Is the “ January Effect ” for Stocks a Real Thing?

If you’ve been around the stock market long enough, you’ve probably heard of the “January Effect,” sometimes called the “January Barometer” or “January Indicator.” The idea is that whatever the S&P 500 does in January foreshadows its performance for the rest of the year. If the index shows a positive return in January, the rest of the year should follow suit, and if it is negative, it may be time to sell stocks–at least, that’s what those say who believe in this particular market proverb. It’s sort of like the old saying that if March “comes in like a lamb” weather-wise, it will “go out like a lion.”

But does this bit of market prognostication hold up to the facts? Well, let’s examine the facts. Since 1926, a negative return of the S&P 500 Index in January was followed by positive returns for the next 11 months about 60 percent of the time (see the chart below). The average positive return for those 11-month periods following a negative January was around 7 percent.

More recently, in 2016, the S&P 500 had its worst beginning performance on record; it declined 7.93 percent during the first two weeks of the year. The index ended January down 4.96 percent, its ninth-worst January performance ever. But for the rest of the year, the S&P 500 returned about 18 percent. Factoring in the awful January numbers, the index was up about 13 percent for the year 2016.

In other words, if you had followed the advice of the January Effect and sold your equities in January 2016, you would have missed out on a major increase in the value of your holdings by the end of the year. In the majority of the years since 1926, you would have similarly lost out on gains you could have achieved by simply waiting out the January downturn.

The moral of this story is that in most cases, for investors holding a well-diversified portfolio of carefully selected and properly allocated stocks, patience will be rewarded. Conversely, those who divest or otherwise alter their strategies on the strength of “conventional wisdom” or market proverbs like the “January Effect” will experience much lower returns. Rather than chasing hot tips or trying to avoid the temporary drops that are a normal part of the market cycle, investors are usually better advised to allow the equity markets to do what they have done so well for nearly a century: reward disciplined investors with meaningful growth over time.

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Life Is Good!

Let me tell you about two guys. They grew up as the youngest siblings in a family of six kids, all crammed into a 720-square-foot home. Their father struggled with anger issues. Their home life had little structure; the grass went unmowed, basic home repairs went unmade, and visits from the local police were not unknown.

If I told you that Bert and John Jacobs ended up incarcerated or as victims of some gang-related crime, you probably wouldn’t be surprised. But what if I told you that these two brothers founded a clothing brand presently worth more than $100 million? What if I told you that their Life Is Good Kids Foundation has donated millions to children’s charities?

Their 2015 book, Life Is Good–the Book: How to Live with Purpose and Enjoy the Ride, details the brothers’ journey through a “free-range” childhood and describes how they built a clothing brand on little more than imagination and optimism. Bert and John discuss the ten “Life Is Good Superpowers”–Openness, Courage, Simplicity, Humor, Gratitude, Fun, Compassion, Creativity, Authenticity, and Love–and provide a playlist of ten songs for each superpower.

Discussing Superpower #2, Courage, the Jacobs brothers open with the story of their sister Auberta–Berta–who suffered a broken neck that left her completely paralyzed. Told by a doctor that she was not likely to walk again, Berta responded with courage and determination. After a risky surgery and two years of grueling rehab, she was not only walking, but also riding a bike. Drawing deep lessons from their sister’s courage, Bert and John narrate the literal hundreds of setbacks they faced while trying to launch their fledgling clothing brand. They make the valuable point that courage is required not only for acts of heroism or dogged perseverance; it is also essential for the daily struggle to face and learn from rejection and failure.

Superpower #5, Gratitude, is closely related. The chapter opens with one of the many letters the brothers have received over the years from customers. They call these testimonials “fuel,” because these communications inspire and empower them and their team to keep learning, creating, improving, and doing. The letter that opens the “Gratitude” chapter is from Alex, who, with his twin brother Nick, was born very prematurely. Alex had to have a leg amputated, and Nick is blind. But Alex says, “We both have extra challenges in the world, but at the end of the day we still have each other.” The Jacobs brothers drive home the point that gratitude is not just for the good times; it’s even more crucial during life’s challenges.

I knew I would like this book when I read the first eleven words of the introduction: “Life is not easy. Life is not perfect. Life is good.” And as a result, Life is Good–the Book became the 20th annual Holiday Gift Book that was sent to our clients in December.

