Schwartz Financial Weekly Commentary 1/29/18

The Markets

The numbers are coming in.

Publicly-traded companies report their earnings and sales numbers for the previous quarter in the current quarter. For example, fourth quarter’s sales and earnings are reported during the first quarter of the year, and first quarter’s sales and earnings will be reported during the second quarter, and so on.

Through last week, about one-fourth of the companies in the Standard & Poor (S&P)’s 500 Index had reported actual sales and earnings for the fourth quarter of 2017. As far as sales go, a record number – 81 percent – of companies sold more than expected during the fourth quarter. That was quite an improvement. FactSet reported:

“During the past year (four quarters), 64 percent of the companies in the S&P 500 have reported sales above the mean estimate on average. During the past five years (20 quarters), 56 percent of companies in the S&P 500 have reported sales above the mean estimate on average.”

The mean is the average of a group of numbers.

The money a company makes through sales is called revenue. For instance, if a lemonade stand sells 100 glasses of lemonade for $1 each, then the proprietors have earned $100. That is the stand’s ‘revenue.’ Of course, as every parent who has financed a lemonade stand knows, revenue doesn’t include the cost of the product. ‘Earnings’ are what the company has left after expenses – the bottom line. If every glass of lemonade cost 50 cents, then the stand’s earnings are $50.

Companies in the S&P 500 are doing pretty well on earnings, too. About three out of four companies have reported earnings higher than expected. Overall, earnings are 4.5 percent above estimates.

Through Friday, annual earnings growth for S&P 500 companies was 10.1 percent. It’s still early in the fourth quarter earnings season, but the data so far seem likely to confirm that 2017 was a bright, sun-shiny year for U.S. companies.

Data as of 1/26/18 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 2.2% 7.5% 25.1% 11.8% 13.9% 7.8%
Dow Jones Global ex-U.S. 1.9 7.0 28.2 7.8 5.5 1.6
10-year Treasury Note (Yield Only) 2.7 NA 2.5 1.8 2.0 3.6
Gold (per ounce) 1.4 4.4 13.7 1.8 -4.0 3.9
Bloomberg Commodity Index 2.6 3.0 2.9 -3.4 -8.4 -7.1
DJ Equity All REIT Total Return Index 1.7 -2.8 4.6 2.8 8.2 7.4
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

certain parts of the circular economy probably adapt to cities and towns better than they do to rural areas.

What is the circular economy?

It is “a system that reduces waste through the efficient use of resources. Businesses that are part of the circular economy seek to redesign the current take/make/dispose economy, a model which relies on access to cheap raw materials and mass production. For example, car sharing addresses the inefficiency of privately owned cars – which are typically used for less than one hour a day,” explains Morgan Stanley.

Imagine not owning a car.

Clearly, it’s not something that would work everywhere. However, if you live in a city or town that has public transportation, ride sharing, car rentals, and bicycles, it’s possible. If you’re retired and you can organize your days in the way you like, it may even be sensible because owning a car is expensive. Transportation costs are the second highest budget item for most households, reports U.S. News. Housing costs top the list.

Giving up a car could help households save a lot of money.

According to AAA, owning and operating a new car in 2017 cost about $8,469 annually, on average, or $706 a month. Small sedans are the least costly ($6,354 per year), on average, and pickup trucks are the most expensive ($10,054 per year), on average, of the vehicles in the study. The calculations include sales price, depreciation, maintenance, repair, and fuel costs.

AAA’s estimate does not include insurance. In 2017, the national average premium for a full-coverage policy was $1,318 annually, according to Insure.com. Auto insurance premiums are highest in Michigan ($2,394) and lowest in Maine ($864).

Combining the averages, the cost of auto ownership is almost $10,000 a year. It’s food for thought.

Weekly Focus – Think About It

“Conservation is a state of harmony between men and land.”

