Americans are reaching Social Security age at an alarming pace. We are the massive Baby Boomer Generation, and we are straining the finances of the Social Security System. For most of us, our Social Security benefits constitute an important part of our retirement income needs. Social Security is fundamentally a lifetime annuity system, and like all annuities, it is very complex. Maximizing lifetime benefits is our own responsibility, yet many Americans are woefully unaware of the myriad possibilities for collecting.

In this blog series, we are covering a range of topics designed to educate Americans on what is rightfully theirs, assuming they earned the right to participate. Once you are employed and paying into the system, the government does a credible job of letting you know that you are earning your way to future benefits. They are not so adroit at helping you maximize your own lifetime Social Security benefits, but we are here to help.

First, consider the term benefits, a commonly-misunderstood term used in the insurance industry. Benefits are payments made to owners of insurance or annuity products. You are entitled to those benefits, once all qualification requirements have been met. That simple definition is why Social Security benefits are actually an entitlement, which means that benefits will be paid to you once you have qualified. It is unfortunate that Americans have been misled by Congress to view the word entitled as meaning you get a handout for simply “showing up”. Those payments are actually Entitlements, wherein the capital letter “E” denotes programs that provide other-than-earned payments.

Qualifying for Social Security benefits is accomplished throughout your working lifetime by completing a minimum of forty (40) “Quarters of Coverage.” A qualified quarter is one in which you earn $1,360 or more, the current limit, which may be changed in the future. Upon completion of your 40th quarter (they do not have to be consecutive), you are qualified to receive a benefit upon reaching age 62. Your filing choices range from ages 62 to 70.

People who continue to work and accrue Quarters of Coverage above their initial 40 are rewarded so long as they earn more in the current quarter than in some prior quarter. In other words, the system includes, for calculation of benefits, the 40 highest-earning quarters in your lifetime of work.

Conversely, people who fail to complete 40 Quarters of Coverage are not entitled to a benefit. Exceptions to the 40-quarter rule are granted to non-working spouses of covered workers, a necessary part of any comprehensive social system. There are other exceptions, such as dependent children of deceased workers. Those are topic for future blogs.

Personally, my biggest surprise as I began to study the Social Security System came when I began to realize how brilliantly the system was designed. (Insert snarky comment about government-designed programs here.) If every person were to go to work, earn their Quarters of Coverage, and later collect lifetime benefits, designing the system would be easy. But life is far more complicated and unpredictable than that. Life’s complexities demand that a fair and honest social system accommodate hundreds of situations. The system does that, and does it well.

In the next few weeks, we will be covering more and more details about Social Security. Our efforts are aimed at teaching people about options existing within the System, and how to plan for their personal “best” ways to collect.

Are Americans more charitable when they receive an income tax deduction for charitable contributions? That question has been argued ad nauseum since tax cuts in the Reagan Administration. Conclusions have been drawn on both sides, and there doesn’t seem to be a single answer. (Perhaps it is just too personal?)

The U.S. Tax Code has long provided an incentive for charitable givers, in the form of an itemized tax deduction for contributions to eligible charities. For taxpayers who itemize deductions on their returns, this directly decreased their tax bill. Was that tax deduction the reason these people supported their charities? Would they continue to give if that deduction were eliminated?

In the 1980s, many people objected to Reagan’s proposed dramatic tax rate cuts. Whether representing reasoning or rhetoric, the claim was that charitable contributions would be less financially rewarding, and therefore would shrink.

Did that happen? Actually, no it did not. Charitable contributions rose following the tax cuts. Presumably, this was the result of the “wealth effect,” meaning that good people found themselves with more disposable income. They continued to be willing to give, and apparently many were also feeling more able to part with their “extra” cash.

In the Tax Cuts and Jobs Act of 2017, a larger Standard Deduction was designed to eliminate itemizing deductions for many taxpayers. The effort was successful, in that only about 13% of taxpayers are expected to itemize on their 2018 returns, down from 30% the prior year. What will happen to charitable deductions remains to be seen when the 2018 statistics become available.

