Planning for the Yearend

20151117 SW blog picWith Paul Ryan being elected as the new House Speaker on October 29, 2015, many are looking ahead to the possible “once-in-a-generation” tax overhaul. Ryan is considered by many as one of Congress’ most distinguished and ardent tax experts. Before becoming House Speaker, Ryan served as the chair of the House Ways and Means Committee where he spent time laying the foundation for an ambitious rewrite of the tax code. Although many of Ryan’s ideas have fallen short in the past, he now carries the weight to push a new tax reform to the next level. With time running out in 2015 and the presidential election happening at the end of 2016, the likeliness of a major tax overhaul could occur in the early stages of the next presidency.

While it’s fun to entertain the idea of a new tax code, we all know how difficult it is for the government to pass any bill these days. With that being said, it’s imperative that you, the taxpayer, remain in the present and focus on tax planning for the current year. Even without the major tax legislation headlines for 2015, it’s still a good idea to know the changes that may take place. If Congress moves as they did last year, the decision on which tax provisions are extended could occur as late as the last week of December. Luckily, most of the major tax changes occurred in 2013, so any last minute decisions to extend some of the current provisions shouldn’t cause a major “sticker-shock” for 2015.

An important part of planning each year is to make sure the tax strategies used in the prior years are still effective. Taxpayers saw as much as 14-18% increase in tax, even with consistent income, since the 2013 laws were enacted. A majority of the increase was related to the increase in tax rates, increase in capital gains tax, phase outs of deductions and addition of the 3.8% Medicare surtax on net investment income. There are strategies such as grouping related passive activities, deferring income and accelerating expenses, shifting income to children – especially if you own your own business, examining the entity structure of your business and minimizing the effects of Alternative Minimum Tax that can help reduce your tax liability. If these strategies are not already in place, it’s important for you to bring some of these ideas to your CPA.

Being that healthcare insurance is an item that affects each and every one of us, it’s important to understand a few of the tax law changes that affect this topic. These changes won’t necessarily have a large impact on reducing your tax liability for the upcoming filing season, but they can affect planning and eliminate penalties. While you may or may not understand the thoughts behind Obamacare, it’s important to know the penalties being enforced for not having health insurance. The penalties last year were fairly insignificant – greater of $95 per person or 1% of household income. Moving forward the penalties are becoming more substantial. The penalties for 2015 and 2016 are the greater of $325 per person or 2% of household income and $695 or 2.5% of household income, respectively. There may not be a way out of paying the penalty for 2015, but it’s advised to look into the exchange market if necessary for 2016. Another area you may be familiar with is a Flexible Spending Account. These accounts allow taxpayers to contribute pre-tax dollars to pay for health care expenses. Traditionally these accounts were “use it or lose it” plans. As of 2013, these plans allowed you to roll over $500 to the next year. Starting in 2015, the laws have changed again in regards to these accounts. If you have an FSA and decide to roll over an amount, you will be ineligible to participate in a Health Savings Account (HSA) for the year into which the amount was rolled over. Many employers offer both FSA and HSA plans if you elect a high-deductible insurance plan. Be mindful of this new change so you can maximize the pre-tax savings gained from contributing to an HSA.

The tax changes and strategies mentioned above are just a few of the important items you should be aware of when looking at year-end tax strategies. With every taxpayer being unique, tax planning should be done on an individual basis. We encourage our clients to schedule an appointment with their CPA each November or December to review their projection. There may still be strategies available that can save 2015 taxes and need implementation by December 31st. For our clients who prepare their own returns, DWM would be happy to help them with this before year-end. It’s always a good financial plan to know what to expect when April 15th rolls around.

P.S. Please join us in welcoming Sam Winkler, CPA, to our DWM team. Sam joined us last week from Dixon Hughes Goodman LLP, in Charleston. Sam, wife Lauren and their twelve-week old son, Will, live in Mt. Pleasant. Sam will be heading up our tax and estate planning area for all DWM clients as well as adding value in all aspects of our wealth management services. Welcome aboard, Sam!

Money and the Shared Economy

uber taxi1Ride-sharing apps, like Uber, are changing the taxi industry. Smartphones connect people who want rides with people who want to drive them. Uber is a high-tech middleman that is making the old intermediaries obsolete. Uber, Airbnb and others are creating a huge expansion of the “sharing economy.” No surprise, it’s spreading to banking and investing, where the real money is.

The old method of buying a house was to contact an agent to show you around. Now, we use the Web to find homes, research prices and take some virtual tours. However, we still generally use (and pay) agents to consummate the deal and, worse yet, still have to deal with archaic loan procedures at the bank. That’s likely going to change.

Zachary Karabell in the WSJ on November 6th provided his concept of the “uberization” of the loan process. “Imagine instead a simple online interface that could generate a tailored credit score for you, taking into account your future earnings potential based on your education and location. It would connect you with lenders ranging from banks to credit unions to pools of individuals who would want to lend privately at a negotiated rate for whatever duration you agree on. You could shop around, combine different types of financing and arrange a mortgage package that suits you, all within a few hours.”

While financing may not evolve exactly as Mr. Karabell envisions, it certainly is going to change. Technology has spawned the shared economy. Legislation will help its proliferation. The JOBS Act of 2012 made it easier for startups to raise money. And, now the SEC has approved rules, going into effect early next year, that will allow any company or individual to raise up to $1 million without any of the regulatory or reporting requirements as in the past.

Peer-to-peer lending should see a huge increase. Thousands of years ago, people with money would lend it to those who wanted to borrow it.   That is returning. Pools of small lenders can combine online to make small loans. And, they can do it without a middleman, such as a bank, and with much less up-front cost or regulations. Peer-to-peer lending already accounts for $7 billion in loans. PWC expects that amount to increase to $150 billion by 2025. The convenience of peer-to-peer borrowing, particularly for smaller loans, is especially attractive for millennials. However, at least initially, the rates will likely be higher.