–Aldo Leopold, American author and conservationist

Value vs. Growth Investing (1/26/18)

Name 1-Week YTD 4-Week 13-Week 1-Year 3-Year 5-Year
US Market 2.09 7.23 6.99 12.30 26.71 13.74 15.94
US Core 1.20 5.53 5.31 9.88 24.75 12.90 16.07
US Growth 2.88 9.74 9.57 15.71 36.02 15.09 17.34
US Large Cap 2.31 7.80 7.56 12.88 28.85 14.37 16.33
US Large Core 1.26 5.83 5.57 9.88 26.62 13.52 16.66
US Large Growth 3.18 10.65 10.47 17.14 38.70 16.15 18.41
US Large Val 2.45 6.88 6.59 11.50 21.60 13.38 13.92
US Mid Cap 1.69 6.09 5.94 11.42 22.58 12.34 15.30
US Mid Core 1.18 5.00 4.91 10.26 22.04 11.52 14.98
US Mid Growth 2.22 7.73 7.70 12.64 29.60 12.08 14.40
US Mid Val 1.66 5.51 5.19 11.32 16.08 13.35 16.50
US Small Cap 0.90 4.59 4.20 8.77 17.33 11.21 13.63
US Small Core 0.55 4.04 3.78 8.86 15.74 11.18 13.68
US Small Growth 1.64 6.07 5.63 9.73 27.01 12.44 14.33
US Small Val 0.51 3.69 3.24 7.63 9.49 9.89 12.79
US Value 2.15 6.38 6.07 11.20 19.65 13.16 14.39
2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

 Office Happenings:

Tax Season Has Started

The world is full of tax preparers who will complete all the right forms using the information from your W-2’s, 1099’s, etc. What you may not know is that, according to the General Accounting Office, approximately 8 out of 10 returns are filed with errors. Why is that the case? This is because the preparer that you hire generally does not really know your situation. What has your tax preparer done to make sure you get all the tax breaks you deserve? When was the last time they came to you and said “based on your plans in this area and your situation, here’s an idea I think will help you save money on your taxes”?

At Schwartz Financial, we believe proactive tax planning is the key to keeping more of what you make. We are a firm that specializes in helping clients to identify and explore opportunities to cut your tax bill. Proactive tax planning encompasses: looking at your personal and family information along with your income and expenses using “Tax Alpha” to take advantage of every available deduction, credit and tax planning opportunity. We will help you do just that!

Paying taxes once is your obligation, paying taxes twice is your fault! Call us, Schwartz Financial, at 215-886-2122 to set up a time to meet.

tax season

Regards,

Michael L. Schwartz, RFC®, CWS®, CFS

P.S.  Please feel free to forward this commentary to family, friends, or colleagues.  If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.

Michael L. Schwartz, RFC, CWS, CFS, a registered principal offering securities and advisory services through Independent Financial Group, LLC., a registered broker-dealer and investment advisor.  Member FINRA-SIPC. Schwartz Financial and Independent Financial Group are unaffiliated entities.

This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed.  Any opinions expressed herein are subject to change without notice.  An Index is a composite of securities that provides a performance benchmark.  Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.  Past performance is not a guarantee of future results.

 

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

 

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 

 

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

 

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

 

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

 

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

 

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

 

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

 

* Past performance does not guarantee future results.

 

* You cannot invest directly in an index.

 

* Consult your financial professional before making any investment decision.

 

* To unsubscribe from our “market commentary” please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at “mike@schwartzfinancial.com”.

Paying taxes once is your obligation, paying taxes twice is your fault!

The world is full of tax preparers who will complete all the right forms using the information from your W-2’s, 1099’s, etc. What you may not know is that, according to the General Accounting Office, approximately 8 out of 10 returns are filed with errors. Why is that the case? This is because the preparer that you hire generally does not really know your situation. What has your tax preparer done to make sure you get all the tax breaks you deserve? When was the last time they came to you and said “based on your plans in this area and your situation, here’s an idea I think will help you save money on your taxes”?

At Schwartz Financial, we believe proactive tax planning is the key to keeping more of what you make. We are a firm that specializes in helping clients to identify and explore opportunities to cut your tax bill. Proactive tax planning encompasses: looking at your personal and family information along with your income and expenses using “Tax Alpha” to take advantage of every available deduction, credit and tax planning opportunity. We will help you do just that!

Paying taxes once is your obligation, paying taxes twice is your fault! Call us, Schwartz Financial, at 215-886-2122 to set up a time to meet.

Breaking Down The New Tax Law

Basic Provisions of the Tax Cuts and Jobs Act

Before we dive into the new bill, it’s important to understand that most of the following changes affecting individuals and couples are set to expire in 2025Thereafter, tax rates and other provisions revert to their current form unless extended by a future Congress.

Most of the changes affecting corporations, on the other hand, are permanent.