What if contributions do fall, as I expect that they will? (It is not the 80s any more.) Apparently, we are not alone, as two Members of Congress have addressed that very possibility by introducing the Charitable Giving Tax Deduction Act. The proposed Act would allow all taxpayers to take an itemized deduction, essentially adding all charitable deductions to the Standard Deduction amount. Chris Smith (R-NJ) and Henry Cuellar (D-TX) co-sponsored the bill.

For better or worse, Congress has long used tax policy to promote desired taxpayer behavior. As the old adage goes, if you want less of something, tax it, and if you want more of something, un-tax it. Smith and Cuellar appear to want a more charitable citizenry. We applaud them.

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

Above-the-line tax deduction – how many people understand that term? All tax deductions are expenses that reduce your taxable income, but there are two distinct categories; above-the-line and below-the-line. What is “the line?” The line item in question is on Form 1040, labeled Adjusted Gross Income, or AGI. Until Tax Years beginning in 2018, AGI wasthe last line on Page 1 of Form 1040. Beginning in 2018, it will be in an as-yet-to-be-determined location, once IRS finishes the redesign of all 2018 tax forms. Portions of your annual tax calculation depend on AGI for computations and limitations, so AGI is important to you as a taxpayer.

Reducing your AGI directly reduces your tax bill (less income = less tax). For tax purposes, a lower AGI is equivalent to not making as much money, except that you actually did. Above-the-line deductions reduce your AGI, and so are the most valuable subtractions. Everyone should understand how these subtractions apply, and how they affect your ultimate tax bill.

Only a few types of expenses reduce AGI. Contributions to Individual Retirement Accounts, or IRAs, are among the most flexible tax planning tools available. Contributions to (non-Roth) IRAs can be deducted on 2018 tax returns, but don’t have to be deposited until April 15th of 2019. That creates a long planning period for determining the tax-reducing value of actual contributions. It also provides extra time to generate the cash needed for those contributions.

IRS can divert some or all of your 2018 refund into an IRA of your choice. Doing so preserves your 2018 IRA deductibility, potentially even enlarging your contribution. For small business owners, other types of IRAs are even more flexible. Small businesses can still open a 2018 SEP IRA or a Personal(k) Plan in 2019, as well, and both have larger contribution limits than Traditional IRAs.

Tax deductibility is only the beginning of IRA benefits. Saving tax-deferred funds for retirement is an absolute necessity for people desiring eventual Financial Independence. Congress has long encouraged taxpayers to save for retirement through tax deductions and investment income tax deferrals. Don’t rely on Social Security as a complete retirement income plan.

While there are not many ways to reduce 2018 taxes after December 31, 2018, if you can save a few hundred dollars in 2018, why not do so?

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

This is an excerpt from a letter we sent out to our mailing list last week, and since then the market has continued to be tumultuous. Check out what we had to say, and if you like it, you can sign up for our mailing list at this link:

Politics and Economics. Both drive the market; one short-term and often irrational, and the other long-term and fundamentally accurate. Right now, politics is “trumping” economics. We are probably smarter to ignore politics, but that is difficult in tumultuous times like these. Nonetheless, cooler heads will always prevail, but when that will start is anyone’s guess.

Let’s look at today’s politics, which include:

  • Partial government shutdown
  • Impending re-implementation of divided government
  • Troops apparently leaving Syria
  • Ongoing “Trump Derangement Syndrome”

What about our economics?

  • Record low unemployment rate
  • Wages and Personal Income rising at fastest pace in over a decade
  • Fastest GDP growth in a decade or more
  • The USMCA replacement for NAFTA
  • Corporate profits at record highs
  • Unsold home inventories at historic lows
  • Record Holiday travel and spending
  • Gold prices low and steady (no panic buying)
  • Leading Economic Indicators strongly positive
  • Business and individual Confidence Levels near record highs

We continually ask ourselves the operative question, “What changed?” One thing we know for certain is that this market will reverse, and most likely when we least expect it to happen. Every day brings us closer to that recovery. Will it start today, this week, next week, or sometime in the near future? We are forced to wait and see. Selling equities in a period such as this will guarantee that paper losses become real. Further, human nature renders us timid to re-enter a rising market. Leaving a couple thousand DOW points “on the table” is never profitable.

