We reported last week in this Blog how Americans are focused on improving their own personal finances in 2024, and we applaud their efforts. Now comes the difficult follow-through. With resolutions, whether formal or casual, time is the enemy of conviction. The time to start is now. The time to relax is, well, never. Change is not an event; it is a process.
Many people resolve to develop a relationship with a financial advisor/investment manager. Choosing the right advisor has never been easier. Before making any calls, a prospective client should understand some fundamental terminology. Fiduciary is a good start. Use of the term requires the planner to place the interests of the client ahead of his or her own. In other words, both parties are on the same side of the relationship, sharing goals.
Fee-only refers to the method of compensation received by the planner, and in this case, means no commissions will be received, thus avoiding inherent or potential conflicts of interest. Don’t confuse fee-only with fee-based, as they can be totally different..
Certified Financial Planner® (or CFP®) is the highest professional designation available among the many qualifications used by people in the financial planning arena.
Registered Investment Advisor (or RIA) is a form of doing business enveloping all these concepts. It is among the fastest growing business models in society, serving hundreds of thousands of Americans. RIAs are regulated by the U.S. Securities and Exchange Commission (SEC), or State Securities Regulators for smaller RIAs (under $100 Million in assets under management). Many investors prefer the personal touch provided by small boutique firms, whereas others prefer to be part of mega-companies.
Finding a potential planner to fit your needs is made easier by a few websites. Letsmakeaplan.org is the website operated by the CFP® Board, which is the organization that administers the CFP® designation. The tab Find a CFP® Professional will identify qualified individuals and companies in your area. NAPFA.org leads to the website and corresponding search for members of the National Association of Personal Financial Advisors. Membership is open only to fee-only, fiduciary financial planners, guaranteeing a prospective client will be served by competent, unbiased professionals. Avoiding expensive mistakes is now easier than ever.
We wish everyone a safe, happy, and prosperous New Year. 2024 is slated to be a year of change. Hopefully, for the better. Hopefully, we can help.
Van Wie Financial is fee-only. For a reason.
In a sure sign of the times, Americans are concentrating on improving their personal finances in 2024. According to a recent Allianz Life study, recent financial difficulties have caused Americans to rethink their own situations. Unfortunately, the conditions that caused our difficulties also hinders relief. On top of already astronomical prices for necessities, inflation (while slowing) continues.
Study participants stated financial goals including their emergency funds, reducing debt, and beefing up Retirement Accounts. These are great ideas, but in a time of already stretched budgets, it is difficult to achieve all (or any) of them. Spending less, while earning more, is the only formula for realizing these lofty dreams.
Already we see a record number of Americans working multiple jobs. Thankfully, the job market is the brightest portion of our current economy. So far, the Administration’s attempt to kibosh the Gig Economy has been a failure, so companies such as Uber and DoorDash are enabling thousands of Americans to supplement their incomes. That is half the battle.
Saving more is a far more difficult challenge. Americans are running out of money before they run out of month, as elevated price levels create obstacles to reducing expenses. There is no real end in sight to our escalating cost of living. Increasing savings will require a reduction in lifestyle for millions.
In the spirit of the Season, we have been keeping this Blog as upbeat as possible. Along these lines, we congratulate all Americans who have resolved to do whatever it takes to improve their personal finances. Hopefully, these resolutions won’t go the way of January gym memberships, which tend to get ignored as weeks go on. Success will require changes, some unpleasant, and most likely long-lasting.
Van Wie Financial is dedicated to helping people realize their financial goals. To that end, we shall continue to bring our ideas and suggestions to the public every Saturday morning at 10:00 on WBOB radio (600 AM and 101.1 FM), and on our website, strivuswealth.com. Remember that you can call the show at 904-222-TALK between 10:00 and 11:00 every Saturday. We also answer questions submitted through our website to info@vanwiefinancial.com.
We wish everyone a safe, happy, and prosperous New Year. 2024 is likely to be a year of change. Hopefully, for the better. Hopefully, we can help.
Van Wie Financial is fee-only. For a reason.