Changes to Tax Rates – Individuals & Married Couples

When Republicans in the House of Representatives released their initial version of the bill, the plan was to shrink the number of tax brackets from seven to four.  The final bill retains all seven brackets; however, rates for most brackets have come down.1

Current Tax Brackets New Tax Brackets in 2018 Income for Individuals Income for Married Couples
10% 10% Up to $9,525 Up to $19,050
15% 12% $9,526 to $38,700 $19,051 to $77,400
25% 22% $38,701 to $82,500 $77,401 to $165,000
28% 24% $82,501 to $157,500 $165,001 to $315,000
33% 32% $157,501 to $200,000 $315,001 to $400,000
35% 35% $200,001 to $500,000 $400,001 to $600,000
39.6% 37% Over $500,000 Over $600,000

 

Date of Effect: January 1, 2018

Expiration: December 31, 2025

 Changes to Tax Rates – Corporations

Fun fact: The Tax Cuts and Jobs Act is the largest one-time tax cut for corporations in U.S. history, which are set to see their tax rate drop from 35% to 21%.2  This is slightly higher than the 20% tax rate Republicans were originally shooting for, and significantly higher than the 15% President Trump called for.  But it’s still a major boon for many businesses, especially large corporations, which Republicans hope will lead to more jobs and increased investment.  (Hence the name of the bill.)

Date of Effect: January 1, 2018

Expiration: Permanent

Changes to Deductions – Individuals & Married Couples

To understand the changes being made to non-corporate deductions, it’s helpful to first understand how the current tax code works.

There are two basic kinds of deductions, standard and itemized.  As the IRS explains it, the standard deduction is a “dollar amount that reduces the amount of income on which you are taxed.”7  Currently, single individuals can take a standard deduction of $6,350.  Married couples can take a $12,700 deduction.  Married couples with children can take even higher deductions.

Under the new plan, the standard deduction goes up to $12,000 for single individuals and $24,000 for married couples.3  That means many people will see a very nice tax cut for the next several years.

But when it comes to the standard deduction, there’s a catch: you can’t take it if you itemize deductions.  So, while the bill doubles the standard deduction, that benefit could be offset for some because of changes to itemized deductions.  This is especially true for those living in high-tax states.

Here are some changes to common itemized deductions3:

  • Mortgage interest: Currently, people can deduct up to $1 million on mortgage interest payments for newly purchased homes. That’s still the case for properties purchased before December 15, 2017.  But for homes purchased after that date, you can only deduct up to $750,000.  This includes your primary residence and one additional “qualified residence,” like a cabin or mobile home.
  • State and local taxes: A popular deduction is to write off state and local tax payments from federal tax payments. Originally, the Republican tax plan called for removing this particular tax break altogether, and you may have seen that reported in the news.  This did not sit well with representatives from high-tax states, however, so a compromise was reached.  Now, taxpayers can deduct no more than $10,000 of any combination of state income taxes, local income taxes, and property taxes.
  • Medical expenses: Originally, the House Republicans’ version of the bill would have eliminated all deductions for medical expenses, but the final version is quite different. Currently, you can deduct out-of-pocket medical expenses that exceed 10% of your “adjusted gross income.”  (This is your total gross income minus specific deductions.)  In 2018 and 2019, however, you can only deduct out-of-pocket expenses that exceed 5% of your adjusted gross income.4

In 2020, the deduction reverts to the original level of 10%.4

Date of Effect: January 1, 2018

Expiration: December 31, 2025 for changes to mortgage interest and state/local income tax deductions.  January 1, 2020 for changes to medical expense deductions.

Changes to Deductions – Businesses

One of the most significant provisions in the new bill is how it affects small businesses – specifically “pass-through” businesses.

What is a pass-through business?  Well, for many small business owners, business income is taxed the same as their individual tax rate.  In other words, any business income passes through to the owner to be taxed at the owner’s individual level.  Essentially, this is a way to ensure a business owner doesn’t have to pay income taxes twice.

The new bill allows pass-through businesses to take a 20% deduction on their business income taxes. However, owners of service-oriented businesses (like a doctor’s office) cannot take the deduction unless their taxable income is less than $315,000 (if married) or $157,000 (if single).5

Date of Effect: January 1, 2018

Expiration: December 31, 2025

Changes to the Alternative Minimum Tax

The Alternative Minimum Tax, or AMT, has long been one of the most complex aspects of the tax code.  Enacted in 1969, the AMT was originally designed to prevent the wealthy from using a dizzying array of credits, deductions, and loopholes to avoid taxes altogether.  Over the decades, however, the AMT began hitting those who were already paying a host of other taxes.