Life Is Good–The Book is available on or at your favorite bookseller. If you read it, send me an e-mail and let me know what you liked best about the book.

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“But Everybody’s Doing It!”

“Investors Yank $150 Billion from Stocks for 3rd Year”

“Investors Pull Billions from US Stocks in Longest Outflow Streak since 2004”

“Investors Yank Billions out of Market Following Trump’s Tax Bill Win”

What do these three headlines have in common? Here’s a hint: it’s not the date of publication. Another hint: they didn’t all come from the same news outlet. The first one was published by on its website, “The Buzz,” and it hit the internet on December 27, 2012–a little over five years ago, as this is written. The second two were both released by CNBC, albeit by different reporters. The second is from August 25, 2017, and the third, as the copy suggests, is from December 22, 2017.

What is your instinctive response when you read headlines like these? Do you feel the urge to call your stockbroker or financial adviser and say something like, “Let’s get out–now!”? Do you feel a vague–or acute–unease as you contemplate your portfolio, firmly invested in US equities, perched like a sitting duck as we rush toward financial Armageddon?

I hope not. I hope, instead, that you’ll consider what happened at the end of 2012 to all those who were in such a hurry to cash out of an “overheated” market. Do you remember what occurred in the equity markets in 2013? The S&P rose 30 percent, and the dividend jumped 19 percent. How much of that cash that investors “yanked” in December 2012 sat on the sidelines in short-term instruments or money market accounts, earning between 0.1 and 0.14 percent for the next twelve months or more? Or how about the cash that was parked in August 2017, earning maybe as much as 1.3 percent–if you were lucky–during a period when the S&P 500 rose by nearly 10 percent?

I hope that the moral is obvious by now: following the herd is almost never in your long-term best interest. Remember when you were in junior high or high school, and you used the time-honored phrase, “But everybody’s doing it!” in an attempt to justify some youthful–and ill-advised–intention? My guess is that if you think objectively, you’ll see that in the majority of cases, going along with the crowd was not a recipe for great personal success. Similarly, abandoning equities on the basis of the herd mentality and sensationalistic headlines in the financial media will almost always ultimately prove to be a huge financial mistake.

Is there a downside correction in the market’s future? Certainly; nothing goes up forever. Is that a reason to abandon stocks and go to cash? In the overwhelming number of cases, the answer is no. Over and over again, history has shown that investors who bail out of the equity markets sacrifice significant gains: gains they could have enjoyed if they had heeded objective, professional, non-emotional counsel.

One of the most valuable services we provide our clients is providing the type of evidence-based, historically grounded advice that keeps them from taking actions that are likely to prove detrimental to their long-term financial health. If you are considering making significant changes to your portfolio, one of the best things you can do for yourself is to have a detailed discussion with a qualified, professional financial advisor. One of the other best things you can do is to promise yourself that you will never make a major financial decision on the basis of headlines in the financial news media.

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Bitcoin: Boon or Bane? Cryptocurrency Basics

If you never heard of Bitcoin until late in 2017, you’re in the majority. Bitcoin, a “virtual currency” invented in 2009 by a person or persons using the pseudonym Satoshi Nakamoto, rose from a value equal to about $1,000 per Bitcoin at the beginning of 2017 to a value just under $20,000 by mid-December. And then, on December 22, Bitcoin, along with just about every other virtual currency (usually referred to as “cryptocurrency”) crashed hard, losing about 30 percent of its value (worth just under $12,000 at its lowest point).

What makes Bitcoin unique is that it relies entirely on digital technology for its creation, use, and value. It is not associated with any government, central bank, or financial institution. It exists only as data on a decentralized, worldwide network of computers. It is–and this is probably the most important point for the present discussion–completely unregulated.

Computers “mine”–or create–Bitcoin by solving the complex algorithms that govern the cryptocurrency’s transactional validity, which prevents any Bitcoin from being spent more than once. It is estimated that the shadowy Nakamoto–whoever he, she, or they are/is–owns about 980,000 Bitcoins–worth about $13.7 billion at current value–placing him/her/them among the world’s fifty richest persons. Not bad for the inventor of an intangible that was originally valued at five cents each.

