New Tax Bill- What it Means to You

The new tax law hasn’t been formally ratified by the U.S. House and Senate, but all indications are that the Tax Cuts and Jobs Act of 2017 will be sent to the President’s desk in the next few days. As you probably know, the House and Senate versions were somewhat different. What does the new bill look like?

Despite the promise of tax “reform” or “simplification,” the bill actually adds hundreds of pages to our tax laws. And the initial idea of reducing the number of tax brackets was apparently tossed aside in the final version; the new bill maintains seven different tax rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Most people will see their bracket go down by one to four percentage points, with the higher reductions going to people with higher income. And the tax brackets, going forward, will be indexed to inflation, meaning that the “real” income brackets will remain approximately the same from year to year.

The new brackets break down like this:

Individual Taxpayers

Income $0-$9,525 – 10% of taxable income
$9,526-$38,700 – $952.50 + 12% of the amount over $9,526
$38,701-$82,500 – $4,453 + 22% of the amount over $38,700
$82,501-$157,500 – $14,089.50 + 24% of the amount over $82,500
$157, 501-$200,000 – $32,089.50 + 32% of the amount over $157,500
$200,001-$500,000 – 45,689.50 + 35% of the amount over $200,000
$500,001+ – $150,689.50 + 37% of the amount over $500,000

Joint Return Taxpayers

Income $0-$19,050 – 10% of taxable income
$19,051-$77,400 – $1,905 + 12% of the amount over $19,050
$77,401-$165,000 – $8,907 + 22% of the amount over $77,400
$165,001-$315,000 – $28,179 + 24% of the amount over $165,000
$315,001-$400,000 – $64,179 + 32% of the amount over $315,000
$400,001-$600,000 – $91,379 + 35% of the amount over $400,000
$600,000+ – $161,379 + 37% of the amount over $600,000

Taxes for trusts and estates were also changed to:

$0-$2,550 – 10% of taxable income
$2,551-$9,150 – $255 + 24% of the amount over $2,550
$9,151-$12,500 – $1,839 + 35% of the amount over $9,150
$12,501+ – $3,011.50 + 37% of the amount over $12,500

Notice that in the lower brackets, the joint return (mostly for married couples) were double the individual bracket thresholds, eliminating the so-called “marriage penalty.” However in the higher brackets, the 35% rate extends to individuals up to $500,000, but married couples with $600,000 in income fall into that bracket. In the top bracket, the marriage penalty is more significant; individuals fall into it at $500,000, while couples are paying at a 37% rate at $600,000 of adjusted gross income.

Other provisions: the standard deduction is basically doubled, to $12,000 (single) or $24,000 (joint), $18,000 (head of household), and in an interesting provision, persons who are over 65, blind or disabled can add $1,300 to their standard deduction.

The bill calls for no personal exemptions for 2018. And the Pease limitation, a gradual phaseout of itemized deductions as taxpayers reached higher income brackets, has been eliminated.

Despite the hopes of many taxpayers, the dreaded alternative minimum tax (AMT), remains in the bill. The individual exemption amount is $70,300; for joint filers it’s $109,400. But for the first time, the AMT exemption amounts will be indexed to inflation.

Interestingly, the new tax bill retains the old capital gains tax brackets—based on the prior brackets. The 0% capital gains rate will be in place for individuals with $38,600 or less in income ($77,200 for joint filers), and the 15% rate will apply to individuals earning between $38,600 and $452,400 (between $77,400 and $479,000 for joint filers). Above those amounts, capital gains and qualified dividends will be taxed at a 20% rate.

In addition, the rules governing Roth conversion recharactsrizations will be repealed. Under the old law, if a person converted from a traditional IRA to a Roth IRA, and the account lost value over the next year and a half, they could simply undo (recharacterize) the transaction, no harm no foul. Under the new rules, recharactization would no longer be allowed.

For many taxpayers who itemize deductions, the adjusted gross income number will be higher under the new tax plan, because many itemized deductions have been reduced or eliminated. Among them: there will be a $10,000 limit on how much any individual can deduct for state and local income tax and property tax payments. Before you rush to write a check to the state or your local government, know that a provision in the bill states that any 2018 state income taxes paid by the end of 2017 are not deductible in 2017, and instead will be treated as having been paid at the end of calendar year 2018.

The mortgage deduction will be limited to $750,000 of principal (down from a current $1 million limit); any mortgage payments on amounts above that limit will not be deductible. However, the charitable contribution deduction limit will rise from 50% of a person’s adjusted gross income to 60% under the new bill.