Calculating what amount people actually pay is a complex process, and the new bill doesn’t change that.  What does change, however, is the threshold at which people are exempt.  For individuals, the exemption level increases from $54,300 to $70,300.  For married couples who file jointly, the exemption rises from $84,500 to $109,400.6

For corporations, on the other hand, the AMT is eliminated altogether.  Most industries claim this will help them spend more on research, expansion, and jobs, which would surely be welcome news to investors.

Date of Effect: January 1, 2018

Expiration: December 31, 2025 for individuals and married couples.  For corporations, the elimination of the AMT is permanent.

Changes to the Estate Tax

Long derided as a “death tax” by its detractors, the estate tax is not being abolished, as was originally the case.  The number of people required to pay it, however, will decrease.  Currently, estates passed onto heirs are taxed up to 40%, with exemptions for those with estates worth up to $5.49 million ($10.98 million for married couples).

The new law doubles both levels.4

Date of Effect: January 1, 2018

Expiration: December 31, 2025

Other Changes

The Tax Cuts and Jobs Act is over five-hundred pages long.  As you can imagine, it contains a lot of provisions – far too many to cover in a single letter.  But here’s a quick rundown of some other significant changes4:

  • End of the Individual Mandate: After failing to repeal the Affordable Care Act, also known as Obamacare, earlier in the year, Republicans were nevertheless able to repeal one of the health care law’s signature provisions. The individual mandate, which requires people above a certain income level to buy insurance or pay a penalty, will end beginning in 2019.
  • Boost to the Child Tax Credit: Currently, parents up to a certain income level may claim a $1,000 credit for each child under age 17. Under the new law, this credit rises to $2,000 for both single individuals and married couples making up to $400,000.
  • Moving Expenses and Tax Preparation Deductions: Two more itemized deductions are consigned to the trash bin of history. Starting next year, people can no longer deduct either moving or tax preparation expenses.

What Didn’t Change

Congress debated many provisions that ultimately didn’t make it into the final bill.  These include:

  • Student Loan Deductions: The original House bill eliminated the option of deducting student loans, but the final bill left it untouched.
  • Changes to 401(k) Accounts: At one point, it was rumored that the bill would restrict the amount of pre-tax dollars people could contribute to their 401(k).  In the end, the rules governing 401(k) accounts went unchanged.
  • Capital Gains When Selling a Home: Married couples can deduct up to $500,000 in capital gains when selling their home, so long as they have lived it in for at least two out of the five years before the date of sale. Initial drafts of the bill would have limited this, but the provision escaped unscathed.
  • Selling Stock: When selling shares of a stock or mutual fund, investors can choose which shares to sell. This enables them to sell only those shares that would incur the least in taxes.  The Senate tried to clamp down on this, to no avail.

Final Analysis

Still with me?  Haven’t fallen asleep yet?  At least this letter isn’t as long as the tax bill itself!

To be honest, there really can be no “final analysis” at this point.  Tax experts are still wrestling with many of the bill’s provisions, and it may be months before we know all the consequences, intended or otherwise.

Furthermore, despite the fact President Trump signed the bill into law, plenty of questions remain, including:

  • What happens if Democrats regain control of Congress? Will parts of the law be repealed?
  • What happens by 2026? Will a future Congress extend these tax cuts, or will they be allowed to expire?
  • Will this bill create millions of new jobs and expand economic growth? Or will it merely add millions more to the national deficit?  You can find experts on both sides of the issue.  All I can say is, “Stay tuned.”

Generally speaking, though, the following things are clear:

  1. Most Americans will enjoy a tax cut, at least temporarily.
  2. Most businesses will see a significant reduction in taxes, which could, in theory, stimulate both the markets and the overall economy.

As I said above, this letter is not intended to be a complete, exhaustive breakdown of everything in the Tax Cuts and Jobs Act.  So, here’s what you should do: Write down any questions you may have.  Hear something on the radio that doesn’t make sense?  Write it down.  Read something in the newspaper and want to know what it means?  Write it down.  Then, feel free to contact me with any questions.  As always, I’ll do my best to answer them.  If I can’t, I’ll direct you to a tax professional who can.

