Broker Check

February 2018

Tax Reform is Comin' To Town...

Against all odds and along predictable party lines, Congress passed (and I assume read) the 429-page Tax Cuts and Jobs Act of 2017. This is the first significant overhaul of the tax code since 1986 during the Reagan Administration. By some estimates, this law will reduce income taxes for 80-90% of the people who pay them, so this should be a net positive to just about all of our readers and most taxpayers.

Like all legislation, there will be some winners, some losers, and some that remain the same. I was secretly cheering for the Tax Simplification Act of 2017 requiring that my taxes be filed on a 5 X 7 index card, but maybe my grandkids will see that one. While these changes are effective immediately, most of us won’t notice much of a change until 2019, when we file our 2018 returns.

There are at least forty provisions of the tax code that are changing, so I won’t go into all of them. If you can’t sleep Google Tax Reform 2017 and take a shot of Nyquil™. You’ll be in REM sleep in no time.

We want to share some of the more significant changes that affect our clients as well as a couple other provisions receiving headlines. In no particular order, they are as follows:

  1. The corporate tax rate is dropping from 35% to 21%, bringing it in line with most of the rest of the world. Since taxes are a significant cost of doing business, this should lead to greater productivity and profitability without companies having to change anything. Some companies, like AT&T, Wal-Mart, JP Morgan Chase, Apple, and over 100 others, announced employee bonuses and raises almost immediately after the bill was signed into law.
  2. There is a one-time repatriation tax of 15.5% reduced from the current 35%. This is to incent U.S. companies to bring back to the U.S. literally trillions of dollars from overseas and hopefully invest in U.S. businesses and workers. Apple is repatriating over $250 billion and hiring 20,000 more employees.
  3. Weary parents (I hear you) can now use their 529 plans to pay for their kids’ private K-12 education costs.
  4. There are still seven tax brackets for individuals, but five of those seven brackets have been reduced by 2-4 percentage points each. If you pay taxes, your bill for 2018 will likely be reduced.
  5. The standard deduction for single and married taxpayers has basically doubled. This should simplify tax filing for the approximately 30% of taxpayers who itemize their deductions.
  6. For you with children, the Child Care Tax Credit has doubled from $1000 per child to $2000. My friend just had his fifteenth child in January. Those fireworks you saw over Florida that day were from his backyard. He’s paying for golf next time I see him.
  7. If you are subject to the Alternative Minimum Tax (AMT), those income thresholds have increased to $70,300 for individuals and $109,400 for married. This should mean significantly fewer people are subject to the AMT.
  8. After December 31, 2018, Americans will no longer be required to buy health insurance. This is a repeal of the so-called individual mandate.
  9. Mortgage interest is no longer deductible for amounts greater than $750,000. This was actually reduced from $1,000,000. “Mortgage” literally means “death grip/pledge” so if you have a $1,000,000 mortgage this one stings a bit.
  10. State and local taxes paid are deductible from your federal income tax bill. This deductible amount has been capped at $10,000 while in the past that was unlimited. People in high tax states will feel this one.
  11. In 2010, as part of the Affordable Care Act, you could only deduct medical expenses over 10% of your Adjusted Gross Income. This new 2017 legislation takes it back to the pre-2011 level of 7.50%. This makes it easier for people with higher medical expenses to deduct them from their federal income taxes.
  12. Teachers can still deduct up to $250 of their classroom expenses.
  13. The $7500 electric car tax credit remains in place.
  14. The estate tax exemption has doubled. Previously, this estate tax was levied on estates greater than $5.49 million for singles and $10.98 million for married couples. Doubling these amounts means fewer people will be subject to estate taxes. There are about 13,000 estate tax returns filed every year, of those only about 5,000 are taxable. Since about 3 million people die every year, there is a very small percentage of people who need to worry about estate taxes. And if you do need to worry about them, then you probably already know.