Since its humble beginnings, Bitcoin has attracted the attention of more and more individuals and businesses, and it is beginning to see actual use as a currency for online transactions and, as suggested above, a basis for wild financial speculation. You can use Bitcoin to pay for a trip on Expedia, to buy a cold beer at a pub in Sydney, Australia, to purchase a Dell computer, or to shop for furniture, jewelry, or home decor on Some custodians will even let you put Bitcoin in your IRA.

You can buy Bitcoin (after first downloading a virtual “wallet” compatible with your iOS or Android device) on any of several online Bitcoin exchanges, using a credit card, debit card, or ACH transfer from your bank. Bitcoin is available in any amount, from a tiny fraction of a Bitcoin (units referred to as “satoshis,” worth a hundred-millionth of a Bitcoin) to the multiple thousands of dollars you’ll need to buy a full Bitcoin.

And that’s not all. Since the success of Bitcoin, other cryptocurrencies have been invented, including Litecoin, Omni, Ripple, Dash, Monero, Ethereum, and many others.

So, why doesn’t everyone own Bitcoin or some other cryptocurrency? Well, there are several good reasons. Perhaps most important is the one already mentioned: there is presently no overarching regulation of cryptocurrency transactions or trading. Most world governments and central banks are studying the issue (see, for example US Treasury Secretary Steve Mnuchin’s recent comments regarding “concern” about Bitcoin’s use for “illicit transfers of funds”). The IRS has issued guidance on how various types of Bitcoin transactions should be treated for tax purposes. But the current scarcity of regulation means that cryptocurrency markets are subject to manipulation—such as the insider trading alleged in a recent controversy at one of the more popular cryptocurrency exchanges–that would be unlawful in regulated markets like the major stock and commodities exchanges. For cryptocurrency markets, it’s still pretty much the Wild West out there, as evidenced by the astronomic swings in value seen in recent days.

Second, because of its decentralized and completely digital nature (one of its principal advantages, by the way, according to its creators), cryptocurrency can be vulnerable to sophisticated hackers and other types of online criminals, as demonstrated by cyberattacks on a South Korean currency exchange that forced it to close its doors.

Finally (and there are probably other risks associated with cryptocurrency that we don’t even fully understand yet), everyone should recognize that this is still an emerging technology. As with anything this new, there are a multitude of different directions the cryptocurrency ecosystem could take, any of which would have very different effects on the value of current products. Think Betamax vs. VHS. The cryptocurrency market is no place for anyone with more than an ounce or two of risk aversion.

Posted in Alternative Investments, Current Events | No Comments

BWM Holiday Tradition – 2017 Edition

The Holidays are a time of tradition and giving. For 15 consecutive years, we have offered to make contributions to charities in honor of our clients instead of sending gift baskets during the Holiday Season. The response from our clients has been overwhelmingly positive, and we appreciate participating in the spirit of giving — which is part of what the holidays are all about.

At Bernhardt Wealth Management, we embrace our responsibility to giving back to our community. Therefore, we are proud to have contributed $10,740 to 39 local and national charities and $26,810 to the following five local charities in honor of our clients:

Boulder Crest Retreat




YouthQuest Foundation

The response we get from each charity is that we are “part of a compassionate community” and “we are grateful for your generosity and hope you take great pride in the important difference that your gift makes.”

Without our clients, we would not be able to help the charities that our clients identified. And just as important, we thank our clients for allowing us to serve them. Thank you!

May your New Year be blessed with peace, love, and joy and may 2018 be a prosperous year for you!

Posted in Bernhardt Wealth Management, Philanthropy | No Comments

The New Tax Law

Last week on December 22, 2017, President Trump signed into law the largest overhaul of the U.S. tax code since the Reagan administration. The law has been widely hailed as very positive for business, and it appears that the law also provides benefits for many middle-income taxpayers. But with all the hoopla and political rhetoric surrounding the law, what should you do? How do the changes in the Internal Revenue Code affect your tax return? Is there anything you should be doing right now?

First, here are a few main ideas to keep in mind.