Taxes are a loaded topic, and it’s impossible to predict exactly what the future holds.  That’s why my team and I will continue to examine both the new tax code and the markets, so we can keep you informed about any potential issues or opportunities.

As always, remember that we at Schwartz Financial are here to help you work toward your financial goals.  Please let us know if there’s ever anything we can do.

Sources

1 Rob Berger, “The New 2018 Federal Income Tax Brackets & Rates,” Forbes, December 17, 2017.  https://www.forbes.com/sites/robertberger/2017/12/17/the-new-2018-federal-income-tax-brackets-rates/#769a8d28292a
2 Heather Long, “The final GOP tax bill is complete.  Here’s what is in it.” The Washington Post, December 15, 2017.  https://www.washingtonpost.com/news/wonk/wp/2017/12/15/the-final-gop-tax-bill-is-complete-heres-what-is-in-it/?utm_term=.0c659bee9706
3 Ron Lieber and Tara Siegel Bernard, “What’s in the Tax Bill, and How It Will Affect You,” The New York Times, December 16, 2017.  https://www.nytimes.com/2017/12/16/your-money/tax-plan-changes.html?_r=0
4 Toby Eckert and Aaron Lorenzo, “What’s in the new tax bill,” Politico, December 14, 2017.  https://www.politico.com/interactives/2017/whats-in-the-new-tax-bill/
5 Michael Rapoport, “What the Tax Bill Means for Pass-Through Business Owners,” The Wall Street Journal, December 19, 2017.  https://www.wsj.com/articles/what-the-tax-bill-means-for-pass-through-business-owners-1513720953
6 Jeanne Sahadi, “What’s in the GOP’s final tax plan,” CNN Money, December 22, 2017.  http://money.cnn.com/2017/12/15/news/economy/gop-tax-plan-details/index.html?iid=EL
7 “Standard Deduction at a Glance,” Internal Revenue Service, https://www.irs.gov/credits-deductions/individuals/standard-deduction-at-a-glance

 

Schwartz Financial ­Weekly Commentary 12/11/17

The Markets

“It’s the hap- happiest season of all.”

While holidays don’t make everyone happy, investors should be feeling festive. The Standard & Poor’s 500 Index is up more than 18 percent year-to-date. The Dow Jones Global ex U.S. Index is up about 21 percent year-to-date (refer to the table), and Treasury bond yields are lower than they were at the start of the year.

In addition, the CBOE Volatility Index (VIX), a measure of how unpredictable investors expect the S&P 500 Index to be over the short-term, finished the week below 10. A low VIX reading means investors expect calm markets through the end of the year.

Some are wary of the optimism that pervades markets, though. Barron’s wrote:

“In fact, everything’s going well right now – really well…The Citigroup U.S. Economic Surprise Index – a metric designed to measure the extent to which economic data have been beating or missing expectations – is near its highest level since January 2014, a sign of just how smoothly everything’s been going. The problem is that once the data have been surprising by this much, for this long, it gets hard for good news to provide much more of a boost…”

There was a disappointing piece of economic news last week concerning wages. Unemployment has fallen to a 17-year low (4.1 percent), and unemployment in the manufacturing sector is at 2.6 percent, an all-time low. It appears demand for labor is high and supply is low. That should translate into higher wages, but it hasn’t yet. Average hourly earnings are up 2.5 percent year-on-year. That’s an improvement on October, but not much of one.

A lot of folks are scratching their heads wondering when inflation is going to move higher. The Fed has been expecting it to happen for a while. Maybe 2018 will be the year.

Data as of 12/8/17 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 0.4% 18.4% 18.0% 8.8% 13.3% 5.8%
Dow Jones Global ex-U.S. 0.0 21.0 20.8 4.1 4.7 -0.8
10-year Treasury Note (Yield Only) 2.4 NA 2.4 2.3 1.6 4.2
Gold (per ounce) -2.0 7.9 6.8 1.6 -6.1 4.5
Bloomberg Commodity Index -2.9 -4.0 -4.1 -9.2 -9.9 -7.2
DJ Equity All REIT Total Return Index -9.5 -1.1 -0.1 3.8 8.3 5.7
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

Are you concerned about human obsolescence? Researchers from the University of Oxford and Yale University asked experts at several artificial intelligence (AI) conferences how long it would be before machines became better than humans at various tasks. The answers weren’t encouraging.

