Don’t Forget Year-End Tax Planning

Holiday season is here.  Lots to do, including year-end tax planning.  Yes, you need to carve out some time to reduce your 2016 tax bill.  Planning this year could be extremely important.  A tax reform is likely in early 2017 that would reduce income tax rates, increase standard deductions and could reduce the impact of big tax deductions.  The basic strategy is to defer income and accelerate deductions.

Here are some key areas for you to review with your CPA:

Reduce income.  The standard advice of pushing as much income as possible into future years is all the more powerful if tax rates drop.  Small business owners might want to wait until the end of December to bill clients so that related payments are received in January.  They might also buy equipment and place it in service before December 31.  The Section 179 Deduction permits up to $500,000 of business equipment to be written off 100% in year of purchase. The closing of a sale of real estate might be put off until January 2, 2017.  If you are in retirement and living off IRAs, consider deferring taking any more distributions until early 2017.

Retirement Tax Breaks.  If you are contributing to a traditional 401(k) or other retirement plan, considering maximizing it ($18,000 for those under 50 and $24,000 for those 50 and over) with larger deductions on your December paychecks.  Consider maximizing IRAs ($5,500 and $6,500 respectively) even if your contributions are not deductible, as you may want to convert those to Roth IRAs in the future.

Capital Gains and Losses.  Capital gains taxes are likely to be less in future years for higher income American taxpayers under tax reform proposals.  The House GOP plan would revert to an older system that taxes a portion (50%) of investment income at regular rates and excludes the rest.  You and your financial advisor should review your portfolio for all realized and unrealized capital gains and harvest appropriate losses before year-end if you haven’t already done that.

Medical Expenses.   Taxpayers can deduct medical expenses if they amount to 10% of their income or 7.5% for taxpayers 65 and older.  If you’re scheduling an expensive procedure, you might want to get it done and paid in 2016.  Some tax reform proposals eliminate medical expense deductions.  And, even if medical expense deductions remain available, they may not be worth as much in tax savings if your income tax rate goes down.

State and local taxes.  This deduction may be coming to an end.  Already, four million Americans lose this deduction due to the Alternative Minimum Tax (“AMT”). Both the Trump Plan and the Ryan Plan intend to eliminate the AMT.  If so, this deduction could be wiped out.  Hence, if possible, consider paying your property taxes and/or state income taxes in 2016.

Mortgage Interest.  All tax reform proposals have continued to support a mortgage interest deduction.  However, it might make sense to make your January 2017 mortgage payment in December.  The standard deduction is expected to be doubled to $25,000 to $30,000.  If so, fewer taxpayers will itemize.

Charitable Contributions.   The raising of the standard deduction will likely mean fewer taxpayers will get a tax benefit from their charitable contributions.  And, even if they do itemize, their income tax bracket may be reduced going forward.   Therefore, consider contributing both your 2016 amounts and your 2017 charitable contributions by 12/31/16.  Here are three good ways to do this:

    • You can contribute to “Donor-advised” funds this year and get the deduction in 2016 and then make “grants” to charities with these funds as desired in the future.
    • You can contribute appreciated property such as stocks, mutual funds and exchange traded funds to a charity. The taxpayer doesn’t pay the capital gain on the appreciation and gets a full charitable contribution deduction.  And, yes, appreciated property can fund your donor-advised fund.
    • You can make a “Qualified Charitable Distribution” (“QCD”) from your IRA. A QCD allows an IRA owner who is at least age 70 ½ to contribute up to $100,000 to a charity without having to claim the distribution in taxable income.  This is particularly valuable to philanthropic taxpayers who can fulfill their Required Minimum Distributions (“RMDs”) by sending payments directly to the charities of their choice.

Our clients know that at DWM we recommend starting tax planning in April or May, following it up in the fall and finalizing it in December. We don’t prepare tax returns.  We do provide suggestions for reducing taxes.  Helping you minimize your tax bill is part of the value you get with DWM Total Wealth Management.  Please let us know if you have any questions.  Don’t delay!

President for All Americans

0209-tiled-flag-of-american-diversity-1On the morning after the election, Donald Trump pledged that he “will be President for all Americans.”  That was a great start.  President-elect Trump has now assembled his transition team.  We’re starting to see that some of the campaign rhetoric and issues espoused by candidate Trump were not to be taken literally.  Further, with our government’s checks and balances, there is only so much one man can do by himself.  Being President of the U.S. will be much different than being Chairman and President of the Trump Organization.

First, let’s focus on four key economic initiatives we expect under President Trump: tax reform, infrastructure, trade protectionism and fiscal stimulus.