  • The new law does not affect the tax return you must file by April 15, 2018; that covers the tax year 2017, and the new requirements don’t take effect until after the first of the year.
  • Under the new law, many personal itemized deductions are either no longer available or are less advantageous. To make up for this, the new law almost doubles the amount of the personal deduction. Previously, for single persons, the standard deduction was $6,500, and after January 1, 2018, it will be $12,000. For a married couple filing jointly, the deduction goes from $13,000 to $24,000.
  • If you operate a sole proprietorship, partnership, or S-corporation, you may still deduct ordinary business expenses as you have been doing. In addition, the new law allows you to deduct 20 percent of the income passed through to you from your business with limited exceptions.

To help you visualize some of these changes, see the sample Schedule A, below, and refer to the red-lettered entries on it as you review the following information.

Between now and the end of the year, there are a few things you should talk over with your CPA or tax advisor:

  1. Accelerate expenses for certain itemized deductions. If you itemize presently, many of your favorite personal deductions will be repealed, beginning in 2018. Expenses like tax preparation fees, employee business expenses including the cost of a home office, investment fees paid to your advisor, moving expenses (except for certain members of the military), and even business-related entertainment expenses (many of which you would put on Schedule A) will not be deductible on your 2018 tax return. So, if you can pay any of those expenses before the end of the year and list them on your 2017 return, you should probably do it. Note that the threshold for deducting medical and dental expenses has been lowered from 10 percent to 7.5 percent of adjusted gross income (AGI). (Note: See red letters “A” and “E” on the sample Schedule A.)
  2. Defer certain types of income. Because the corporate tax rate will drop dramatically for most U.S. corporations, any corporate earnings that can be deferred until after January 1, 2018, will be taxed at a lower rate. Owners of incorporated businesses that employ cash accounting should consider holding off on billings in order to move income into 2018. Those who use the accrual method may be able to postpone job completions or deliveries until after midnight on January 1, as long as doing so won’t create problems for trading partners. At the very least, corporate business owners should confer with their tax advisors to see what their options are.
  3. Beginning January 1, 2018, state and local taxes (SALT) will only be deductible up to $10,000 on your federal tax return. Because of this, many might consider prepaying such taxes this year, to “double-dip” while such payments are still deductible. However, the new law specifically enjoins taxpayers from prepaying 2018 state income taxes in 2017, even if their state laws permit it. Local taxes, like property taxes, are not covered by this prohibition. So you might want to write your property tax check for 2018 and put it in the mail before New Year’s Eve, if you want to increase your deductible amount for 2017. (Note: See red letter “B” on the sample Schedule A.)
  4. Alternative Minimum Tax (AMT) considerations. The new law doesn’t repeal the AMT, but it does greatly expand the exemptions available. One important example would be persons with incentive stock options (ISOs) from their employer. Exercising an ISO is one of the events that can trigger AMT liability. But with the new, higher exemption, you are less likely to be liable for the AMT after January 1, 2018. So, if you can defer exercising an ISO until after the first of the year, you could significantly reduce your risk of incurring the AMT.

Now, let’s look at some provisions of the new law that may change the way you approach your investments and tax planning strategy, going forward.

  1. Estate taxes. If you are utilizing trusts to manage estate tax liability, make an appointment with your estate planning attorney to review your documents. The new law doubles the exemption for estate taxes, which means that many fewer estates will be large enough to be concerned with paying them. However, the estate tax laws have changed frequently in the past, and no doubt they will continue to do so. You need to carefully review your documents and your strategy with a qualified legal advisor who is well versed in estate law and the implications of the new tax law. (Note: This exemption sunsets at the end of 2025.)
  2. Pass-through income deduction. The new law allows a 20 percent deduction for owners of most “pass-through” businesses–operators of S-corporations, partnerships, or sole proprietorships. Such businesses will be able to deduct 20 percent of the income generated by the business, with the remainder taxed at the owner’s marginal rate. Such owners who are married and filing jointly and earning $315,000 per year or less would have a top marginal rate of 25 percent in 2018, based on the brackets that will go into effect with the new law.
  3. Alimony. Previously, alimony payments were deductible for the payor and taxable to the payee. Under the new law, alimony payments are no longer deductible or taxable. The law grants a window, until December 31, 2018, to finalize pending divorce agreements, in order to permit time for these new considerations to be incorporated into the calculation of payments. It will be advantageous for those likely to be payors to finalize agreements before year-end of 2018. On the other hand, those who will be receiving payments may wish to defer alimony agreements until after January 1, 2019.
  4. Mortgage interest deductibility. For loans closed after December 15, 2017, mortgage interest on loans of up to $750,000 is deductible (down from $1 million under the previous law). Home equity loan interest for loans with an effective date later than December 15, 2017, will no longer be deductible. (Note: See red letter “C” and yellow highlighting on sample Schedule A.)
  5. Section 179 depreciation deduction for real property. Under the previous law, there was a $520,000 annual limitation on Section 179 deductions; the new law increases this to $1 million. The new law also allows for “qualified real property” to be eligible for this deduction.
  6. Charitable Donations. Under the new law, charitable donations are still deductible. However, because of the much higher personal deduction, many fewer taxpayers will see an advantage in itemizing, so you should consult with your tax advisor about your specific situation. That said, the new law does raise the amount of AGI allowed for charitable donations from 50 percent to 60 percent. (Note: See red letter “D” on sample Schedule A.)