With only 9 trading sessions left (as I write this), 2023 appears to be ending on a financial high note. The Dow-Jones Industrial Average (DJIA) closed last week with three consecutive new all-time highs. Meanwhile, the S&P500 Index also reached a new high, this one on a total-return basis, which includes dividends throughout the year. The NASDAQ Composite is up over 40% so far this year. Quite a performance, all in all.
So why did it feel so negative?
This time of year, at least when the equity markets have performed well, investors are generally upbeat and confident. Yet this year, based on many client meetings we have conducted in recent weeks, people are not feeling positive. Most are surprised by their outstanding Year-to-Date and full-year portfolio performance. We have been in dozens of conversations regarding the incongruity of perception vs. reality. Here’s a short list:
- For people living on a relatively modest income, inflation has hit them in two of the most sensitive areas, food and energy. These items have increased far above the government-reported rate of inflation.
- Wage increases have not kept up with price increases, and more people than ever are working multiple jobs to stay afloat economically.
- For three years, the bond market has been falling, causing low-risk tolerance investors to take a beating on their “safe” investments.
- Interest rates have been rising at a record pace, as the Federal Reserve (FED) has acted to curtail inflation. Many people have been aced out of the car and home markets, due to high payments on secured loans.
- Credit card debt, which has been growing for many years, featured relatively low-interest rates for some time. That is now ancient history, with absurdly high rates making balance reductions challenging.
- Political bickering, coupled with slanted media reporting, has divided us more than ever, and people with convictions are labeled as enemies. This negative attitude is reflected in almost every aspect of daily life.
- Formerly radical concepts, such as gender reassignment among children, are being forced into our lives, along with admonishments to accept what is intolerable to most Americans.
We could go on, but we’d rather point out the positive aspects of the Season. The market is forward-looking, suggesting that investors are forecasting good things to come. Rather than offer an opinion on that concept, we’d rather just wish everyone a safe, happy, and prosperous Holiday Season.
Van Wie Financial is fee-only. For a reason.
Insatiable governments are constantly searching for new sources of revenue, and the 118th Congress is no different. Sticking to the mantra of “tax the rich,” a handful of elected officials are constantly seeking new and creative ways to separate successful people from more of their assets. Unable to satisfy their spending appetites with a large portion of everyone’s earnings, certain members of Congress occasionally revisit the notion that a tax could (and apparently should) be levied on unsold appreciated assets. This insidious concept represents a form of taxing wealth instead of (or in addition to) income.
Back in February 2023, right here in this Blog, I dubbed this conceptual enigma Taxation Without Monetization. In our income-based tax system, taxes are levied in three categories. Earned income is taxed through withholding and/or quarterly tax deposits. Profits from sales of appreciated assets are taxed at the time of sale using a Capital Gains Tax. Unearned income, such as interest and dividends, is taxed annually. All payments are due only after the income is received.
Over recent decades, several attempts have been made by envious and spiteful government officials to implement a Wealth Tax. Currently in front of the Supreme Court is a case involving Taxation Without Monetization. This one sprung from the Tax Cuts and Jobs Act of 2017 (TCJA), under which a provision was intended to assess a one-time small Repatriation Tax on foreign profits voluntarily brought home to the USA in cash. IRS has interpreted that provision to assess a tax on unsold, but appreciated, assets held by individuals in overseas companies, but not yet voluntarily repatriated.
This did not sit well with Charles and Kathleen Moore, who were assessed a tax of $14,729 on shares of KisanKraft Machine Tools Private Ltd., a company in India that supplies tools to farmers. Moores’ shares have not been sold, so there is no cash flow from which to draw a tax. They contend that such a tax on unrealized profit is unconstitutional. It remains unclear how this tax situation came to the attention of the IRS.
Sometime in the summer of 2024, the Supreme Court is expected to make a ruling in this case. Should the Court decide against this tax provision, the concept of a Wealth Tax may be put to a well-deserved and abrupt demise.
As with all court cases, the devil is in the details, and there is no way to accurately predict the eventual outcome. In our opinion, this unfair and unpopular concept should be retired from the American lexicon. For our part, when the answer is released, we will bring the news to this Blog and to the Van Wie Financial Hour radio program.
Van Wie Financial is fee-only. For a reason.