Overall, researchers think there is a 50 percent chance that AI will outperform humans at all tasks within 45 years. They also said it’s possible many jobs humans do now will be automated within 120 years. Asian survey participants expect the change to happen more quickly than North American participants do.

Wondering if this might affect you? Here are a few of the time frames as determined by averaging survey participants’ answers. Machines may be better at:

  • Translating languages by 2024
  • Writing high-school essays by 2026 (Would this be cheating?)
  • Driving trucks by 2027
  • Working in retail by 2031
  • Writing bestselling books by 2049
  • Working as surgeons by 2053

While the idea of human employment prospects becoming more limited is disturbing, there is still time to capitalize on shorter-term opportunities. For example, eSports is a booming industry. FactSet reported, “Last year’s League of Legends World Championship sold out the Los Angeles Staples Center in less than an hour…an additional 43 million tuned in online – for context, the 2016 NBA Finals Game 7 broke records with 30 million viewers…” The League of Legends champions took home about $1.5 million in 2017.

If you can’t picture yourself encouraging your loved ones to spend hours playing video games, perhaps an online or bricks and mortar eSports store is an option. According to reports from Statista, the eSports market is growing 40 percent year-over-year globally and is expected to generate about $1.5 billion by 2020.

Weekly Focus – Think About It

“Gamers always believe that an epic win is possible and that it’s always worth trying, and trying now. Gamers don’t sit around.”

–Jane McGonigal, American game designer and author

Value vs. Growth Investing (12/8/17)

Name 1-Week YTD 4-Week 13-Week 1-Year 3-Year 5-Year
US Market 0.30 20.35 2.51 8.36 19.74 10.97 15.62
US Core 0.35 20.43 2.53 7.71 20.40 10.66 16.34
US Growth 0.14 28.26 1.39 7.61 26.89 11.96 16.16
US Large Cap 0.40 21.63 2.30 8.17 21.85 11.22 15.69
US Large Core 0.44 21.99 2.05 7.09 22.91 11.00 16.81
US Large Growth 0.33 29.86 1.31 7.46 29.16 12.57 16.70
US Large Val 0.43 13.70 3.68 10.05 14.03 10.05 13.60
US Mid Cap 0.20 18.23 3.03 8.69 15.76 10.40 15.71
US Mid Core 0.31 18.67 3.59 9.07 16.49 9.88 15.42
US Mid Growth -0.28 24.47 1.60 7.71 21.66 9.94 14.57
US Mid Val 0.64 11.70 4.05 9.37 9.23 11.34 17.13
US Small Cap -0.45 13.65 3.24 9.44 10.74 9.96 14.51
US Small Core -0.44 11.41 4.06 9.72 8.88 10.01 14.60
US Small Growth -0.67 22.61 1.62 8.96 19.07 11.23 14.98
US Small Val -0.21 7.28 4.24 9.68 4.59 8.56 13.88
US Value 0.43 12.85 3.78 9.89 12.35 10.23 14.35
 ©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

 Office Happenings:

12 Smart Planning Moves to Consider as Tax Reform Looms

It’s hard to believe, but another year is almost behind us. With January just around the corner, now is a great time to review various items you may want to consider as you get set to enter 2018. Many of the IRS publications referenced below are for tax year 2016. Changes are not anticipated when 2017 guides are published.

Before we get started, let me stress that it is my job to assist and help you! I can’t overemphasize this, and I would be happy to review the options that are best suited to your situation. When it comes to tax matters, I recommend you check with your tax advisor.

Right off the bat, let’s talk about what’s on everyone’s mind–tax reform.

  • Sweeping changes in the tax code were supposed to be enacted much earlier in the year, but Congress has been preoccupied with health care. Instead, changes appear to be in the pipeline for 2018.

Both the House and Senate have passed their respective versions of tax reform. The House and Senate will now convene a conference–a give-and-take session that is designed to craft a single bill that must then be approved by each chamber. Only then can the President sign the legislation, which will usher in a new tax code.

 That said, how we file for tax year 2018 may differ from how we file for tax year 2017.

 For example, will the alternative minimum tax (the AMT) be wiped from the tax code? Will Congress kill the estate tax?

Both the Senate and House proposals make few, if any, changes to retirement accounts, but we could see tweaks in a final bill.