Tax Reform. House Speaker Ryan and President-elect Trump are not that far apart on tax reform.  The corporate tax (currently 35%) could end up at 20% (Ryan) or 15% (Trump).  The logic here is that lower rates would provide an incentive for American companies to repatriate profits held overseas. And, with that ready cash, they would be in a position to increase capital spending in the U.S.

On the personal side, we’d all get a tax cut.  The current seven tax brackets would be cut to three brackets. The highest bracket, currently 39.6%, would become 33%.  Tax reform could raise the standard deduction, limit exemptions and eliminate the alternative minimum tax.  And, it would eliminate or greatly reduce estate and gift taxes.

Individual tax reform is estimated to cost between $2.2 to $3.5 trillion over the next 10 years.  However, both President-elect Trump and Speaker Ryan believe that tax reform will put more money in people’s pockets and create demand which will grow the economy to offset this cost.

Infrastructure.  Further tax incentives would be given to support private funding for some of the repair and upgrading of roads, bridges and airports.  $140 billion in tax credits could provide funds for $1 trillion in infrastructure investments over the next 10 years.  And, using Standard & Poor’s formula that every dollar spent on infrastructure adds $1.30 to the economy, the plan is again for growth and more jobs.

Trade Protectionism.  Candidate Trump promised to put tariffs on Chinese imports and renegotiate NAFTA with Mexico and Canada.  He opposes the Trans-Pacific Partnership, which would eliminate most tariffs on goods from countries in the alliance.  The net effect is that retail prices may be going up soon (to cover the increased costs of foreign produced merchandise) which may push inflation perhaps to the 3-4% range.

Fiscal Stimulus. Tax reform, along with more public spending on infrastructure, will likely increase the budget deficits and drive up interest rates.  According to Jeffrey Gundlach, CEO of Doubleline Capital, and one who predicted in January that Mr. Trump would be elected President, “Trump’s pro-business agenda is inherently ‘unfriendly’ to bonds.” Mr. Gundlach predicts the 10-year Treasury note, currently at 2.27%, will be 6% in 4-5 years.

Candidate Trump said he can get the economy to grow at 4% a year, twice what it is now.  He also promised add lots of jobs and reduce taxes.  We hope President Trump can make that happen.

Second, we need to recognize that this acrimonious presidential campaign was about more than simply “pocketbook” issues.  It showed very clearly that there are also deep divides in our country over race, ethnicity and culture.  When the votes were counted, millions in the rust belt and rural regions of the country cheered their new champion.  Yet, in the urban areas, thousands of minorities, millennials and millions of women and men fear that our country may be entering a dark and divisive time. We hope that President Trump will continue to change the rhetoric of candidate Trump as he did on 60 minutes Sunday night with Lesley Stahl.  He publicly asked those harassing Latinos and Muslims to “Stop it.”

In conclusion, we hope the economy can grow and help all Americans prosper in the coming four years. We also hope that President Trump will continue throughout his term to denounce the hate in our country and promote the safety and dignity of all of our 320 million diverse people.  If he accomplishes all of this, he certainly will be the “President for all Americans.”

“You’re Hired!”

trump-youre-hired-002“You’re hired!” was something The Apprentice reality show viewers heard at the end of every season as someone emerged from a group of highly different “characters” and was chosen as the winner. In a surreal twist, Donald Trump, the star of that show, has just been hired as our next President after a surprise victory over Hillary Clinton highlighting a populist uprising defeating the status quo.

No, November has not been just a bizarre dream; although on paper, both the Chicago Cubs winning the World Series and Donald Trump winning the US Presidency, seems about as outlandish as a UFO. These events have actually happened! Donald Trump will be our next President for at least the next four years and the Cubs most certainly will become a dynasty during that time. We are in for change. But is change necessarily a bad thing? At this point, the voters have voted and we no longer have a choice. Hence, time to embrace that change. However, what does it mean for you and your money?

First off, this is not Brexit #2. Recall that the markets fell significantly following the surprising June 2016 Brexit “Leave” victory, only for the market to recover fully in several days’ time. Yes, there were times last night when market futures were down big, but it didn’t prevail. Markets opened in steady fashion this morning and are up, not down, close to 1% as of this writing.

That, too, may come as a shocker to many as until now the market had been fluctuating based on Hillary’s success chances. See, the market had been pretty cool with status quo and hesitant of uncertainty, which Trump would undoubtedly bring to the table. But if we look at what Trump will be working on in the early months of his Presidency, we can see that it’s quite possible that it provides positives:

  1. Putting forth a giant infrastructure agenda in the likes of Eisenhower
  2. Working on trade reform which will most likely lead to inflation and thereby helps the banks
  3. Working on healthcare reform – most likely replacing the Affordable Care Act with something that – well, let’s face it – has to be better
  4. Decreasing regulation which will make many corporations and financial markets happy
  5. Working on tax reform – both individual and corporate, including repatriation (bringing back perhaps trillions of dollars of American companies that are currently overseas)

Many of these are pro-growth / pro-economy and the market likes that. Furthermore, for those that feared the Trump bulldog approach, the bark we heard on the campaign trail will be bigger than the bite as there are roadblocks to the rhetoric. The legislative and judicial process tends to mute campaign promises. Trump will not enjoy unlimited power. Smart negotiations will likely be made.