Once again, I am driven to perform my annual exercise in futility by itemizing my Wish List from the current (118th) Congress, which meets from October 1, 2023, through the end of 2024. As always, there are many unresolved tax questions, expired (but important) tax provisions, and inconsistencies within the rules for Qualified Retirement Accounts. When contrasted with the few planned workdays left in the December Congressional schedule, unfinished business portends yet another “disaster of the undone.”
Wish Number 1. If I could be granted one, but only one, wish, it would be to make the Trump Tax Rate Cuts of 2018 permanent. It is also simple to accomplish, except, of course, that it quite literally takes an Act of Congress. In the Tax Cuts and Jobs Act of 2017 (TCJA), which took effect on January 1, 2018, both individual and corporate tax rates were dramatically lowered. A majority of taxpayers, along with scores of employees of corporations, benefitted greatly from more cash in their pockets. Some high earners in high-tax states actually paid more. Many received one-time bonuses funded by lower corporate taxes. Tax cuts always provide additional government revenue through economic growth. Always – no exceptions.
Wish Number 2. Index all tax items, including the SALT (State and Local Taxes) annual deduction limit and the Net Capital Loss deduction annual limit, which have been stuck at $10,000 and $3,000 respectively. Both need to be increased immediately and then adjusted annually for further inflation.
Wish Number 3. Have some mercy on tax preparers, tax planners, and taxpayers by giving us the rules early in the tax year. Far too often, “tweaks” are renewed as elected officials are checking their flight schedules to get home for the Holidays, leaving our clients unable to accurately forecast important numbers. This is especially helpful when planning items such as Roth IRA Conversions, where there is no longer time to correct unintended errors.
Wish Number 4. Restore the ability of taxpayers to perform Recharacterization of Roth Conversions, in whole or in part, after the year of the Conversion. We had this tool until TCJA was passed. I believe that was a mistake, and I’d like to see it restored. Congress could restore it with a simple majority vote. Don’t hold your breath.
Based on our divided government, very little can be expected to pass into tax-friendly law in 2023. We can only hope that the lower rates will survive and get extended, and anything beyond would be a real plus.
A guy can dream, right?
Van Wie Financial is fee-only. For a reason.
Most Americans have only a cursory understanding of the personal income tax portion of the U.S. Tax Code, and are content to pass along their required annual Tax Return preparation to a paid professional, or even to a computer program. While we encourage the use of tax professionals (Note: we are not tax preparers), the truth is that very few professional preparers have time during Tax Preparation Season to delve into individual situations to see where improvements could be made for the future.
Beginning in 2018, the Tax Cuts and Jobs Act of 2017 (TCJA) positioned many taxpayers to discontinue itemizing deductions in favor of a new, much higher, Standard Deduction. It worked. However, changing from one method to the other is an annual decision, left to each taxpayer’s option. When choice is involved, a planning opportunity often exists. This is no exception.
Deductible Expenses. Taxpayers have the annual ability to plan deductions and compare them to simply taking the Standard Deduction (SD). Manipulating the timing of some deductible expenses may allow the taxpayer to switch between itemizing and taking the SD by doubling up on some expenses one year, then skipping the year in between in favor of the large SD.
SALT Deductions. Property taxes are included in the $10,000 annual State and Local Taxes (SALT) deduction limit. Homeowners whose Property Taxes are sufficiently under $10,000 annually can effectively double up payments every other year, as property taxes can generally be paid over the course of a few months, usually spanning a year-end. Doing so will help to maximize itemized deductions in the years of itemizing, leaving zero for the SD years.
Charitable Donations. But wait, we’re not done yet. Charitable Donations are not capped by SALT limits. For taxpayers who participate in charitable giving annually, double payments can be applied every other year, enhancing overall Itemized Deductions in the itemizing years.
Medical Expenses. Payments for direct medical expenses and insurance premiums are deductible only in excess of 7.5% of a taxpayer’s Adjusted Gross Income, or AGI. Timing the payment of medical expenses can also contribute to a taxpayer’s ability to exceed the deductible expense target, and add to Itemized Deductions in a selected year.
Income Planning. For taxpayers with variable incomes, timing deductions with an eye toward planning income may pay off in taxes saved. Accelerating or delaying income, usually by deciding when to send invoices for small businesses, is not available to everyone, but those who qualify can often influence a specific tax situation, even if only once in a while.
