Every occupation and profession, including politics, has its own vocabulary, but math is the same around the world, right? Not so fast—remember Washington, D.C.? In Washington Speak, “It’s different up here.” It certainly is.

We know that in Washington, D.C., words mean things; they just mean different things inside the Beltway. A vocabulary of Washington Words:

  • Taxes are “contributions”
  • Government Spending is “Investing”
  • “Fair Share” is more than you pay now, and more than you have ever paid
  • “Budget Cuts” are costs that increase less than in earlier proposals
  • “Tax Expenditures” are items that reduce government revenue (this requires accepting the premise that all money is government money)
  • “Paying for” a program means imposing new taxes on select taxpayers
  • “The wealthy” are people who either (a) make more money than members of Congress, or (b) have higher net worth than members of Congress, or (c) both
  • “Scoring” a Bill means estimating the cost to taxpayers using ridiculously flawed assumptions, as well as a not-so-independent CBO that leans left and is under the absolute control of Congress

Similarly, Washington Math is neither Old Math nor New Math–it is uniquely Government Math. Washington Math is easily illustrated using calculations from the State and Local Tax (SALT) Deduction included in proposed Infrastructure programs. In the Tax Cuts and Jobs Act of 2017, (TCJA, the Trump tax cut bill), SALT deductions, which formerly had no upper limit, were capped at $10,000 annually. The “Infrastructure Bill” allows taxpayers to deduct up to $80,000 of state and local taxes (as far as we know today) from their income. This would, of course, grant a substantial tax cut to the highest-income taxpayers, primarily in high tax states.

On its face, granting tax cuts to wealthy people would amount to a “Tax Expenditure” (see vocabulary above). Enter Washington Math, and it becomes a revenue generator for Uncle Sam. How is this mathematical sleight of hand accomplished?

Due to ridiculous and arcane Senate Rules, TCJA is set to expire in 2026, after which pre-TCJA laws will apply. The $10,000 SALT limitation would disappear, and tax deductions for wealthy taxpayers would rise dramatically. This would “cost” the Federal Government billions of dollars beginning in 2026.

Now the key—how to project additional revenue long-term by claiming future savings. Under the proposed new rules, the government would collect less money until 2026. After that, the $80,000 cap would limit deductions for the wealthy, raising their future taxes. Counting “expected” revenue for a few years makes time-phased revenue loss turn positive. Eureka! A positive estimated “revenue stream,” which in D.C. is apparently convincing. Confused yet?

There is virtually NO CHANCE that these numbers will see the light of day. But inside the Beltway, most everyone will buy it. Don’t you wish you could live on Government Math?

Van Wie Financial is fee-only. For a reason.

Inflation is here, and depending on where you choose to get your news, it is either here to stay, or merely transitory. As a student of economics and a “seasoned citizen” who has lived through a lot of inflation (the 1970s), I believe that inflation itself is not the problem. Most inflation results from bad government policy. Inflation is a process, not an event. Increased prices are the bogeyman in my worldview.

Consider an example from physics. A steadily moving vehicle travels a predictable distance in a predictable period of time. A simple computation allows anyone to greet the vehicle at a predictable destination. However, the destination of an accelerating vehicle cannot be anticipated until acceleration stops. Right now, inflation is accelerating, and where prices will land is unpredictable.

During the year 2020, steady and low inflation rates produced predictable price levels. Knowing the beginning price point, we could easily extrapolate the ending point. Our current (accelerating) rate of inflation is leading prices to an unspecified and unpredictable higher level. During and after several more months of rising inflation, prices will climb, and when inflation abates, only then can we observe price levels.

There is currently a great debate in the media regarding inflation. The “transitory inflation” group claims that inflation’s end is near, while “Commodity Super Cycle” proponents believe we face several more years of rampant inflation. Arguments on both sides are rational, leaving readers to form their own conclusions.

During and after inflationary cycles, certain commodities experience flexible prices. Lumber has been a great example over the past several months, as prices skyrocketed before falling back to Earth like a Space-X capsule. This price action, while extreme, is emulated by many commodities, though their fluctuation is mostly more muted.

Prices of other purchases are nowhere near as flexible. Labor costs, automobiles, taxes, insurance, medical care, and many other daily purchase prices are sticky on the downward side.

Inflation is generally measured using the Consumer Price Index, or CPI, which measures the current overall price level of a basket of goods and services, and compares the result to the same figure from an earlier period. In rare instances, and over short periods, the CPI change is slightly negative. However, over any significant period, the CPI rises, reflecting the fact that our overall price level has risen.

