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happened (in a modified way) for one year in 2010, but those taxes came back in 2011, and now need to be permanently repealed.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.
Sometimes we feel like we need to be the watchdogs for financial reporting, and this week we have a classic example. Pulled from the Sunday, October 28, 2018 online headlines in Yahoo! Finance(Yahoo! only reported it, they did not author the piece), was this lead:
That seems like an innocuous statement on its face, but anyone with sufficient training in economics understands that it is blatantly incorrect. In Macroeconomics, we learn that GDP, or Gross Domestic Product, is a measure of the economy output of a country over a defined period. Changes in GDP are used to illustrate the health of the economy by measuring growth or contraction in GDP. Presidents are measured, in part, by the health of the economy during their tenure. In 2018, we have experienced a very healthy growth rate, as measured by the GDP, which was 4.2% in Q2, and has been estimated to be 3.5% in Q3. The Q3 number is subject to a couple revisions, but it is likely to be fairly accurate at 3.5%.
Apparently, some of the President’s critics are not terribly happy about this revelation, as evidenced by the above-captioned headline. One of Trump’s main economic targets is to narrow the trade deficit (see definition below). In Q3 that did not happen, as imports outpaced exports by an increased margin. Ipso facto, they imply that Trump is failing in his attempts to balance international trade.
For definitions of terminology in finance and economics, we highly recommend the website Investopedia.com, from which we pulled this explanation of the effect of trade imbalances on GDP:
“Impact of the Balance of Trade: The balance of trade is one of the key components of a country’s gross domestic product (GDP) formula. GDP increases when the total value of goods and services that domestic producers sell to foreigners exceeds the total value of foreign goods and services that domestic consumers buy, otherwise known as a trade surplus. If domestic consumers spend more on foreign products than domestic producers sell to foreign consumers – a trade deficit – then GDP decreases.”
Simplified, this means that the author has it exactly backwards; increased imports produce reduced GDP. We can think of only two possible reasons for erroneous reporting such as this. The first is that the authors and publishers have such a limited understanding of economics that they should probably seek a different focus for their journalist talents. The second, and more likely, scenario is that their political bias causes them to put out misinformation in hopes that voters will buy their hype. Either way, we are here to assist in revealing “fake news” wherever we can.
Van Wie Financial is fee-only. For a reason.
Despite his naysayers and critics, President Trump managed to “herd the cats” in Congress in late 2017 in order to pass the Tax Cuts and Jobs Act of 2017. Many among us were trepidatious, not truly believing the political hype about “tax cuts for the Middle Class.” We were (thankfully) wrong, and the tax cuts went through as promised.
Having now had time to digest the tax changes, and to incorporate them into our work as financial advisers and planners, we are able to offer suggestions for clients with varying financial goals. More than ever before, income planning has become a forefront issue. This is due mostly to two factors; reduced tax rates, and expanded tax brackets.
Not only are these changes important to working people, but they play a large role in estate planning. Think about this; would you rather pay more taxes today and leave more tax-free assets to your heirs, or leave the heirs with more eventual taxes by paying less today? The answer is not always easy, and is dependent on the legacy you choose (or, can afford) to leave.
Under the new tax law, an expanded range of planning techniques is available for both earners and retirees. My focus here will be on retirement years, and how to explore income to maximize the trade-off between taxes today and taxes later. Possibilities expand with the number of forms of income available to the retiree. For today’s retirees, these can include, but are not limited to:
- Pension income
- Annuity income
- Interest and Dividends from investments
- Required Minimum Distributions from IRAs, 401(k)s, TSP Accounts, and 403(b) Accounts
- Social Security income
- Disability income
- Qualified Longevity Annuity Contracts (QLAC)
- Part-time work
- Real estate rentals
- Inheritance
Some of these items are fixed, but others are variable and under control of the retiree. Some assets receive a “step-up in basis” at the death of the owner, and others do not. Some items go to zero upon the death of the retiree, but others don’t. Some receive Long-Term Capital Gain or Qualified Dividend tax treatment, but others don’t. Understanding the way taxes are levied on various forms of income is important for planning a managed tax bill and an optimized legacy at death.
