-printed paper currencies, you can clearly see that promised scarcity is Bitcoin’s primary allure. While unlikely, perhaps Bitcoin will someday supplant the historic role of gold. But, there’s only one major problem, you cannot use Bitcoin to pay your taxes. That’s the ultimate definition of legitimacy. It seems only US dollars will truly satisfy Uncle Sam. Given this, I think I’ll stick with old-fashioned dollars and marvel at Bitcoin’s wild ride!

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com