We continually ask ourselves the operative question, “What changed?” The simple answer for these past few days is a resounding, “Nothing.” In response, our suggestion is to respond logically by doing no harm (the Investor’s Hippocratic Oath?). It isn’t easy, and it isn’t fun, but it is logical. Economics will emerge triumphant; it always does.

Better news is on the way. Meanwhile, enjoy the Holidays with family and friends. This, too, will pass.

Steve and Adam

Last week we discussed Required Minimum Distributions, or RMDs, which pertain to tax-deferred retirement accounts. This week we shift to Harvesting Tax Losses, a topic for investors owning non-retirement (taxable) investment accounts. The concept is simple – sell assets that have lost value since their purchase, declare the loss on your tax return, and pay less taxes. Like most tax topics, there is complexity, and taxpayers need to know the rules.

The past decade has been strong in the financial markets, and most investors have entered the year with little or no carried-forward (prior-year) tax-deductible losses. That makes December of 2018 Tax Loss Harvestinga potentially valuable process. In order to understand Tax Loss Harvesting, there are two terms you will need to understand; Realized Gains (and Losses) and Unrealized Gains (and Losses). The difference is simple, but important. Realized Gains and Losses have been incurred through a sale of assets. Unrealized Gains and Losses pertain to assets that are still owned, and exist only on paper. For tax purposes, only Realized Gains actually affect your current-year’s returns (and therefore your tax bill).

Here’s the process we use to identify and harvest tax losses:

  • Pull out last year’s tax returns to see if you have any remaining “carried-forward” losses, just to be sure
  • Check your taxable investment account statements to see if you have realized gains or losses for the current year
  • Check those same taxable accounts online, as the information is contemporaneous, to see if you have unrealized gains or losses
  • Compare the numbers to see if there is a way to reduce your capital gains for the year to zero or below using offsetting transactions

Many misconceptions exist about the U.S. Tax Code provisions for claiming capital gains and capital losses. In our Financial Planning practice, we encounter many people who do not understand that any and all capital gains are able to be negated with capital losses, if incurred in the same calendar year. Should losses exceed gains, an additional $3,000 of losses can be deducted from taxable income in the year realized, and the balance is carried forward to subsequent years’ returns until fully used.

Knowing the rules will help reduce your tax bill. Should you need help with tax planning, Van Wie Financial can help, whether on the radio or in the office. Be sure to note that we are tax planners, but do not offer tax advice or prepare tax returns.

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

Last week the stock market took a sizeable dive, only 1 week after experiencing a large up week. Two major problems were reported as being the catalysts for the recent drop; Chinese Trade Talks and the “Inverted Yield Curve.” Both were, to some degree at least, “Fake News.” Could this simply be a media attempt to blame the Administration, or are these genuine worries?

A U.S./China “handshake agreement” resulted from the recent Buenos Aires G20 meeting, creating the framework for a few immediate actions. It also provided another 3-month trade negotiating extension. Several of the immediately agreed-upon actions have been started already, but there was no positive market reaction to this news, so we conclude that the China issue was, at best, secondary.

That leaves the much-publicized “Inverted Yield Curve,” but that did not happen. Media reporters latched onto the inversion curve story en masse, but they were wrong. The Yield Curve (a graph illustrating the relationship between bond interest rates and corresponding maturities) never actually inverted. There was a “dip” in the curve in the 5-year maturity range, but an actual inversion would have shown 30-year rates to be less than short-term rates. Long-term interest rates are currently above 3%, and short-term rates are under 3%. That represents a Normal Yield Curve.

Investors and other market watchers should be very frustrated by poor media reporting. Mass hysteria can be provoked by false reporting. Remember the 1938 Orson Welles radio broadcast, War of the Worlds? I don’t, but some people alive today can remember the incident, which caused a significant panic by proclaiming a Martian landing on Earth. This is considered by many to be the original “Fake News.”