Van Wie Financial is fee-only. For a reason.
Americans everywhere are being bombarded with welcome news regarding falling inflation. We are of course pleased with the news, but at the same time, we are appalled at the misreporting of the true meaning of that news. As usual, much of the erroneous slant on the news is intentional, attempting to convince Americans that prices they pay are falling.
Every increase in the Consumer Price Index (CPI) reflects rising prices. Some items have recently fallen in price, including gasoline and other commodities, but the overall price level of items we all need day to day is higher than ever. Only negative changes in the Index reflect lower aggregate price levels. In fact, we recently saw a negative change in the Producer Price Index (PPI), which reflects a generally lower price level at the wholesale level. This has little effect on the CPI unless negative readings persist.
Loyal readers may remember my discussions of the Chapwood Index, which is similar to the CPI, only accurate. Developed by Ed Butowsky, a financial advisor, the aim of the Chapwood Index is to measure changes in prices of a consistent basket of goods, in 50 consistent geographic areas. Findings are published every six months, and the results are eye-opening. In Jacksonville, FL, one of the locations tracked by the Index, the average annual rate of inflation over several years is 10.4%. For the record, this is about average for population centers tracked. Several areas clock in at over 13%.
In my lifelong study of economics, I was taught that a little inflation was required for a healthy economy. The argument was that purveyors of goods and services were incentivized by inflation to do things now, rather than later. Similarly, consumers were reluctant to wait, as prices would be higher later. The key, we thought, was to keep inflation “under control,” say 3% annually. Today, the Federal Reserve (FED) has a target of 2% annually.
Both numbers are completely useless. Not because of the numbers themselves, but because they are fictitious. With actual price increases closer to double digits, the reported numbers are bogus, but we’re forced to accept them as gospel. As a result, our standard of living is constantly eroding. In fact, during the 110 years of the FED, our dollar today is worth less than a nickel was in 1913. How bad can it get? We’ve seen it before, and it’s not pretty.
Reacting to ever-rising prices is an individual challenge. “Settling” for less quality and/or quantity is, unfortunately, among the rational responses to price pressures. Don’t be fooled by optimism in media and government. Excessive government spending is the underlying cause of inflation. It hurts everyone, and we all must demand lower spending from elected officials.
Van Wie Financial is fee-only. For a reason.
Our Government has long been inconsistent in applying Cost of Living Adjustments (COLAs) for taxpayers. We have been disappointed when inflation adjustments are applied unequally among aspects of our individual financial lives. In practice, every year brings more inconsistencies, and American Taxpayers seem always to wind up on the losing side of the battle to maintain our lifestyles.
According to the Bureau of Labor Standards (BLS), the annual rate of inflation for the U.S. Government’s Fiscal Year 2023 (ended 9/30/2023) was 3.7%. Most Americans believe inflation was much higher than that, but individuals have no say in the process.
Summarizing various inconsistent applications of COLAs for 2024, we were amazed to surmise that Americans are actually receiving a reasonable package of changes, starting January 1, 2024. We cannot remember the last time this happened, and we are not reluctant to share good news.
Even in a good deal, not all aspects are beneficial to every affected American. Social Security Benefit increases and maximum contributions to company-sponsored Retirement Accounts did not keep pace with inflation. Individual savers, however, will receive an above-inflation boost in allowable Contribution Limits to Individual Retirement Accounts, or IRAs.
Other good news can be found in the indexing of Individual Income Tax Brackets, which were expanded (in size, not tax rate), by about 5.4%. Due to the progressive nature of our tax system, taxpayers at every level will preserve more of their income in the two lowest brackets, 12% and 22%. Families with taxable income below $94,300 will also collect any Long-Term Capital Gains tax-free. (Note that taxable income includes Capital Gains.)
The Standard Deduction will also be indexed by 5.4%, and will provide additional relief in excess of the stated change in CPI.
The U.S. Tax Code is getting slightly more user-friendly in 2024; but unless something is changed in Washington, D.C., our current tax brackets will soon return to the pre-2018 level. The Trump tax cuts are set to expire at the end of 2025, costing every taxpayer significantly more tax dollars, beginning on January 1, 2026. Preventing this should be a top priority for every elected representative, but we seldom hear the topic discussed.