What about estate taxes? The bill doubles the estate tax exemption from, currently, $5.6 million (projected 2018) to $11.2 million; $22.4 million for couples. Meanwhile, Congress maintained the step-up in basis, which means that people who inherit low-basis stock will see the embedded capital gains go away upon receipt.

Public “C” Corporations saw their highest marginal tax rate drop from 35% to 21%, the largest one-time rate cut in U.S. history for the nation’s largest companies.

And pass-through entities like partnerships, S corporations, limited liability companies and sole proprietorships will receive a 20% deduction on taxes for “qualified business income,” which explicitly does NOT include wages or investment income.

As things stand today, all of these provisions are due to “sunset” after the year 2025, at which point the entire tax regime will revert to what we have now.

Sources:

https://www.washingtonpost.com/news/wonk/wp/2017/12/15/the-final-gop-tax-bill-is-complete-heres-what-is-in-it/?utm_term=.4b0efca718e8

https://www.forbes.com/sites/kellyphillipserb/2017/12/17/what-the-2018-tax-brackets-standard-deduction-amounts-and-more-look-like-under-tax-reform/#42b575bf1401

Individual Tax Planning Under The Tax Cuts And Jobs Act Of 2017

https://www.bna.com/2017-Individual-Tax/

https://www.nytimes.com/interactive/2017/12/15/us/politics/final-republican-tax-bill-cuts.html

Why Rebalance?

You probably know that your investment portfolio is being rebalanced on a regular basis, but you might not know why. Is it for higher returns? For maintaining the agreed-upon balance of investments that is in your risk tolerance comfort zone? Does rebalancing help manage portfolio risk?

The answer to the above is “yes,” “yes,” and “yes,” but with a qualification. Rebalancing an investment portfolio is most importantly a form of discipline, a way to reduce the impact of those dangerous emotions of greed and panic on the investment process.

Rebalancing is necessary because all of the moving parts in your portfolio rise and fall at different times and degrees. During a bull market, stock prices rise faster than bond values, causing them to make up a larger percentage of the portfolio than you signed on for. Similarly, when the bear growls, stocks will fall faster than bonds, causing your portfolio to become more conservative. Real estate investments and commodities often rise or fall at different times than stocks or bonds, pulling your overall percentage allocations away from the target mix.

So what does rebalancing accomplish? When you rebalance, you’re selling the assets that rose in price and buying the ones that went down. This discipline results, over time, in consistently buying when an asset goes on sale, and selling when the asset becomes more expensive.

There are three ways to rebalance. The easiest is to use whatever new money is coming into the portfolio, monthly or quarterly, to buy the assets that have gone down, allowing you to make consistently fine adjustments that keeps the portfolio at its prescribed allocations.

Another possibility is to rebalance at certain times of the year—every three, six or 12 months.

Or you could follow the most complicated process, and rebalance whenever assets deviate by more than certain set percentages from the baseline asset allocation.

A recent article on the Seeking Alpha website notes that rebalancing reduces portfolio volatility, because you are not allowing the stock allocation to rise in the portfolio during bull markets (which would set you up for a bigger drop when the market rise turns into a bear market).

An illustration in the article, using a simple mix of 60% stocks and 40% bonds shows that rebalancing using the percentage deviation method would have led to higher overall returns from the beginning of 2000 to January 2016. It found that wider bands produced higher returns (and fewer rebalances), although of course there is no guarantee that this would be the case in the future.

But perhaps most importantly, rebalancing gives you back, over and over again, the portfolio that you expected when you started, the portfolio whose expected long-term returns are incorporated in your financial plan, the portfolio you were most comfortable with when the investment process was first discussed. And when it comes to making decisions in a time of crisis, having a rebalancing policy in place ensures that they will be made with discipline, rather than emotion.

Source:

https://seekingalpha.com/article/4075169-value-tactical-rebalancing?page=2

Tax Bill

The U.S. House of Representatives passed its proposed tax “reform” bill last month, and now the Senate has followed suit. Interestingly, the two bills are different enough that the two sides are going to have to meet and hammer out a compromise.

Here’s a quick glance at the provisions in the Senate bill and some of the differences.

First, the Congressional Budget Office created a quick report that assesses a variety of income levels, and whether they’ll come out ahead, tax-wise (blue and white cells) or will lose ground financially (pink cells) under the proposed bill. (See graphic).

Under the Senate bill, there would be seven tax brackets (compared with four in the House version): 10%, 12%, 22%, 24%, 32%, 35% and 38.5%. The threshold to reach the top rate would be raised from $418,000 (single) or $480,000 (joint) to $500,000/$1 million.