Remember that it is important to speak with a qualified tax advisor in connection with the matters outlined above. The new law offers several advantages for many taxpayers, but along with these come changes that need to be thoroughly understood.

Posted in Current Events, Estate Planning, Taxes | No Comments

The Rising Cost of Being a Caregiver

As the oldest members of the Baby Boom generation reach their 80s in the next few years, the number of Americans needing assistance with the challenges of aging is, not surprisingly, on the increase. Many people have not considered an important corollary, however: those providing much of that assistance–Boomers’ children and, in some cases, grandchildren–lack adequate preparation for the emotional and financial costs of providing care for aging family members.

Recently, Merrill Lynch, in partnership with Age Wave, published a study noting that 40 million Americans are already acting as caregivers for a friend or family member. But as more and more of the postwar generation reaches advanced age and begins to experience serious health setbacks, we are likely to see a “caregiving crunch”–increasing numbers of older Americans will require some sort of assistance, placing a tremendous strain on those attempting to meet their needs. Additionally, increasing lifespans are adding to the problem; as people live longer, they are more likely to encounter medical and lifestyle challenges that require a caregiver.

According to the report, many caregivers are providing some sort of financial assistance for older persons. In the study, 92 percent of the respondents mentioned helping in this area, second only to emotional/social support (98 percent). An overwhelming majority (88 percent) of the 2,010 individuals involved in the study, all of whom had served as nonprofessional caregivers for an adult within the previous three years, said that they had served as a “financial coordinator”–paying bills, filing taxes, or managing investments. A sizeable 68 percent reported acting as “financial contributors”–using their own funds to pay at least some of the expenses for those they cared for. On average, “financial contributors” paid out around $7,000 per year for the personal and medical needs of their charges. Those looking after older adults with more complex medical needs–Alzheimer’s patients, for example–disbursed some $10,800, on average. Collectively, caregivers could expect to spend some $190 billion out-of-pocket in order to provide for the needs of a loved one.

Lack of financial preparation on the part of the elderly persons needing care is a principal factor contributing to this “caregiver crunch,” combined with the soaring costs of professional assistance. The cost of a home health aide can easily top $46,000 per year, and the median nursing home semi-private room runs around $82,000 annually. Nevertheless, only about a third of those age 40 and older have funds allocated for long-term care, and a mere 11 percent have long-term care insurance. Lacking other alternatives, they are typically forced to rely on loved ones for assistance with their daily needs.

Neither Medicare nor Medicare supplemental insurance will fully cover long-term care. The takeaway is that adults should begin planning financially for their long-term care well in advance of when it is likely to be needed. Such advance planning can greatly reduce the otherwise high emotional and financial cost of giving and receiving care.

Posted in Healthcare, Senior Issues | No Comments

Smart Ways to Build a Moat Around Your Wealth

Have you taken steps to protect the assets you have worked so hard to build?

Chances are, you know someone who has been sued. Maybe that someone is you.

The fact is, your enviable position as a successful person comes with a major downside: You’re a potential magnet for lawsuits—which may very well be frivolous and unfounded—and other attacks that can wreak havoc on your financial health.

That means you need to take steps to protect the assets you’ve worked so hard to build. Otherwise, you may jeopardize the financial security of yourself and your family.

Why you need asset protection
The logic of asset protection planning is clear: You build a moat around your assets that is as difficult as legally possible for litigators, creditors and others to cross. Instead of trying to fight it out with you in court for months or years and risk losing, the litigant sees that the only reasonable option from a legal standpoint is to settle for pennies on the dollar—or, ideally, to leave empty-handed.