Slowing increases in CPI simply mean that current prices, no matter how high, are still rising, just not as quickly. But you will pay more to live your daily life than ever before. Prices do not measure inflation; they measure past inflation. Future inflation merely raises your cost of living. It will not return your purchasing power to those halcyon days of yesteryear.

Beware politicians pacifying their flocks with claims of upcoming reduced inflation rates. It will not return your lifestyle to pre-inflationary levels. Consumers continue to pay more and more, wages do not keep pace, and our standard of living erodes. Transitory Inflation supporters attempt to placate us with their claim that inflation will return to 2.0% in a couple of years. At that time, a new base rate for prices will have been set. Prices will continue to rise atop that new base level.

Next week, we examine the possibility of a “Commodities Super Storm,” and its potential impact on how we live our lives.

Van Wie Financial is fee-only.  For a reason.

American investors of all ages have been “treated” to some market events they would rather forget. This week was the anniversary of October 19, 1987, when the S&P500 lost over 22% in one day. Mostly remembered now as “Black Monday,” it remains an annual source of apprehension as October comes around. For somewhat younger investors, their first market shock day was September 11, 2001, when terrorists attacked New York and Washington, D.C. More recently, the March 2020 COVID-19 pandemic caused a major interruption in the market.

While underlying reasons for these events vary, in each case many investors over-reacted, sold perfectly good assets, and lost more money in less time than they ever expected. These unfortunate souls made a tragic mistake – they “did something.” History shows that holding on is generally the most successful technique for lifetime investing. Remember, only long-term money (5-years minimum) should ever be exposed to the market.

Potential errors made by investors are twofold. First, many panic and sell their rapidly declining assets. Secondly, they fail to re-enter the market until the recovery brings the market higher than before the event. In 2020, only 58 days after the COVID-19 “market crash,” the market returned to pre-COVID-19 levels. However, the pandemic marched on, leaving reluctant investors behind as the market attained new highs.

Bad market days and stretches can happen any time of any year, and not always for reasons that are predictable. In 2001, the sudden and negative market reaction was understandable. In 2020, our country was ordered to grind to a halt, and the market reacted similarly. In 1987, only advisors and dedicated investors would have had any clue that equities were dramatically overheated. The later events happened after Internet access was universal.

Economic cycles are more understandable than sudden shocks, and to a degree, investors can make reasonable portfolio changes before and during recessions. However, there are problems with this philosophy as well. The market is forward-looking, and when market professionals see light at the end of the recessionary tunnel, buying begins in earnest. Average investors usually spot the new trend too late to make a positive difference.

Any experienced investor remembers at least one terrible incident, and many have experienced negative outcomes from their own (re)actions. Controlling the urge to “do something” is difficult, and goes against our instincts. Perhaps this is the best reason to work with an experienced financial advisor. Having a trusted and stabilizing advisor will generally result in better long-term returns.

One of the oldest adages in the market says to never make long-term decisions based on short-term events. Resist the panic urge, no matter how gruesome your lingering memories from past market events.

Van Wie Financial is fee-only. For a reason.

Medicare is an extremely popular National Health Insurance program for seniors and some disabled Americans. Advocates abound across the fruited and political plains. In one form or another, the national health insurance program is here to stay.

Government Social Systems tend to become underfunded over time, and Medicare’s insolvency is not far off. In the absence of change, reduced benefits are certain in the future. Most likely, the near future. Many experts are forecasting insolvency as soon as 2024. Clearly, something must be done, but Congress and this Administration have shown little propensity to broach the subject.

Funding problems are not the subject of today’s Blog, and will instead be discussed over time, as reasonable solutions are proposed and considered. Today we are looking at widely held misconceptions regarding Medicare. Also, we are limiting this current discussion to the 52 million+ over-65 recipients, as well as the thousands of Americans who are turning 65 every day. Disability is a complex subject and pertains to a small minority of Medicare recipients. We will discuss Disability Benefits at a later date.

Medicare is not free. Far too many Americans believe that Medicare is free. Most people do receive Part A (hospital coverage) free, but Part B (doctors, etc.) and optional Part D (prescription drugs) are never free. Premiums are partially based on income level, with IRMAA (Income Related Monthly Adjustment Amount) surcharges (taxes) applying to higher-income recipients. Medicare premiums are deducted from Social Security benefits for current enrollees.