The Senate bill raises the standard deduction to $12,000 for singles and $24,000 for joint filers, compared with $12,200 and $24,400 in the House version. The Senators decided to keep the mortgage interest deduction as it is today, rather than (House version) limit the amount of mortgage debt upon which interest can be deducted to $500,000.

Meanwhile, the House repealed the alternative minimum tax, but the Senate decided to keep it, although it did propose to raise the income exemption levels from $50,600 (single) or $78,750 (joint) to $70,600 and $109,400 respectively. Both versions would raise the estate tax exemption to $11 million for individuals and $22 million for joint filers, but the House version would repeal the estate tax altogether in 2024, while the Senate version would not.

Like the House, the Senate bill would eliminate many popular deductions, including state and local income taxes, casualty losses and unreimbursed employee expenses.

It is possible that the final version will greatly reward taxpayers who own and receive income through so-called “pass-through entities;” that is, corporate arrangements where the taxes are calculated and paid by the owners rather than at the corporate level. This includes partnerships, Subchapter S corporations and limited liability companies, which would, under the Senate bill, be taxed at a rate of about 29.6% rather than the top rate, whatever that turns out to be.

Interestingly, this lower rate is also extended to publicly-traded pass-through vehicles—which suggests that you might see a lot of new tax-advantaged investment products come on the market if the bill is passed.

Speaking of publicly-traded entities, companies with significant earnings outside the U.S. will also receive a generous tax break; they would, under the Senate bill, be able to bring their earnings home at tax rates ranging from 7.5% to 14.5%—lower than the proposed new 20% corporate tax rate.

The consolidated bill is expected to be signed before the end of the year—and of course the professional community is watching closely to calculate the impact on all of us.

Sources:

http://money.cnn.com/2017/12/03/pf/taxes/senate-house-tax-bills-individuals/index.html

https://www.forbes.com/sites/anthonynitti/2017/12/02/winners-and-losers-of-the-senate-tax-bill/#79382054254d

Formula for Life

If you’re looking for a quick list of ways to improve your physical and mental health, you could do worse than follow a list compiled by Bala Afshar, author of The Pursuit of Social Business Excellence, who works as “chief digital evangelist” for the Salesforce CRM organization.

His list looks like this:

1 Get more sleep
2 Find time to exercise
3 Drink more water
4 Eat less sugar
5 Stay teachable
6 Read and write more
7 Remove clutter
8 More random acts of kindness
9 Don’t respond to negativity
10 Spend quality time with family
11 Laugh loudly
12 Forgive first

Making that Impression

When you meet people, at work, in interviews, at parties, there is a lot of judging going on, and the good or bad impression you make usually isn’t based on the words you say. A recent article in Forbes magazine suggests that you’re most often evaluated on your unconscious behaviors, the things you probably never think about.
For instance? Apparently corporate interviewers are now in the habit of taking potential new hires to lunch, and watching how they treat the wait staff. If you’re especially nice to the interviewers and other “important” people, but treat the waiter with disdain or indifference, then the conclusion is that you’d be a jerk with subordinates and support staff if hired into the office environment.

Checking your phone during a conversation is considered a sign of many negative things: a lack of respect, inability to give someone your full attention, poor listening skills, and, interestingly, a lack of willpower. At the least, it lowers the quality of face-to-face interactions.
People also notice how long it takes you to show interest and curiosity about them. We’ve all experienced conversations where someone talked about themselves the entire time; your conclusion is that they loud, self-absorbed “takers.” People who ask questions and show an interest in the other person give off the impression that they will be reciprocators who work well in teams.
Showing up late for the meeting or engagement is always a turn-off to new relationships, leading people to think that you lack respect and tend to procrastinate—or, worse, that you’re lazy or disinterested. Interestingly, research shows that this is usually not the case—that tardiness is typically seen in people who multitask, or are high in relaxed, Type B personality traits. But you should recognize the impression you’re making, however fair or unfair it may be.

The point here is that what you say matters less than what you do when people are evaluating you as a friend, colleague, romantic interest or new hire. If you want to change how you’re perceived, addressing these nonverbal tendencies would be a great start.
Source:

https://www.forbes.com/sites/travisbradberry/2017/01/10/seven-small-things-people-use-to-decide-if-they-like-you/#45ea069a3ce1

’Tis the Season

The period between Thanksgiving and the end-of-year holiday season would seen like a sleepy time for financial planners, but in fact it is anything but.  You might be surprised at how much activity takes place on behalf of you and your investments in the final month of the year.

For instance?  Even though this has been a good year in the markets, not all investments will have gained value.  This is the last opportunity to harvest any losses we find in taxable accounts, by selling investments that have gone down and “booking” the loss.  Then we can look for investments that have gained value, sell some of those to offset the losses, and thereby save capital gains taxes in the future.  Up to $3,000 of ordinary income can be offset by investment losses as well.