Herd Instinct (or, Herd Mentality) is a market phenomenon, described by Investopedia.com as follows:

Herd instinct is a mentality that is distinguished by a lack of individual decision-making or introspection, causing people to think and behave in similar fashion to those around them. In finance, a herd instinct relates to instances in which investors gravitate toward the same or similar investments based almost solely on the fact that many others are buying the securities. The fear of missing out on a profitable investment idea is often the driving force behind herd instinct.

Far too often, market reactions represent Herd Mentality, and make little or no sense. Don’t become a victim of the “herd.”

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

How it happened to become the Holiday Season so quickly will remain a mystery of the Universe. Yet, here we are, and at this time of year I like to evaluate how far we have come, financially, and where we’d like to go in the imminent New Year. Since passage and implementation of the Tax Cuts and Jobs Act of 2017, much has changed. Unfortunately, much remains to be desired going forward, including:

  • Wish # 1 –Income tax rates have been lowered for individuals, and now need to be made permanent in order to avoid a scheduled reversion to the previous (higher) rates in 2025.
  • Wish # 2 – Reduce Capital Gains tax rates, which were not modified in the 2017 Act.
  • Wish # 3 – Dramatically increase contribution limits for IRAs, which are currently only adjusted for inflation. This will encourage personal responsibility for retirement savings.
  • Wish # 4 – Repeal all Estate (Death Taxes) and Gift Taxes. This happened (in a modified way) for one year in 2010, but those taxes came back in 2011, and now need to be permanently repealed.
  • Wish # 5 – Eliminate the Clinton-era tax increase on Social Security benefits for certain income levels, from the current 85% taxable to the previous 50% taxable limit. (Ideally, all Social Security income would be tax-free, as promised when the system was first implemented in 1935. That is likely too much to ask of a government that is critically reliant on every dollar of our taxes.)
  • Wish # 6 – Eliminate the Alternative Minimum Tax (AMT), which was implemented in 1969 in order to force a handful of wealthy Americans to pay a minimum amount of income tax, despite them already following all the rules in the Tax Code. Over the years, the AMT was expanded to include thousands of Americans and corporations. This Administration managed to repeal the Corporate AMT, and now is the time to eliminate the entire onerous AMT concept.

This list has been prioritized, with Wish # 1 ranking highest by far. Hopefully, Congress will follow through with making the new rates permanent, and, with luck, add a few of my other wishes before singing Auld Lang Syne. Passage of these changes would boost our already-revived economy, extending the current period of prosperity.

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

Americans recently celebrated Veterans’ Day, the annual day for recognizing everyone who has ever worn the uniform of the U.S. Armed Forces. 2018 has been a year of focus regarding Veterans’ benefits, and we have uncovered a little-known benefit that will render needed assistance to certain veterans and their spouses.

The need for Long-Term Care is prevalent throughout society, but is especially keen in the ranks of military veterans’ families. In an ideal world, Long-Term Care expenses would be paid by every individual’s personal Long-Term Care insurance (LTCi) policy. Alas, we do not live in an ideal society, and most seasoned citizens cannot afford costly premiums for individual policies.

For many veterans and their families, help is on the way, in the form of the Veterans’ Aid and Attendance Improved Pension Program (“A & A”). It is named because it kicks in when a veteran of wartime requires the aid and attendance of another person in order to live his or her daily life. Benefits provided are tax-free additional pension payments for the life of the Vet and/or spouse. Although the A & A program has been around for a while, it is relatively obscure and seldom advertised.

What is A & A and do you qualify? Here are some of the qualification requirements and available benefits:

  • Must have reached age 65, and be qualified both medically and financially
  • Must require assistance with the Activities of Daily Living, or ADLs
  • Must have less than $80,000 in assets, excluding home and vehicles
  • Must have had 90 days of active duty, 1 day beginning or ending during a period of War, as determined by the U.S. Government
  • Spouses married at the time of death of the Vet, also qualify (with no age restriction)
  • Monthly tax-free benefits range from $1,149 to $2,837, and continue for life
  • Benefits cover in-home care as well as nursing home care

While the aid and Assistance program is great benefit, qualified recipients are limited. But if you believe that you might qualify, more information is available locally through the National Association of Veterans & Families (NAVF). They can be reached at 904-394-3904 or online at www.NAVF.org.