For a married couple filing jointly, the marginal tax rate (the rate at which 1 more dollar of income will be taxed) was 25% over a taxable income of $75,300. With passage of the Tax Cuts and Jobs Act of 2017, the marginal rate is less than 24% all the way to $315,000, and is only 12% up to $77,400. This opens up significant possibilities when doing income planning.
Planning for income and estate taxation is part of the service of Certified Financial Planners operating in a fee-only Registered Investment Advisory (RIA). Van Wie Financial is fee-only. For a reason.
October 11, 2018: Yesterday was not much fun on Wall Street, Main Street, nor on Your Street. The Dow-Jones Industrial Average (DJIA) lost 831 points, closing at 25,598. Moreover, the previous couple days weren’t that much fun, either. What’s up with that?
I took a little stroll in the financial park today, just to regain some orientation, and was intrigued by my findings. The first tidbit came from a 1-year look-back on the DJIA, which yielded an interesting number – 22,779. A little simple math shows that the index has gained 2,819 points (12.37%) in exactly one year. That is above the average annual performance for the past 100 years.
So why does it feel so bad, you might ask? Several of you have actually done just that, and we felt that a response was warranted. After all, we are in the market personally, just like you are.
Let’s look at some of the media hype surrounding this normal market pause. How many of you think that DJIA 26,000 is a brand new phenomenon? Would you believe that we first achieved that milestone on January 17, 2018? Look it up if you need to, in order to feel better.
Further, how many remember that in a span of two weeks (January 26 through February 7, 2018) the DJIA fell 2,756 points? This was a drop of over 10%, which is called a “correction.” The average number of “corrections” over time is one per year. We didn’t have one in 2017, so are we due for another one in 2018? We have no idea. It could happen, but this is not 2007, a year when the economy was in ruins.
Why, you might ask, is this happening? There are reasons, and there are excuses, both in abundance. None of either can be shown to have caused the sell-off. The market does what it does, without regard to our feelings, our insight, or our analysis. What matters is the driving force of market performance – the economy. Right now, we challenge anyone to find a better time in the nation’s economic history.
Logic dictates that this is a temporary, normal condition, which will soon end. Neither fun nor profitable, it is normal and healthy for the market. We suggest you take in a good movie, go for a walk on the beach, or otherwise bide your time for a while. Let the current outstanding business environment create the turnaround we need in order to feel better. It will come. We can’t say if it will be one day, one week, or longer, but we are confident that it can’t take long in this economy.
Van Wie Financial is fee-only. For a reason.
(Update – This letter was written and sent on October 11, and on that day the DJIA fell another 500+ points. On the 12th, a Friday, the DJIA rebounded nearly 300 points. This Blog is being written on Saturday, October 13, and we have no idea what next week will bring.)
Market watchers, investment managers, financial advisors and investors everywhere constantly seek new, current, and comprehensive information. In our 24/7/365 news cycle, data is everywhere, but we are left to ourselves to find raw data, and then to interpret that information to guide policy.
Jobs reports are released during the first week of each new month. The first report is an analysis of changes in private sector payrolls, as compiled by ADP, the large payroll processing company. ADP reports are produced from ADP’s internal numbers of actual payroll employees, and tend to be very timely. They are released on the first Wednesday every month, and precede the government reports, which come out on Friday. In the Financial Media, ADP reports are generally ignored.
On the first Friday of the new month, the U.S. Government Bureau of Labor Statistics (BLS) releases their reports, starting with a “Headline Number,” which is what the media touts as “The Jobs Report.” That, of course, is nonsense, as many reports must be taken together in order to get a clear picture (one worthy of affecting policy).