This is also the time of year when mutual fund companies post, in advance, the amount of ordinary income and capital gain distributions they will make to their shareholders.  Since the value of the shares drops by the amount that is distributed, this would seem like a non-event performance-wise.  But in fact some mutual funds are poised to make 20% or even 30% distributions, and this cash is immediately taxable, unlike gains in the share values, which are only realized when you decide to sell.  By selling funds before the distributions, and buying them back later, we can reduce your tax bill this year.

For people over age 70 1/2, this is the time to make sure that the required minimum distributions have been made out of IRA accounts, since failing to take that money out of the tax-deferred bucket would result in an IRS penalty.  And of course we keep an eye on the various tax reform proposals, and tentatively plan around them.  One possibility this year is to make charitable contributions before year-end, in case the deductability of your donations goes away.  If we believe tax rates are going down, and especially if itemized deductions are about to be limited, we might consider accelerating expenses into this year and deferring income, where we can, into next year’s lower brackets.

Meanwhile, we hope you enjoy the holiday season, and that you gain a little extra comfort knowing that a lot of issues are being tended on your behalf.

 

Bitcoin Bubble

It is probably not a good sign for an investment when its largest clearing firm takes out an advertisement in the Wall Street Journal asking for more regulatory oversight and warning investors that its investment category is so volatile that futures contracts could create devastating losses.  Yet this is exactly what has happened recently when Interactive Brokers, the clearing firm for the bitcoin cryptocurrency, responded to the Chicago Mercantile Exchange’s plans to start listing bitcoin futures.

The dustup is significant for a variety of reasons.  First, you can hardly turn on your computer today without reading about the remarkable runup in bitcoin prices, and seeing a plethora of advertisements telling you how you, too, can get on the action.  This, of course, is exactly what one sees at a precipitous market top, and indeed bitcoins are now trading at around $7,800—up more than 700% year to date, compared with a mere 14.6% for a pedestrian investment known as the S&P 500 index.

Second, there are serious questions—despite the “come-ons” and advertisements—about whether bitcoins should be considered investments in the first place.  This proposed futures contract is the cryptocurrency’s first foray into the mainstream investment world, and some bitcoin owners are now wondering what, exactly, one does with a “currency” that is nothing more than blips in a distributed computer database, whose primary purchase vectors so far have been illegal drugs and illicit weaponry.

Bitcoin owners, meanwhile, are doubtless experiencing some of the same feelings that a dutch farmer would have gone through in the early 1600s, when the tulip bulb he held in his hand—worth far less than a guilder two years before—could now, in the teeth of a mania, be sold for a nice house or ten times the annual income of a skilled craftsworker.  The wise move then would have been to cash out before the collapse.  The same may be true today.

Sources:

https://www.ft.com/content/b4c1a564-c9fe-11e7-ab18-7a9fb7d6163e

https://www.marketwatch.com/story/wall-street-pioneer-takes-out-ad-in-wsj-to-warn-of-bitcoin-trading-perils-2017-11-15?mod=mw_share_twitter

https://www.forbes.com/sites/cbovaird/2017/11/16/bitcoin-reaches-latest-high-inches-closer-to-8000/#1fc43ef74caa

https://www.economist.com/blogs/buttonwood/2017/11/greater-fool-theory-0?fsrc=scn/tw/te/bl/ed/?fsrc=scn/tw/te/bl/ed/thebitcoinbubblegreaterfooltheory

 

Bear Warning

One of the oddities of a significant bull market—and this one we’re in today qualifies, as the second-longest in modern American history—is that they tend to go on longer than you might expect from the pure market fundamentals.  The last leg of a bull market tends to be driven by psychology; people have recently experienced an up market, and so they tend to expect more of the same.  They buy at prices they would never consider buying at when the markets have experienced a downturn, driving prices ever higher without regard to the price.  As a result, the long tail of the bull market will also see some of the greatest, fastest increases.

Whenever stocks become more expensive than their long-term averages, we enter a time of when a market downturn should not be a surprise.  Today, as you can see from the accompanying charts, The S&P 500 index is moving into rare valuation territory.  The first chart shows the evolution of the total market capitalization of the S&P 500 compared with U.S. gross domestic product.  The second shows the Shiller CAPE price/earnings ratio—a popular measure of stock market valuations.  In both cases, you can see that buying company earnings has actually become more expensive than it was before the Great Recession, and may be approaching the rarified territory of the dot-com bubble.