Peer-to-peer lending and other shared economy measures may help boost the economy. Last night’s Republican debate included a number of candidates lamenting the small amount of business start-ups. One of the issues confronting potential new businesses today is tight credit. Federal Reserve surveys of bank loan officers indicate that current credit standards are tighter today than before the financial crisis of 2008-2009. It may be prudent for the banks, but it has certainly reduced new business formation.

As a result, new “crowdfunding” sites such as Kickstarter and Indiegogo have done very well. These sites could be described as the “Wild West” or “Vegas” sites, where almost anyone can announce an idea and solicit money for it for $1,000 or less. These contributions are donations. However, the next wave will offer equity ownership for small investors.

The other big impact is on stockbrokers. Investors don’t need an expensive middle-man to make trades, particularly a stockbroker that has no legal responsibility to put their interests first. Roboadvisers, as we have discussed in earlier blogs, have shaken the brokerage community. They offer online asset allocation and investing services at a fraction of the traditional brokerage fees. While roboadvisers typically don’t provide comprehensive investment management and certainly don’t provide value-added services that a wealth manager does, they do provide an inexpensive solution for some young people and/or those do-it-yourselfers with small accounts.

It’s interesting to try to forecast what the world of money might look like 5-10 years from now. There is no question that many changes will continue, particularly those areas where middlemen, who provided little value and took a big fee, will be replaced. The shared economy principles are here to stay. For those focused on receiving and providing value at a fair price, it’s all good news.

DWM Fall 2015 Seminar Recap

emoji 2Money and emotions. Inseparable. We’re hard-wired that way. Since caveman times, we’ve always had an aversion to loss. And, that’s one of the reasons many people aren’t feeling so great about their money in 2015. All asset classes – equities, fixed income and alternatives – are all just about break-even for the first ten months of 2015. And, because our minds place more emphasis on recent events than longer term, many are wondering what lies ahead for their money and their net worth. Those were the subjects of our two annual seminars; yesterday at the Liberty Tap Room in Mt. Pleasant and last week at Emmett’s Brewery in Palatine. Both locations served as great places to not only deliver an important financial presentation, but also as a great place to just hang out and visit with one another.

In case you missed our 2015 seminar entitled “How Are You Feeling About Your Money Lately?” here are some of the highlights:

  • Looking at the last five centuries for clues to what’s coming next: Citing many facts from Northwestern University’s Dr. Robert Gordon’s report on U.S. economic growth, there have been waves of change. There was not much real economic growth before 1750. Then, in 1750, the first Industrial Revolution, which included steam and railroads, pushed economic growth for almost 8 decades. Industrial Revolution #2 was centered in the U.S. with the invention of cars, planes, electricity, communication and refrigeration. From 1870-1970, Americans moved from the farm to factories, working in the cities and manufacturing new products and buying them. It was a huge push on economic growth. Currently, we are in Industrial Revolution #3 covering the period 1960 until now and is characterized by computers, e-commerce and the internet. Dr. Gordon’s premise is that many of the positive characteristics in the 20th century that pushed economic growth, such as demographics, women entering the workplace, education advances, a rising middle class and low debt (federal, state and local) have diminished. Therefore, at this time it will be difficult for the U.S. to obtain an increase in its real growth rate of roughly 2% per year unless and until there is a major innovation breakthrough.
  • Last 100 years of bull markets and bear markets: Though bear markets seem “unbearable” when occurring, the fact is that they are much shorter in duration and much less in impact than bull markets. However, based on expected lower growth and inflation, the average annual stock market returns will likely be less in the coming decades than the 80’s and 90’s for example. Indeed, there will be bear markets at some point in the future. But that said, it is not wise to try to time the market; instead control the things you can control and stay invested in an appropriate diversified asset allocation and stick to your long-term investment plan.
  • Emotional biases: The markets are not rational because of human beings and their emotions and the fact that they sometimes trade on those emotions. As such, the markets tend to continually overshoot one way and then the other. Recency bias, loss aversion bias, anchoring bias, and other biases can have major (and typically bad) impacts on our decision making. For example, recency bias was the principal reason many investors felt compelled to get out of stocks in late September based on the last two months’ most dismal performance – had they traded on that emotion, they would have missed out the huge October rally upward. Emotional biases in investing can significantly disrupt sound investment plans but there are fortunately ways to cope including: understanding the problem exists, creating a culture of discipline which can be done by creating a sound investment plan (e.g. Investment Policy Statement), and working with a financial coach like DWM that keeps you and your emotions from hurting yourselves.
  • Other Key Metrics: Protecting and growing your net worth is much more than simply focusing on investment returns. One needs to regularly review and monitor other key measurements that matter. These include assets, additions to assets, planned date of financial independence, retirement income, inflation, investment returns, effective tax rates, goals (needs, wants and wishes), expected longevity, estate planning and stress testing, including risk management. There are many “financial advisors” out there willing to work with your investments, but not as many that are qualified and willing to go through a comprehensive financial planning process using the metrics above and providing other value-added services to completely help manage your financial life. DWM’s Total Wealth Management Process includes both Investment Management and Value-Added Services. The process has two parts: first, a series of initial meetings to review all aspects of a client’s financial life and provide review, recommendation and implementation. And, second, an ongoing process to monitor and adjust the plan through life’s twists and turns. It is focused on the client’s numbers and emotions and designed to help protect and grow their legacy and provide peace of mind.

For more information about the discussion above, don’t hesitate to contact us.