The fact of the matter is that this is a healthy economy in the US right now and poised to get better. GDP is up, unemployment is down. It’s not as “gloomy” as one may feel. This new business-friendly administration coming in will look to keep that going.

In conclusion, polls and markets will remain unpredictable. Don’t let politics overrule how you invest. Here at DWM, we’ve constructed portfolios for our clients to stand the test of time. Sure, we’ll have blips here and there like Brexit and the one we were bracing for this morning that didn’t happen. Volatility will always be a part of investing. The key is to remain invested in a diversified fashion for the long-term and don’t let your emotions turn into knee-jerk reactions you’ll ultimately regret. Last night’s event may have been a bit of a shocker, but the sun did indeed come out this morning and is shining down on America. We are in for a little change. But we should embrace this change and come together as a country to make it stronger than it has been. Hey, if the Cubs can do it, why not the good ole US of A?!? “Holy Cow” as Harry Caray would say!

In America We Trust

trust-3

Americans have some major trust issues as we approach November 8th. We are mired in distrust of our Presidential candidates, Congress, the media and each other!  It is election week and the biggest hurdle facing both of our Presidential candidates is their inability to inspire the trust of the American voters.  Poll after poll highlights this seemingly national concern and has been fodder for debate all year.  In a September Wall Street Journal poll, far less than half the voters believe that either of the major party candidates are trustworthy.  A recent CBS/NYT poll showed that 2/3 of likely voters view both candidates as untrustworthy.  Not only that, but we don’t even trust each other.  A Gallup poll, also in September, showed that only 56% of us have a great deal or a fair amount of confidence that our fellow Americans will make good judgments about the issues facing our country.  Wow!  Not surprisingly, the same poll shows that only 32% of us have even a fair amount of trust in the media and 57% have little or no confidence or trust in those currently in office or running for office.  That is an awful lot of American cynicism!

Are these political campaign season statistics and events unprecedented in history?  Nope.  Even the Founding Fathers were full of distrust.  The framers of the Constitution created the Electoral College to decide the presidential election. Instead of allowing for “one person, one vote” presidential elections — as the democratic process would imply — the founders opted to place the responsibility in the hands of a select few who “will be most likely to possess the information and discernment requisite so complicated an investigation,” or so wrote Alexander Hamilton in The Federalist, No. 68 [source: League of Women Voters].

Because Electoral College voting does not necessarily reflect the vote of the American people, a president can be elected without receiving the majority vote. Looking back in history, we have had a few disputed outcomes to our Presidential elections that caused distrust on all sides.  For example, in 2000, George W. Bush won the presidential election by winning in Electoral College votes even though neither Bush nor Al Gore, Jr. had a clear popular vote victory – remember the hanging chads in Florida?  In 1824, Andrew Jackson charged that a corrupt deal led Congress to award the Presidency to John Quincy Adams when no candidate received enough Electoral College votes.  Sometimes we don’t even trust our democratic process!

Of course, the financial services industry is under perennial scrutiny, especially this year with some of the banking industry issues we have seen.  In order to restore a sense of trust, the Department of Labor rule defining fiduciary responsibility will begin taking effect in 2017. It will require that financial institutions and advisors give advice in the “best interest” of the client and that they comply with a professional and reasonable standard of conduct and compensation.  See our previous blog:  http://www.dwmgmt.com/fiduciary-standard-closing-in-on-reps-and-brokers.   DWM welcomes these changes and believes it is the right way to do business.  As members of NAPFA, the National Association of Personal Financial Advisors, we have always adhered to these principles.

The National Association of Personal Financial Advisors (NAPFA) is the country’s leading professional association of Fee-Only financial advisors—highly trained professionals who are committed to working in the best interests of those they serve. Since 1983, Americans across the country have looked to NAPFA for access to financial professionals who meet the highest membership standards for professional competency, client-focused financial planning, and Fee-Only compensation.”    http://www.napfa.org/

 

One thing we can trust is that, once this election is over, there will be a renewal of the iconic American optimism, no matter who wins.   We certainly hope that, as Americans, we can begin to re-establish a belief in our democratic process, in our leaders, in the media, the financial services sector and in each other.  At DWM, we are confident that we have earned the trust of our clients and will continue to operate with the integrity that you have come to expect.  Happy Election Day-please make sure to vote!!