Enrollment is not automatic. Many people believe that as they turn 65, Medicare will place them into the program. They are incorrect; all Americans must qualify and make application to receive Medicare benefits. Qualification requirements mirror those of Social Security. To earn benefits, the applicant (or a spouse) must have qualified by working and paying into the system through payroll taxes for 40 calendar quarters. All applicants must have attained 65, though application can be made with 3 months of reaching age 65.

Delayed applications, penalty-free. Any American turning 65 and covered by a group health plan (or a spousal health plan) may delay filing for Medicare until personal coverage lapses. Following the loss of private coverage, Medicare application must be made with 8 months. These deferrals are penalty-free.

Penalties for late enrollment. Americans who fail to enroll by age 65, and who do not qualify for a penalty-free delay, will be fined through a surcharge in their Medicare premiums. Eligibility for Part A carries a 10% penalty for twice as long as the delayed filing period. Failure to enroll in Part B carries a 10% penalty for each 12 months of delay. This surcharge is cumulative and permanent.

Know the rules, and you will avoid incurring penalties, while retaining important continuous health insurance coverage.

Van Wie Financial is fee-only. For a reason.

Mortgage rates remain near all-time lows, real estate prices are escalating, and the stock market has been on fire for the past few years. Inevitably, an age-old question has resurfaced, “Should I borrow against the equity in my home to invest in the market?” Seems like a no-brainer, with cash-out refinancing and Home Equity Lines of Credit (HELOCs) carrying interest rates in the 3% range.

One of Van Wie Financial’s foremost suggestions (read: rules) for investors is to never expose money to the stock market unless you have a minimum of 5 years before needing to touch the funds. Risk is a function of time, and market risk is not tolerable to many people. In any single year, the probability of loss is about 37%. Even after 5 years, the probability of loss is about 22%, and in ten years the risk of loss shrinks only to 14%. It is critical to note that these numbers apply to a theoretical diversified portfolio; 100% stock portfolios are even riskier.

How long would you be willing to pay interest on your borrowed money before realizing a positive return? Six months, one year, two, five, ten, or more? Sizing up market risks, then adding the cost of borrowed money, most investors get a bit queasy if they don’t show a positive return for several months or years. Here are just a few pertinent forms of risk:

Stock Market Risk is always present and unpredictable. Ten-year periods ending in 1999, 2000, 2001, and 2002 produced sequential S&P500 Index returns of -3.8%, -3.4%, -0.9%, and 0.4%. So that readers might breathe a little easier, there has never been a 15-year period in which the broad U.S. stock market lost money.

Credit Rating Risk results from borrowing against a home, which could lower your credit score. Excellent credit scores are hard-earned and easily “dinged.” Credit scores impact everything from credit card and loan interest rates to insurance premiums. For people with marginal credit scores, the loss of a few FICO points could be costly.

Real Estate Market Risk is real. “Recency Bias” is an observable phenomenon that causes people to believe that the future will emulate the present and recent past. House prices have been rising for some time now. When the country undergoes another real estate Bear Market, and prices begin to fall, investors who borrowed could get caught in a cash crunch.

We have no philosophical bias against the “borrow-to-invest” concept. Our arguments, both pro and con, are practical, based on decades of experience, and reflective of a deep understanding of people and their relationships with money. Generally, as we discuss risks with clients or potential clients, enthusiasm for the “borrow to invest” concept wanes.

Anyone considering tapping home equity to risk investing in the market should be financially stable, educated, and mentally prepared. And, did we mention patient?

Van Wie Financial is fee-only. For a reason.

Inflation is saturating national news these days, which should come as no surprise to anyone. Blatant examples of rising prices are everywhere, exemplified by gasoline, where prices are announced on the marquee before you even reach the pump. Driving past the same station day after day, you have likely noticed the price change from under $2.00 to over $3.00, and more in some areas.

Some inflation is more subtle and difficult to assess without taking time to analyze. A classic example came to light this week when our private Medicare Supplemental Prescription Drug insurance provider sent a 12+ page booklet itemizing changes for the coming year. A dive into the paperwork revealed a collection of increases that together will add significantly to our 2022 out-of-pocket medical expenses.

Our basic monthly premium increase is the “face value” of prescription drug insurance. In this case, the increase was “only” 4.88%, or $43.20/year (each). However, that is just the beginning. Our Annual Deductible increased by $75.00 (again, each), piling an additional 8.48% onto the inflationary impact. Think I’m done yet? Not at all, because our Tier 1 – Preferred Generic Drug $0.00 copay will suddenly be $3.00. Due to the rules of math, there is no percentage increase calculation, as we can’t divide by zero. We could go through our 2021 records to see how often this might apply, but it is simpler to say that each $3.00 charge adds to our inflation-adjusted cost.