You probably recognize the threats to your wealth from others. According to research, more than 86 percent of successful business owners say they are concerned about becoming the object of unjust lawsuits or being victimized in divorce proceedings.

Here’s the bad news: Only about a quarter (27.5 percent) of successful business owners have a formal asset protection plan in place. Whether you are a business owner or not, with the risk you face in our litigious culture, this number is likely far too low.

Five key steps to protect assets

If you’re one of the many successful people who lack an asset protection plan—or you’re curious whether your existing plan is up to snuff—consider these key steps.

1. Get protected before a claim against you is made. You can do a lot to protect your wealth before a liability arises—but thanks to a concept known as “fraudulent conveyance,” very little after. As with insurance, the time to have asset protection in place is well before you need it—or even think you might need it.

2. Cover the basics. Evaluate your liabilities and other related insurances and maximize them as best you can. The fastest, easiest—and cheapest—move you can make is to take out a large umbrella policy to safeguard assets. Another simple but powerful strategy is to place your assets in someone else’s name, such as your spouse’s (assuming you have a great deal of trust in your spouse and your marriage). If you’re sued, those spouse-controlled assets are often untouchable.

3. Consider advanced asset protection strategies. The ultra-wealthy often take sophisticated steps to protect their wealth once they have covered the basics. Options to consider include:

  • Equity stripping. Some ultra-wealthy business owners protect their assets from unjust and frivolous lawsuits by using bank loans to strip out the equity in their businesses. Conceptually, it’s simple. You take out a loan from a bank and secure the loan with the assets (such as equipment or real estate). This way, the bank has preference over judgments obtained by creditors. For creditors to get to the encumbered assets, they would first have to pay off the bank loan.
  • Captive insurance companies. A captive insurance company is a closely held insurance company set up to insure the risks of the parent company. The owner of the parent company wholly owns the captive insurance company. Therefore, the business owner controls the operations of the captive insurance company (including underwriting, claims decisions and the investment policy).
  • Onshore and offshore trusts. Currently, a number of states allow for domestic asset protection trusts, while countries such as the Bahamas, Belize, the Cook Islands and Nevis (among others) are good locations for offshore trusts. Assets placed in these are generally out of reach of creditors. That said, the rules governing these trusts vary greatly depending on the jurisdiction. Understanding the specifics of the jurisdiction is therefore critical.

4. Be sure your attorney or other professionals are qualified to help you protect your assets. Far too many financial professionals are not in a position to provide guidance on and implementation of many asset protection solutions. Take equity stripping, for example. Our research has found that fewer than 10 percent of financial advisors or the specialists they work with are familiar with equity stripping, and that less than 1 percent have ever provided it to a client.

5. Avoid big mistakes that will trip up your asset protection efforts. Many of these more advanced asset protection strategies are complex and require a deep familiarity with and understanding of how they work to set up and execute them effectively. If poorly structured, asset protection strategies will have no “teeth” when they’re needed most—and your assets many not be nearly as safe as you assume.

ACKNOWLEDGEMENT: This article was published by the BSW Inner Circle, a global financial concierge group working with affluent individuals and families and is distributed with its permission. Copyright 2017 by AES Nation, LLC.
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The New Tax Reform Bill

On Saturday, December 2, 2017, at about 2:00 AM, Eastern Standard Time, the US Senate passed the most comprehensive tax reform bill in more than thirty years: the Tax Cuts and Jobs Act. Previously, in mid-November, the House of Representatives had passed a version of the same bill. Now, one of the most anticipated and intently watched pieces of legislation since the election of President Trump goes to a House-Senate committee for reconciliation and a final vote by both chambers.

While the law is not final, the picture is becoming clearer for how changes in the tax laws will affect most taxpayers. On Friday, December 1, as the final modifications to the Senate version were being hammered out before voting, we had the opportunity to participate in a webinar hosted by Robert Keebler, CPA, a leading authority in tax planning and accounting for high net worth individuals and estates. Bob suggests ten key points from the new tax bill that you will want to discuss with your accountant. This is especially time-sensitive information, as several of these involve year-end tax planning in light of the new law, which will take effect on January 1, 2018. While we should caution that the bill will not be finalized until the end of the reconciliation process and the final vote by the House and Senate, some aspects are well enough established that you may be well advised to make some strategic decisions now. And of course, as the bill takes its final shape, we will provide updated information.