So…that’s about it. If you were expecting to get rich off of this or were expecting to get soaked, let not your heart be troubled. If I had to put money on how you end up on your 2018 taxes, my guess is you’ll end up a little better off.

If you have a bunch of kids, you’ll see a higher child credit. But if you have a bunch of kids, you probably have a bigger house and higher property taxes, and that deductibility is now capped. You win some; you lose some.

Since personal spending accounts for about 70% of the economy, if there is more money in the pockets of individuals and business owners, then that should translate into more spending and more economic growth.

Like everything else…we’ll see. Thanks for listening.

Pete Knutson

Please note: This material is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.

Market Commentary: Don't Be Lulled

Written January 19, 2018

Here we are in the first few weeks of 2018 and the S&P 500 has already hit many economists’ full-year forecasts. In the first three weeks. Seriously, this is wild! Leading into this 4% rise year-to-date, let me first fill you in on some interesting facts about 2017. Last year the S&P 500 did not experience a single negative month for the first time since the index came into existence. It also had the lowest volatility for any year on record. The biggest “correction” last year was less than 3%.

This is nuts. Yes, nuts! Moreover, the consequence could be that investors are tempted to be lured out of their proper risk tolerances into aggressive allocations, emotionally chasing returns without paying heed to the risks. Looking at the past 12 months in a vacuum, why be content with 3% returns in bonds when you could get 20% returns in stocks with practically no downside in the market?

What about 2018 year-to-date? Bonds are actually down 0.75% while the S&P 500 is up day after day, already gaining over 4% in the first three weeks of the year. It appears nothing can get in the market’s way. That is precisely the time when investors should be the most vigilant.

As stock prices rise, the risks rise with them. The more distorted prices are from the company’s value that they are supposed to represent, the farther those prices need to drop to realign with those proper values.

When we look at economic indicators, skies are blue with hardly a cloud to be seen. Good news, but the consequence of that has become investor complacency. A symptom of that is the lack of volatility. The last time we saw volatility this low was the end of 2006 leading into 2007. You may recall the last year of the last bull market was 2007, and that market’s peak was October.

Add to this, the parabolic move major indices have made since the beginning of the year. Complacency has turned into a chase for returns. It is unsustainable. It increases the probability of a steeper correction in the coming months. Now don’t get me wrong - you cannot try to “time” corrections like these, and we strongly urge against it. There is a risk that once a real 10%+ correction occurs, panic selling by blindsided, unprepared investors could make that correction sharper than it would have been otherwise. This could also make corrections more frequent until the extreme volatility feeds into the next bear market.

Let’s look at the graph below to see how investor complacency led to increased market volatility before the bear market of 2008.

Very low volatility in the last half of 2006 and into the first two months of 2007 was followed by a modest decline of 5.8%. The ensuing bounce was steeper than the prior rise. The next decline was almost 10% followed by a rebound even steeper than the last. That marked the top of the S&P 500 that wasn’t seen again until the beginning of 2013.

I am telling you this for a few reasons. One is a reality check. The low volatility we have seen in the market is not typical and we should not expect it to continue. Another is to urge you to stay in your proper risk tolerance and not chase returns. Finally, it is to prepare you for what could lie ahead. While no one can know for sure, I would not be surprised to see a sharp, fast drop (or more than one) in the stock market in the coming months. I do not want you to be surprised, either.

- Victoria Bogner, CFP®, CFA

Disclaimers and Notes
Securities offered through Cetera Advisor Networks LLC, member FINRA/SIPC. Investment Advisory Services offered through Cetera Advisor Networks LLC and McDaniel Knutson Financial Partners. Cetera is under separate ownership from any other named entity.

The views are those of Victoria Bogner and should not be construed as investment advice. All information is believed to be from reliable sources, however, we make no representation as to its completeness or accuracy and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation. Economic and performance information is historical and not indicative of future results.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into accounts the effects of inflation and the fees and expenses associated with investing.

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