Tier 2 – Preferred Generic Prescription Drug copay will rise from $11.00 to $13.00 each, again adding to the inflating cost of our insurance. There may be other subtle inflation indicators hidden from view. Sometimes meds get changed from Tier 1 to Tier 2 or higher, increasing out-of-pocket expenses for repetitive prescriptions. Whatever other increases are looming remain as yet unidentified.

Putting it all together, it appears that we will be experiencing about 15% inflation in this single budgetary item. When the national Social Security COLA is released later this year, along with the increased cost for Medicare, we will update the inflationary impact. Meanwhile, study your own costs and watch for changes. Shop relentlessly for better deals. It’s all up to you to control expenses to the degree possible.

Remember, the government is lying to all of us regarding inflation. If you doubt that, Senator Rick Scott of Florida recently proffered a Bill to require Senate Committees to include an inflationary impact statement for every Bill passed out of committee. Senate Democrats voted him down. Why?

Van Wie Financial is fee-only. For a reason.

Millions of Americans remain unemployed, while even more millions of job openings remain unfilled. One of the most unusual sights today is a business’s door front without a “Help Wanted” or “Now Hiring” sign. Amazon is adding 125,000 jobs during the Holiday Season, starting wage $18.00/hour. Restaurants are so desperate for help that some are closing an extra day or two each week. Car sales are through the roof, despite scarcity due to semiconductor shortages. Face it, the economy could be booming, right here in the Homeland. In fact, a recent email that is “going around” says:

To Whom it May Concern: This entire country is hiring! If you don’t have a job….you just don’t want one! The End!!!

Yet, our Federal Government ruling class is demanding more economic stimulus, under the guise of infrastructure investment. Do we really need it? True infrastructure, which is limited to a tiny proportion of the overall spending plans, would be helpful. That can, and should, be a stand-alone proposal.

Reasons for avoiding further stimulus include the following:

  • Start with GDP or Gross Domestic Product. GDP is used to measure the total value of goods and services produced in the USA. GDP has been rising consistently and quickly, following last year’s setback due to COVID-19. From the plethora of available jobs listed nationally right now, I’d argue that not increasing our debt is a higher priority than injecting additional stimulus through excessive spending.
  • Government Revenues are currently the highest in history, up 13% year-over-year. Raising more revenue, whether from adding make-work jobs or raising taxes, would likely slow our current economic recovery. Filling current job openings, while at the same time reducing outlays for Unemployment Compensation, results in higher net revenues.
  • Arguments for new stimulus programs are not based on solid economics. Proponents of new social programs generally favor additional taxation over job creation. My view is completely at odds with theirs. To me, as the old saying goes, “If it isn’t broken, don’t fix it.” In fact, far from broken, our economy is right now in the “Goldilocks” comfort zone, neither too hot nor too cold.
  • Congress has a never-ending supply of perceived and reported problems to solve, with a concurrent undeniable urge to “do something.” The best policy for right now is to do nothing.

Van Wie Financial is fee-only. For a reason.

Behind closed doors and protected from average Americans by a newly reconstructed fence around the Capitol Building, Joe Biden, Nancy Pelosi, and Bernie Sanders recently hammered out their Taxation Wish List. In true Washington style, the euphemism American Families Plan, or AFP, was bestowed upon their List. The plan is to implement AFP in a single-party Budget Reconciliation Bill that will be rejected by every elected Republican. I’m experiencing ObamaCare déjà vu.

“Progressives” claim to need vast new Government Revenues to cover their underestimated $3.5 Trillion spending boondoggle, while supposedly living up to Presidential Candidate Biden’s promise to not increase taxes on anyone earning under $400k annually. A simple look at reality, plus a reading of the proposal, suggests a miserable failure.

Taxes have already been raised on all Americans through government-imposed inflation. Largely based on restrictive Energy Policy, items such as gasoline and food have already risen sharply. This is essentially a regressive tax on Americans, as lower-income people spend a larger share of their income on necessities. So much for limiting new taxes to “the Rich.”

As to revenue projections, Congress uses a “Static Budgeting” process that does not reflect human behavior. We have already read stories from high earners, who will be working, producing, and earning less, should their marginal tax rates rise. Over time, actual Government Revenue collections will disintegrate.

For average Americans, most AFP provisions will not directly affect Income Tax Returns. Long-term, AFP will suppress economic viability nationwide, and we will all be hurt. Punishing success by taxing larger income taxpayers to an even higher degree has never worked, and never will.