Also being largely ignored are looming insolvencies in Social Security and Medicare, as well as the unsustainable National Debt. These problems need to be addressed, and will likely involve tax increases down the road. For now, we’ll take the relatively good news and plan accordingly.
Van Wie Financial is fee-only. For a reason.
Support for American generosity is embedded in the U.S. Tax Code. Why, then, does the IRS make gifting rules so complex and difficult to follow? The rhetorical nature of that question does nothing to lessen the value of carefully following ever-changing terms and conditions for improving a taxpayer’s cash flow through gift-giving.
In general, tax breaks are available for donations to qualified charities. IRS maintains a database of Qualified Charities on the irs.gov website. Search for Tax Exempt Organizations to verify the deductibility of an intended gift.
Gifts can be lumped into a few categories, with differing tax consequences for each type.
- No Tax Consequences. Gifts to family or friends do not produce monetary benefits to the donor. Every real person, not an entity such as a trust or corporation, can give any other real person $17,000 in 2023. The transaction is non-taxable, and doesn’t even have to be reported on either tax return. Most estimates are that the amount will be inflation-adjusted to $18,000 for 2024. Keep good records, just to be certain.
- Later Tax Consequences. Wealthy Americans may have their estates subjected to Estate Tax after death, and during life may take steps to minimize or eliminate that possibility. Lifetime gifting to relatives can keep the estate value under the taxation limit, but rules must be followed. Above the current $17,000 annual limit for non-taxable gifts, the donor must file a Gift Tax Return when the limits are exceeded. There is a lifetime upper limit, and IRS will keep track.
- Immediate Tax Consequences. As mentioned earlier, gifts to Qualified Charities receive an immediate income tax deduction for the donor, but even these are limited to a percentage of the donor’s Taxable Income. Qualified donations in excess of the allowable deduction may be carried over to subsequent years.
Based on taxation rules as illustrated above, it is apparent that our Federal Government strongly encourages individual generosity. Based on the track record of Americans, it seems that we are only too pleased to respond positively.
In coming Blogs, we will cover many more topics of interest for investors.
Van Wie Financial is fee-only. For a reason.
Americans are truly the most generous people on the planet. During COVID-19, we slid to 19th place in world rankings but quickly recovered to a tie for first place with Myanmar (we learned it as Burma). Even American millennials have begun to establish patterns of generosity. For the record, we applaud their efforts.
For many Americans, generosity is not rooted in tax benefits but is instead just part of their DNA. Studies have shown that the number one reason for charitable gifting is to support causes and concepts near and dear to them. Nonetheless, saving on taxes, or otherwise improving current or future cash flow, is a plus.
Uncle Sam encourages gifting, using the tax system to exclude donations to qualified charities from taxable income. This deduction is currently applicable only to taxpayers who itemize deductions, which has become a far smaller percentage of the population in recent years. The loss of itemized deductions has surprisingly not put a damper on our collective generosity.
Taxpayers aged 70-1/2 and above may avoid taxation on their charitable gifts using Qualified Charitable Distributions (QCDs) from IRAs. We discussed QCDs in recent blogs. Maximizing the cash flow impact of donations for people under 70-1/2 will be a subject for upcoming Blogs.
Wealthier Americans use gifting to spread their assets around while they are alive, possibly shielding those funds from a high Estate Tax rate upon their death. While the value of assets excludable from taxation at death is currently quite high, there is a strong likelihood that those limits will drop in the future. Depending on the possible reduction in exclusion limits, many more Americans may find themselves over the tax-free limit. Escalating housing values, retirement assets, and higher incomes, all add up over time, and planning is critical to minimize the impact of future Estate Taxes.
This time of year, many charities solicit donations using a matching gift process, whereby a wealthy Samaritan matches (sometimes even multiplies) donations from average Americans. While this does not improve the donors’ cash flows, it adds to the satisfaction received from their generosity.
Based on taxation rules, it is apparent that our Federal Government strongly encourages individual generosity. Based on the track record of Americans, it seems that we are only too pleased to respond positively.
In the coming Blogs, we will cover many more topics of interest to charitably-minded citizens.
Van Wie Financial is fee-only. For a reason.