Here are the steps to a more thorough analysis:
- ADP (payroll processors) releases their monthly private sector jobs changes at www.adpemploymentreport.com
- BLS releases their “Establishment Survey” at www.bls.gov, detailing job additions or losses among large employers
- Each monthly BLS report also details revisions to their prior 2 months of reports
- BLS also releases their “Household Survey,” which is developed from actual household sampling
- The Household Survey varies from the Establishment Survey, as it is picks up people who are self-employed
- Finally, BLS also publishes the “CES Birth/Death Adjustment”at www.bls.gov/web/empsit/cesbd.htm, estimating jobs created or destroyed through business startups and closings
Individually, these reports provide bits of data. Together, they form a picture of the overall jobs market in the country. Individual statistics cannot provide a comprehensive picture of the national economy, but jobs and unemployment are among the most meaningful indicators. Our economy is 70% consumer-driven, and a growing job market translates into creation of new consumers.
Rather than accepting “Headline Numbers” and their chosen adjectives, learn to do a little more research, or listen to our monthly analysis on the Van Wie Financial Hour.
Van Wie financial is fee-only. For a reason.
You may have heard advertising lately claiming that “Wall Street 401(k)s have failed.” I’m not sure what a “Wall Street 401(k)” is, but I assume they mean those accounts invested in traditional stock and bonds.
Why is this claim being made, and on what is it based? It is a strange conclusion to draw here in the 10th year of the second-longest Bull Market in history. A recent report by the Federal Reserve (FED) highlighted some observations, and I believe that the insurance industry misinterpreted the FED’s findings. Among the FED observations were:
- A typical couple nearing retirement will receive only $600/month from their 401(k)s.
- The $600 payment is not indexed for inflation.
- 401(k) balances for the age group 45 to 54 have declined by an average of 3% during the past 3 years.
- People aged 35-44 have experienced balance declines on average of nearly 20% in three years.
- Reasons for the declines are “high fees and leakages.”
The insurance industry concludes that, “Continuing to Do Something that isn’t Working is INSANITY.” While no one could disagree with that statement, we wonder why the average account balance in these age groups is declining in an era of rampant market growth. Yes, 401(k) Plans have been subjected to high fees. However, since the Bush Administration’s Pension Protection Act, fees have been steadily declining. “Leakages” refers to people withdrawing money from their plans prior to retirement. I fail to see how that could be the fault of the 401(k) Plan itself.
So far, there is nothing I see that would render the 401(k) Plan a pariah. Blaming the 401(k) Plan itself for the failures of many 401(k) Plan participants is backwards. Problems with 401(k) accounts frequently rest with their owners, who far too often are taking early withdrawals, cashing in accounts when they leave an employer (failing to roll over their balances), and simply failing to contribute on a routine basis. Perhaps Plan participants are failing their own 401(k)s? If so, wouldn’t these people also draw funds from their life insurance policies? Who or what is to blame for many peoples’ failures? Draw your own conclusions.
Van Wie Financial is fee-only. For a reason.
Identity theft is more common today than ever before. Credit monitoring is great, but it only helps AFTER something bad has happened. How are we supposed to prevent identity theft?
Freezing your credit is a way to prevent anyone (including yourself) from opening new lines of credit with your social security number. If you know that you will not be opening any new credit cards or applying for any loans soon, freezing your credit is a way to give yourself peace of mind. You can also freeze your child’s credit if they’re under 16 to prevent anyone using theirs.
The issue with this is that there have always been fees to freeze and “thaw” your credit. This can go from being mildly irritating to not worth the expense. But President Trump just signed a law that removes fees from freezing your credit. All three reporting agencies must offer this service for free to anyone who needs it. This law also gives active military free credit monitoring in addition to this service. When you are ready to open a new line simply “thaw” your credit and apply for that new car. In some states thawing your credit can still carry a fee, anywhere from free to $10.
This service has NO effect on your credit score. It is a great way to protect yourself without having to pay for those expensive credit monitoring services.