  1. Accelerate itemized deductions. Because the new tax law is likely to reduce the number and types of deductions for individuals, you should take these expenses before the end of the year in order to take advantage of the current law’s more liberal provisions. After January 1, 2018, many individual filers will no longer be able to deduct expenses like tax return preparation fees, unreimbursed employee business expenses, investment expenses, and state or local taxes, including income taxes (property taxes up to $10,000 will probably maintain deductibility; there should be no effect on deductibility of home mortgage interest). So, to extent possible, pay those expenses before the end of the year, while you can still deduct them. If your state has an income tax, consider making your estimated tax payment in December rather than January and discuss with your account about prepaying some of your 2018 taxes in 2017.
  2. Timing on securities sales. The new tax law requires individuals to use “first-in, first-out” (FIFO) accounting for securities sales. Where investors were formerly able to designate which purchase lot they were selling, enabling the sale of securities with a higher cost basis for tax-loss purposes, the new law requires that the securities held the longest be sold first. Typically, these securities will have the lowest cost basis, resulting in higher capital gains upon sale (and higher taxes paid on those gains). So, if you have multiple positions in a security and some have a higher cost basis, you may wish to consider designating those less-profitable lots for sale before the end of the year, while you still can.
  3. Alternative Minimum Tax (AMT) Repeal Planning. The new law will almost certainly repeal the AMT (this was in the House version) or at the very least, significantly raise the threshold. For high net worth individuals who have been subject to the AMT in the past, the benefits are obvious. If you can delay income until the new law takes place on January 1, 2018, you should have a conversation with your accountant about how such a delay might affect your tax liability.
  4. Alimony agreements. The payment of alimony will no longer be deductible for the payor for divorces after the tax bill is enacted. Therefore, it would be wise to talk with your attorney and accountant if you are currently attempting to finalize the alimony provisions of your pending divorce.
  5. Roth recharacterization. Formerly, those who converted traditional IRAs to Roth IRAs had the ability to “recharacterize,” or perform a reversal of the conversion. Typically, an individual might do this because of a change in anticipated future tax liability or a drop in anticipated future income that makes the tax-free distribution rules for Roth IRAs less advantageous. But under the new law, such “U-turns” are no longer allowed. If you are considering “Rothification” of your traditional IRA, you should probably consult with your advisors as soon as possible, because the option will go away at the end of 2017.
  6. Estate tax planning. The new tax law substantially raises the amount of an estate’s value excluded from estate taxes. If you utilize trusts, gifting, or other legal strategies to mitigate estate tax liability, you should consult with your advisors to see if such strategies should be reviewed, or if they are even still necessary. Bear in mind that estate tax laws have changed before, so the new statutes could be altered in the future. But now is a good time to assess your current situation.
  7. Timing business expenses. Because the Tax Cuts and Jobs Act makes lowering the business tax rate–including the rate for sole proprietorships, partnerships, and personal service corporations (LLCs)–a central aim, many business organizations are likely to be in lower effective tax brackets on January 1, 2018, than at present. “Pass-through” businesses like sole proprietorships, partnerships, and LLCs get an exclusion on 23 percent of their income if they earn less than $250,000. Additionally, the top marginal rate for such businesses drops from 39.6 percent to just below 30 percent. This means that it may make sense to pay business expenses in 2017, at the higher rates of taxation, to generate a larger tax benefit.
  8. Business taxation. Another core principle of the new tax law is to reduce the taxes paid by corporations, since the US reportedly has the world’s fourth-highest statutory rate of income taxation. Accordingly, in the House version, the top corporate tax rate goes from slightly less than 40 percent down to 20 percent, and the Senate proposal mandates a 20 percent flat corporate rate in perpetuity. For this reason, corporations have a huge incentive to defer income into 2018, where possible.
  9. S corporation vs. C corporation. In light of the significantly lowered corporate tax rate, the advantages that formerly accrued to small “pass-through” businesses of organizing as an S corporation are no longer as persuasive. Even with the proposed exclusion from taxation of a percentage of pass-through income, the reduced corporate rate may be a bigger savings. S corporation owners should consult with their CPA and consider their individual situations.
  10. Intentionally defective nongrantor trust (IDGT). This one gets a little more complicated. IDGTs are essentially trusts with a “built-in flaw” that forces recognition of income from the assets contained in the trust for income tax purposes, but not for estate tax purposes. Typically, the beneficiaries of such trusts are children or grandchildren, who receive assets for which the income taxes have already been paid by the grantor, while excluding the assets from consideration for estate or other death transfer taxes upon the passing of the grantor. However, with the new, much higher thresholds for estate assets subject to estate taxes, avoiding estate taxes may be less of an issue. Those utilizing these trusts may wish to review their estate planning documents with their attorney to see if changes are advisable.

