Our Blog

DWM is committed to learning for its team, clients and friends. In this changing world, it’s extremely important to stay current in all areas impacting your financial future.

We encourage all of team members to “drill down” on current topics important to you and contribute to our weekly blogs.  Questions from our clients and their families are often featured in our blogs.  

Financial literacy for clients and their families is very important to us.  We generally hold an annual wealth management seminar for all of our clients.  We encourage regular, at least semi-annual, meetings in person with our clients to review family updates, progress on financial goals, asset allocation and performance of investments.  We’re happy to assist younger members of the family as part of our total wealth management program.

Here’s our latest blog:

 

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Tax Reform: this year's Christmas gift or a future Christmas coal?

Written by Les Detterbeck.

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On top of the regular holiday season’s festivities, this year we’re watching the proposed “Tax Cuts and Jobs Act” likely making its way to the President’s desk for signature. The “joint conference committee” announced yesterday that they have a “final deal” and Congress is scheduled to vote on this next week.  Before we review what we specifically know about the bill (not all details have been released as of this morning) and provide some recommendations concerning it, let’s step back and review it from a longer-term perspective.

Since last year’s election, stock markets have been on a tear- up over 20%, mostly driven by increased corporate profits, both here and abroad.  U.S. GDP is growing and unemployment is close to 4%.  Most economists believe that now is not the time for a tax cut, which could heat up an already expanding economy to produce some additional short-term growth and inflation. The Fed reported yesterday that the tax package should provide only modest upside, concentrated mostly in 2018 and have little impact on long-term growth, currently estimated at 1.8%.  So, tax cuts now will not only likely increase the federal deficit by $1.5-$2 trillion over the next decade, but will take away the possibility of using tax cuts in the future, needed to spur the economy when the next recession hits.  Certainly, we would all like lower taxes and even higher returns on our investments, but we’d prefer to see longer-term healthy economic growth with its benefits widely shared by all Americans and steady investment returns, rather than a boom-bust scenario and huge tax cuts primarily for the wealthy that may not increase long-term economic growth.

As of this morning, December 14th, here are the current major provisions:

Individual

  • Income Tax Rates.  The top tax rate will be cut from 39.6% to 37%.
  • Standard deduction and exemptions.  Double the standard deduction (to $24,000 for a married couple) and eliminate all exemptions ($4,050 each).
  • State and Local Income, Sales and Real Estate Taxes.  Limit the total deduction for these to $10,000 per year.
  • Mortgage Interest.  The bill would limit the deduction to acquisition indebtedness up to $750,000.
  • Limitations on itemized deductions for those couples earning greater than $313,800.  Repeals this “Pease” limitation.
  • Roth recharacterizations.  No longer allowed.
  • Sale of principal residence exclusion.  Qualification changed from living there 2 of 5 years to five out of eight years.
  • Major items basically unchanged.  Capital gains/dividends tax rate, medical expense deductions, student loan interest deductions, charitable deductions, investment income tax of 3.8%, retirement savings incentives, Alternative Minimum Tax, carried interest deduction (though 3 yr. holding period required.)
  • Estate Taxes.  Double the estate tax exemption from $5.5 million per person to $11 million.

 

Business

  • Top C-Corporation Tax Rate.  Reduce to 21% from 35%.
  • Alternative Minimum Tax.  Eliminated.
  • Business Investments.  Immediate expensing for qualified property for next five years.
  • Interest Expense.  Limit on expense to 30% of business interest income plus 30% of adjusted EBITDA.  Full deduction for small businesses (defined as $25 million sales by House, $15 million by Senate).

Another key issue, the top rate on pass through organizations (such as partnerships and S Corps), is yet to be determined. However, it appears that a reduction of 20% to 23% will be available to pass-through income, subject to W-2 minimums and adjusted gross income maximums. This would produce an effective top rate of 29.6% on pass through income.

If all of that seems confusing, you’re not alone.  Lots of moving parts and lots of details still to be clarified. Even so, if the bill passes, you will have been smart to consider the following:

Recommendations:

1) Because the bill would limit deductions for local income, sales and real estate taxes, you should make sure that you have paid all state income tax payments before December 31, 2017. If you are not sure, pay a little extra.