Each of AFP’s provisions applies mostly to higher-income people, with no immediate effect on the rest of us. Long-term negative effects on the economy will impact every American. Producers will produce less, manufacturers will manufacture less, and service providers provide less service. The Administration is incorrectly claiming that AFP, which would cost a minimum of $3.5 Trillion, is totally paid for by taxing rich people and corporations. They are wrong.

Van Wie Financial is fee-only. For a reason.

May 17, 2021, is long gone, and many of you probably forgot why it was an important date. Due to COVID-19 and other factors, the usual IRS April 15 tax filing deadline was extended for 2020 Tax Returns. Today, except for those taxpayers who filed for an Automatic Extension, 2020 Returns have been examined. Now, large numbers of taxpayers are receiving dreaded mail with the IRS logo in the return address section of the envelope. For those who have never found the IRS logo on their incoming mail, it is never a good feeling. No exceptions.

This year, the largest group of taxpayers receiving IRS correspondence are receiving math-error letters. IRS has sent more than 14 times more math-error letters than were sent last year. The good news is that math-error letters are not audit notices but rather requests to correct information that doesn’t match IRS records. Most math-error letters for 2020 Tax Returns are due to economic stimulation payments made following the beginning of the coronavirus pandemic in early 2020.

Economic stimulus checks were authorized for Americans whose annual incomes were below certain specified limits. Determining who was eligible required IRS to use tax data from past years to prepare a list of 2020 recipients. For the majority of taxpayers, that information has not changed substantially. But, for a significant group of payment recipients, rising incomes eliminated all or part of their eligibility. As a result, many people received payments to which they were not entitled. Now, IRS wants to be reimbursed. Soon.

We should note that the result of any math-error letters correction may result in a lower refund, or a tax due, which must be paid in a timely manner. Unfortunately, IRS neglected to convey impatience by leaving out the 60-day deadline for responding to the math-error letters. Now, at taxpayer expense, they are sending follow-up letters to inform people that time pressure exists. Failure to comply may result in referring the Tax Return to the IRS Audit Department.

In case anyone believes that the current math-error problem is a one-off, next year’s math-error letters will likely be more numerous and more complicated. There are additional child tax credit payments being made to many people in 2021, which must be documented on Tax Returns filed in 2022. Rules for these payments are different and more complicated than last year’s payments. Further, many more people had rising incomes this year as they regained employment, and will end up ineligible for the child tax credits paid to them in 2021.

Eligibility rules are posted on the IRS website (www.irs.gov). If you have received a math-error letter and/or tax credit payments, it would be wise to visit the website and become familiar with the eligibility rules.

Van Wie Financial is fee-only. For a reason.

Financial giant Goldman Sachs recently released a dismal report regarding potential upcoming evictions of American renters. According to Goldman, in the absence of government action, about 750,000 American households are subject to eviction by the end of the year 2021. This group owes their collective landlords about $17 Billion in back rent. Landlords, whether individuals or corporations, are financially dependent on rental income to maintain investment properties. Further, they have contracts with renters promising rent payment.

Along came COVID-19 in 2020, and many renters lost their employment income. As much as I detest government expansion, some problems are so massive that only government is large enough to make the needed difference. Congressional reaction was swift, and assistance for almost every conceivable aspect of the economy began quickly.

Among many bailouts was a provision for renters, allocating nearly $47 Billion to 50 states and Washington, D.C. Local governments were charged with disbursing funds to affected renters, restoring their ability to pay rent. This was designed to circumvent a potential eviction crisis. But it has not worked.

Of the nearly $47 Billion allocated, only about 11% was actually paid to renters. Over $40 Billion remain in the coffers of the states. If governments worked efficiently, that money would be doled out immediately, landlords would get paid, tenants would have a secure a place to live, and the economy would carry on as before. Eviction problem solved. If only government worked like a private business.

Two problems are hindering this process. One is qualification standards set by the Federal Government, under which many renters simply don’t qualify for relief. The second problem is lax renters, who seized the opportunity to stop paying their rent. Together, these problems contribute to a potential human homeless expansion.

What to do about it? That is the dilemma. First, stop the giveaways, as the money is already in the hands of the state governments. Next, at the Federal and State levels execute an independent review, but one that employs objective and qualified consultants. Give them a short deadline and demand results. In other words, act like a successful private organization by changing the Regulations.

Color me doubtful about a timely fix. I want my money back.

Van Wie Financial is fee-only. For a reason.