As mentioned previously, none of the provisions of the law have been finalized, as of this writing, and the law will not take effect until reconciliation is complete, there is a vote in both the House and the Senate and President Trump signs the final bill. However, it seems very likely that the above ten topics will be a feature in the law when it is finalized. We recommend consulting with your CPA, attorney, and/or financial advisor before year-end to see if any of the above strategies would be beneficial. And of course, as the law proceeds toward enactment, we will update you on any changes or other strategic considerations.

Posted in Current Events, Taxes | No Comments

Paying Off Your Mortgage: Is It Worth It?

In previous times, people approaching retirement were also looking forward to having a debt-free home. In fact, retiring and paying off the mortgage became almost simultaneous rites of passage for those who had spent the previous thirty years or more in the workforce–many of them working for the same company for their entire careers.

But this is no longer the norm. In fact, Baby Boomers (ages 51–71) are typically approaching retirement with much higher mortgage debt than their parents. According to a recent study conducted by the Demand Institute, the median balance owed on most Boomer mortgages is $118,000, up 142 percent from the 1992 median amount of $48,743.

It may still make sense to pay off your mortgage, but it depends on the specifics of your situation. If you are likely to be in a high income bracket following retirement, and especially if you have a low-interest (5 percent or less) mortgage, it may make sense for you to continue to make payments and to take advantage of the tax deduction for mortgage interest. This is doubly true if paying off your home would greatly deplete your cash reserves. In retirement, your need for money to pay for increased healthcare costs and other expenses associated with aging will only grow. A recent Fidelity report estimated, for example, that a typical couple retiring in 2014 at age 65 is likely to need about $220,000 to take care of medical expenses during retirement. While Medicare will handle part of this burden, it certainly won’t cover 100 percent of one’s medical expenses. Having a debt-free home is not as important as being able to maintain your health and mobility during your retirement years.

There is also the consideration of opportunity cost. Let’s assume, for example, that you are servicing a mortgage with an interest rate of, say, 4.5 percent. Meanwhile, your retirement or other investment account is earning roughly market-average returns of around 8 percent. Does it really make sense to withdraw funds that are earning 8 percent in order to liquidate a debt that is only accruing 4.5 percent? Such a calculation deserves careful thought.

The strategy of continuing your mortgage payments during retirement assumes, of course, that you will be able to also maintain your standard of living. As you approach retirement, it is very important that you do some careful financial forecasting, taking into consideration all your sources of income and all your projected expenses, including your house payment, to determine whether your monthly cash flow will be adequate for your needs. As with most important life events, good planning is paramount. You would also likely benefit from the services of a qualified, professional financial advisor as you evaluate this decision.

On the other hand, if you are approaching retirement with a well-funded retirement account, a relatively low mortgage balance, and adequate cash and income, it may be worth it to pay off the mortgage. The peace of mind that comes with knowing you are the true owner of your home can be a tremendous benefit, even if it is not strictly financial in nature.

Another strategy to consider is that of accelerating your mortgage payments while you are still working, in order to pay off the loan early. This can allow you to liquidate the debt while you are still in your peak earning years, and enter retirement with a debt-free home. Finally, you may wish to consider down-sizing upon retirement. In some cases, homeowners who anticipate needing less living space in retirement can sell a larger home with significant equity and use the proceeds to pay for most or all of a smaller dwelling–perhaps a low-maintenance town home or condo–and thus greatly reduce or eliminate their mortgage debt burden.

Posted in Debt, Real Estate | No Comments