Of course, we have no way of knowing whether the next year will bring us more good news or the long-awaited downturn of 20% or more (the definition of a bear market).  Other than market valuations, the signs are positive.  American corporations continue to report strong earnings, economic expansion continues steadily albeit more slowly than historical norms, and a greater number of countries are experiencing sunny economic weather.  Persistently low interest rates mean that investment dollars virtually have to turn to the stock market for the potential to earn reasonable returns.  And, as mentioned before, the end of a bull market tends to be very generous to patient investors.

The key point to remember is that investment markets are, by their nature, volatile and unpredictable.  Historically, the market has experienced a 5% correction every 7.2 months and a 10% correction every 26.1 months.  We know that a more precipitous bear market (defined as a drop of 20% or more) is in our future, but we have no idea when or how.  We do not practice market timing because we believe that long-term investment success comes from patience. When you jump out of the market to avoid a downturn, there is no way to make up for the returns you lost while you were on the sidelines.  All we know for sure is that the next correction will represent an opportunity to rebalance and buy positions more cheaply than today’s prices—and, if the past is any indication, to sell higher down the road.

Here’s a prediction we can all be confident in: over the next few months or years, you will read financial headlines that say the bull market has a long way to run, and others that will say a devastating bear run is imminent.  Please remember that nobody has a magic crystal ball.  The more important thing to remember is that markets in the past have experienced terrible losses, only to experience new highs a few years later.

 

Ancient Adult Beverages

People have been drinking alcoholic beverages for a very long time.  Recently, a team of researchers found evidence of large-scale wine making in 6,000 BC—in clay vats big enough to hold 400 bottles of wine, in the Caucasus mountains in the modern nation of Georgia.  The grapes came from vitis vinifera, the only grapevine species known to have been domesticated, and the grandparent of all 8,000-10,000 modern wine-making grape species.

This is the first evidence of large-scale production, but not the earliest archeological evidence of adult beverages.  Traces of a concoction made from wild grapes, hawthorn fruit, rice beer and honey mead have been found on pottery from China that dates to around 7,000 BC.

More recently—as in, in the past few years—Patrick McGovern of the Biomolecular Archaeology Project for Cuisine, Fermented Beverages, and Health at the University of Pennsylvania Museum has been recreating ancient beverages.  Among them: an ancient ale made with cacao, dated to 1400 B.C. in Honduras,  and early Etruscan based on residues found in 2,800-year-old tombs in central Italy.  The Etruscans used malted heirloom barley and wheat, mixed with hazelnut flour, pomegranate and myrrh.

One of the most interesting is the Midas beverage, made in bronze vessels recovered from the Midas tomb in Turkey, which dates from 700 B.C. The ingredients included wine, barley beer, and mead.  By adding some saffron as a bittering agent (hops were not available in the Middle East 2,700 years ago) the researchers produced a sweet, aromatic blend which Dr. McGovern describes as a little like white wine, with delicious, piquant qualities.

But Dr. McGovern points out that ancient beverages probably varied dramatically from one batch to the next.  Different “vintages” would have been made up of whatever ingredients happened to be available, which means the alcohol manufacturers alternated between beer and mead along with wine, and sometimes producing mixtures of all of the above.

Sources:

https://www.economist.com/news/science-and-technology/21731456-viticulture-was-big-business-ancient-caucasus-wine-making-existed-least?fsrc=scn/tw/te/bl/ed/

http://www.slate.com/articles/health_and_science/medical_examiner/2017/11/mixing_opioids_with_other_drugs_makes_them_particularly_risky.html

Multiplying Disasters

Does it seem to you that America is experiencing more than its share of natural disasters, and that there are more extreme weather events happening today than ever before?  Turns out you’re right.  Since 1970, the number of major storms, floods, earthquakes and heatwaves that cause at least ten deaths or prompt the declaration of a national emergency has quadrupled worldwide, to around 400 a year.  China, India and America suffer the greatest number of natural disasters—not always in that order.

The accompanying chart only goes up to the unusually mild year of 2011, and therefore misses the increases over the last few years, but you can see the trend, and it’s an ominous one.  But if you look away from the blue line, listing the number of disasters, to the orange one, listing the number of deaths, the situation becomes more hopeful.  Due to better preparedness, better home and building construction and more prompt relief efforts, disasters that would have caused many deaths in the early 1900s cause proportionately fewer today.

An article in The Economist warns against complacency, however.  Urban planners, it says, have to operate on the assumption of even more extreme events.  Today, it appears, the storms and other disasters are delivering a high social cost even before they strike.

Source:

https://www.economist.com/blogs/graphicdetail/2017/08/daily-chart-19