2) Also, make sure you pay your 2017 real estate taxes in full before 12/31/17. Because Illinois real estate taxes are paid in “arrears” it will be necessary to obtain an estimated 2017 real estate tax bill (generally due in 2018) by going to your county link and then paying this before 12/31/17.  Let us know if you need help on this.  In the Low country, while our CPA friends indicate that paying 2018 real estate taxes in 2017 should be deductible, as a practical matter, there appears to be no way to get an estimated tax bill for 2018 and prepay your 2018 real estate taxes in 2017.

3) Meet with us and/or your CPA in early 2018 to review the impact of the Act, assuming it becomes law, on your 2018 income tax planning. It will be important to review the various strategies that may be available to make sure you are paying the least amount of taxes. 

Yes, tax reform may be here before Christmas. Not sure what it will be: a wonderful gift for this year’s holiday or perhaps a lump of coal in our stockings for Christmases to come.  Stay tuned.

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The Other Side of the “Bitcoin”

Written by Grant Maddox.

 

bitcoin-bubble-dash-killer-app.jpgWith the rise of new technologies, each one more advanced than the last, a new form of electronic payment has emerged.

Bitcoin is a decentralized digital currency created for efficient electronic payments. It is run and controlled by what is known as a ‘blockchain’, a public ledger of all transactions in the bitcoin network. A ‘blockchain’ is essentially a company-wide spreadsheet that can be accessed by all. The purpose of the ‘blockchain’ is to determine legitimate transactions and deter attempts to re-spend coins that have already been spent.

Bitcoin works similarly to a check in that there are two different numbers per transaction: your personal private key (or account number) and a signature that confirms your transaction on the above mentioned ‘blockchain’. The digital currency can be spent in a number of different ways, but can only be held in two forms. A bitcoin user can hold an electronic wallet (e-wallet) via a web wallet or a software wallet by using a downloadable software. An e-wallet is essentially an online bank account that allows you to receive bitcoins, store them, and send them to others. A software wallet is a downloadable software that allows the consumer to be the custodian of their bitcoins. Often the latter leads to more liability for the consumer.

It all sounds pretty enticing, and maybe you are wondering if you should jump into this next innovative technological trend. But the rapid growth of bitcoin has many people concluding that it’s just another bubble waiting to burst.

Markets have seen many different financial bubbles over the years, and none of them have ended particularly well. A financial bubble occurs when market participants drive prices above market value. This investment behavior can be attributed to herd mentality, where people think that because everyone else is investing in a certain entity and seeing short-term success, that means it’s a good investment. Inevitably, these financial bubbles can’t be sustained long term and they burst.

The first documented economic bubble in history occurred in the 17th century, when Dutch tulips were all the rage. The contract prices of the newly introduced and popular bulbs grew to an outrageous high, eventually leading to a dramatic collapse or “burst” in February of 1637. Today this is known as “tulipmania.” More recent examples include the dot-com bubble of the late ‘90s and the housing bubble in the 2000s. I’m sure we all remember how those financial bubbles ended, and the repercussions that followed those bursts.

Looking back on all of these events, it’s easy to see now how these bubbles formed, so we can use these prior experiences to better predict financial bubbles. Today, the cause for concern is bitcoin, and it’s more the question of when the bubble will burst rather than if it will.

Bitcoin got its humble start six years ago at $2. Three years later it was at $300 and last week it topped off at $11,000. With a 1000% increase so far this year alone, it’s easy to see why many people are raising the alarm or joining the frenzy, depending on the person!

With its frequent surges and sharp price moves, bitcoin is as volatile as they come. In other words, if you think you want to give bitcoin a shot, it’s best to assume that you’ve already lost that money. Everything we’ve learned about financial bubbles over the past four centuries points to an imminent burst in this digital currency’s future, and you and your money don’t want to be caught in a tight spot when it does.

There is also speculation that regulators will step in at some point because of the potentially disastrous economic consequences associated with the runaway bitcoin prices. The first concern is as we’ve outlined above, the bubble will burst and cause devastating losses. Additionally, future contracts are opening bets for bitcoin, and some funds are set to take form in early 2018 to pitch bitcoin to more mainstream investors. The more bitcoin gets wrapped up in our financial system, the worse it will be for everyone when it bursts.