Van Wie Financial appreciates our veterans. We are and remain fee-only. For a reason.

Ronald Reagan famously said, “The nine most terrifying words in the English language are, ‘I’m from the government and I’m here to help.” We believe that the recent 2018 mid-term election demonstrated Reagan’s veracity and wisdom.

Demonstrating our hypothesis this past week was simple for market watchers. By late Tuesday night we knew that a divided government inevitable, if only for the next two years. Regardless of individual preferences, overall investor confidence was on display as the Wednesday trading session took the Dow-Jones Industrial Average (DJIA) up a significant 545 points, or 2.13%. A very nice day for investors, who are reeling from a steep October sell-off.

Many politically-oriented investors were personally disappointed, as neither side achieved a sweeping victory. Yet market euphoria reigned for a full trading session, as investors were secure in their knowledge that nothing of consequence would happen with a divided Congress.

Then some “other stuff” happened. Suddenly, some settled races were again in question, as vote totals kept evolving after reporting times were passed. Memories of the 2000 Gore/Bush debacle were refreshed, and investors cringed with uncertainty. The DJIA started to retrace its gains, and ended with a smaller weekly advance. Still a welcome up week, but it somehow felt worse.

This election will eventually be completely over, and a divided government will be with us for a couple years, if not longer. Rather than bemoaning our losses, no matter what side you are on, we should approach investing with the knowledge that markets are far more sensitive to uncertainty than to “who won and who lost.”

Like politicians and political parties, certain stocks and certain industries will become winners and losers. Predicting (guessing) will most likely get you nowhere. Sound portfolio management involves diversifying your holdings so as not to get swept away by a couple market losers.

Expect more controversy and volatility, and you should not be disappointed. Attempt to outsmart the market reaction, and you will likely be disappointed.

This “crisis” will pass, only to be replaced by another “crisis.” The media will see to that, believe me. And the beat goes on.

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

“I want to be good to my children, so I am adding them to the deed to the house.” We hear it in the office, on the radio show, in emails, and during phone calls, and it is almost always well-intentioned. Many times, however, what sounds like a nice idea is actually a detriment to the financial futures of both parents and children. An understanding of IRS rules can prevent costly errors from being made. Generally speaking, once the error has been made, there are no “do-overs.”

Owning a home presents the owner(s) with opportunity to commit an egregious (and common) financial planning error. Parents who add children’s names to the deed for the family home harbor a misconception that it will facilitate the title transfer upon the death of the last parent. In fact, it usually does the opposite, due to a tax rule called a “tax basis step-up,” or simply “stepped-up basis.”

The basis step-up is a simple, yet powerful, tax-saving concept. Inherited assets receive a basis step-up upon the death of the owner. This means that the assets are deemed to have “cost” the beneficiary whatever the market value of those assets is at the time of the owner’s death. As a result, those assets can be sold, and the only gain that needs to be reported is the difference in value between the stepped-up basis and the amount received from the actual sale. For long-held and/or highly-appreciated assets, this can mean thousands of dollars in tax savings as those assets are sold. Avoiding taxes is best accomplished by merely passing along the house to beneficiaries as instructed in a Will and/or Trust.

A further tax benefit is derived from the new (and much higher) exclusions from the “Death Tax.” Every person can now leave over $11 Million to his or her heirs, with absolutely no (Federal) inheritance taxes due. For most of us, this means simply that Death Taxes will not apply (I am assuming for now that the current tax law will be made permanent, as parts of it are set to expire in several years).

“Too nice” mistakes are not limited to treatment of a home. Gifting other assets, including money, can also catch unknowing parents in a tax trap. One of the most common mistakes involves gifting of appreciated stock. Assume that stock purchased for $1,000 is worth $10,000 today. Selling would create a $9,000 capital gain tax bill, and gifting the stock to the child for a later sale does the same thing. The only difference is that the new owner gets the tax bill. Should that same stock be inherited, the tax basis would be stepped-up to $10,000, and a subsequent sale world generate no tax bill. It pays to know the rules.

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