The other major consequence presents the other side of the “bitcoin”: what if the bubble doesn’t ever burst, and bitcoin becomes an alternative, or worse, a replacement for standard U.S. currency? We cannot see regulators allowing what to happen, so it’s safe to say that even if this bubble miraculously doesn’t burst, it will most likely lose traction one way or another.

As many of you know, at DWM we don’t try to time the markets, and when it comes to speculative investments that require you to do so, it’s best to avoid them altogether. 

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Plant the Seed & Let It Grow: How DWM is Helping Emerging Investors

Written by Jake Rickord.

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Coming out of college can be a very stressful time for an individual. One goes from the structured and carefree life of being a student to someone bewildered with what is often their first glimpse of responsibility, trying to grab the wheel and get some control on their future. For a lot of recent graduates, it’s not an easy transition.

Having graduated from Carthage College in Wisconsin last May, I understand what some of these sobering realizations feel like. Fortunately, my family relationship with DWM team member, Jenny Coletti, earned me an interview at Detterbeck Wealth Management and, fast forward a few weeks, I’m proud to be a new part of the DWM team!

Even though I majored in mathematics, as a young person fresh out of college, it is extremely daunting on how to get your hands around your financial wherewithal and start planning for your future. DWM is guiding me through that process and in the near future will be doing this for other “emerging investors”!

That said, we’d like to introduce you to a program DWM plans to roll out in the near future: DWM’s Emerging Investor (“EI”) Program, a program designed for young investors looking to kick start their wealth management future! One of the most common things you’ll hear people say when talking about investments is: “I wish I started earlier.” DWM agrees and decided it was time to help younger folks get invested and on their way to financial freedom at an early age.

Highlights of this EI Program include the following:

  • Automated investment management utilizing DWM investment strategies via the Schwab IIP Platform
  • Emerging Investor On-Boarding - Financial assistance geared directly toward an Emerging Investor needs, which could include the following:
    • Budgeting/cash flow planning
    • Debt Management
    • Asset Allocation including assistance with your employer-based plan
    • Assistance with other work benefit options
    • Access to nifty financial tools
    • Educational planning (for those with kids or planning to have them soon)
    • Access to the DWM Emerging Investor Relationship Managers
      • In Charleston: Ginny Wilson & Grant Maddox
      • In Palatine: Me, Jake Rickord!
  • The ability to graduate to DWM’s Total Wealth Management (“TWM”) Platform – the one that our current clients benefit from - when their account value reaches a certain level

This platform can serve many needs, but Brett and Les are very excited about this being a nice spot for children of TWM clients and other select younger people looking to grow their portfolios, where they become their own investor and spread their own wings!

It should be noted that this Emerging Investor Program is a different service package than our more sophisticated Total Wealth Management experience. Given that it is geared toward a younger audience, which have different – typically less complicated, but still important - needs, the areas of focus are much different. For example, my recently graduated college friends are more interested in cash flow/budgeting management and making sure that their 401k through work is getting the most bang for the buck, given the employer’s match and investment choices, and less interested in retirement, estate, tax planning, etc. The investment management portfolios are still constructed by the same team at DWM, but do not utilize the more sophisticated alternative investments. Also, from an administrative perspective, reporting is completely handled through the Schwab IIP Client portal – no custom Orion/DWM reports like our TWM clients receive. In fact, with this EI program, everything is on-line and paperless, which to a Millennial sounds fantastic, but may be daunting to the older generations. A co-browsing session between the new EI client and one of our team members can be scheduled to make on-boarding a piece of cake. And whereas this new EI program has many differences from our traditional TWM program, the main theme remains the same: we will help select investors make their money work harder by addressing the unforeseen landmines hidden within their financial plans by equipping them with education, knowledge, tools, and sound advice. 

Overall, I am extremely excited to be a part of the DWM family. I’ve learned a great deal and met some great people since joining several weeks ago. I look forward to meeting all of the clients in due time. And I cannot wait to help roll-out this new Emerging Investors platform. We still have plenty of work to do, but stay tuned for the official launch!

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