Personally, I’m encouraged that the House and Senate have yet to materially alter the tax treatment for retirement accounts and the favorable treatment dividends and capital gains receive.

However, I should point out that the Senate bill changes the way we would account for capital gains, i.e., a first-in, first-out method to calculate gains when a stock is sold. That said, I’m reluctant to speculate how these key categories may emerge if tax reform is signed into law.

Investment and financial planning

  • Is it time to rebalance your portfolio? Changes in the market can cause your asset allocation to shift. As we head into the homestretch, we’ve witnessed strong gains in stocks this year, both domestic and international. Year-end is a great time to review your portfolio and make any necessary adjustments.

Typically, I would counsel that profits should be taken next year, pushing the tax burden into tax year 2018.

But I must caution that there is an outside possibility the final version that may land on the President’s desk could produce changes in how capital gains are treated.

  • Review your income or portfolio strategy. Are you reaching a milestone in your life such as retirement or a change in your circumstances? Has your tolerance for taking risk changed? If so, this may be just the right time to evaluate your approach.

However, let me caution about making changes based simply on market performance.

One of my goals has always been to remove the emotional component from the investment plan. You know, the one that encourages investors to load up on stocks when the market is soaring and to sell when stocks have taken a beating.

We know that markets rise and fall. I get that declines can be unnerving, I really do. Yet over the long term, markets rise much more than they fall.

While stocks have been on a record run, it’s a good time for me to once again remind you that a disciplined approach that avoids emotional decisions has historically been the shortest path to reaching one’s financial goals.

I know I’ve said this before, but it is a key principle for successful investing.

  • Take stock of changes in your life and review insurance and beneficiaries. Let’s be sure you are adequately covered. At the same time, it’s a good idea to update beneficiaries if the need has arisen.

Tax planning in the context of possible changes in the tax code

  • Tax loss deadline. You have until December 31, 2017 to harvest any tax losses and/or offset any capital gains. But be careful. There are distinctions between short- and long-term capital gains, and you must be aware of wash-sale rules (IRS Publication 550) that could disallow a capital loss.
  • This brings us to mutual funds and taxable distributions. This is a topic best discussed by using an example: If you buy a mutual fund on December 18 and it pays a dividend and capital gain December 20, you will be responsible for paying taxes on the entire distribution, even if the capital gains and dividends collected by the fund occurred throughout the entire year.

Yet, following the distribution, the net asset value of the fund will fall by the amount of the payout. Put another way, your investment in the fund remains the same. It’s a tax sting that’s best avoided. Therefore, it is usually a good idea to wait until after the annual distribution to make the purchase.

  • Required minimum distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70½, regardless of whether he or she is retired (IRS Retirement Plan and IRA Required Minimum Distributions FAQs).

The first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of that year.

The RMD rules also apply to 401(k), profit-sharing, 403(b), 457(b) or other defined contribution plans as well as SEP IRAs and Simple IRAs.

Don’t miss the deadline or you could be subject to steep penalties!

  • Contribute to a Roth IRA. A Roth gives you the potential to earn tax-free growth (not just deferred tax-free growth) and allows for federal tax-free withdrawals if certain requirements are met. There are income limits, but if you qualify, you may contribute $5,500, or $6,500 if you are 50 or older (IRS Retirement Topics–IRA Contribution Limits).

If you satisfy the requirements, qualified distributions are tax-free. You can make contributions to your Roth IRA after you reach age 70½ and there are no requirements to take mandatory distributions.

You may also be eligible to contribute to a traditional IRA, and contributions may be fully or partially deductible, depending on your circumstances. The same contribution limit that applies to a Roth IRA also applies to traditional IRAs. Total contributions for both accounts cannot exceed the prescribed limit.

You can make 2017 IRA contributions until April 17, 2018 (Note: statewide holidays can impact final date).

  • Consider converting a traditional IRA to a Roth IRA. There are a number of items you may want to consider, including current and future tax rates as well as the potential for tax reform, but if the situation is right, it can be advantageous to convert to a Roth IRA.
  • College savings. Tax reform looms large over college savings accounts. A limited option, called the Coverdell Savings account (IRS Publication 970) gets the ax in the House bill. The Senate bill maintains the status quo, according to the Senate Finance Committee document, “Tax Cut and Jobs Act and College Access.”

Currently, total contributions for a beneficiary cannot exceed $2,000 in any year. Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual’s modified adjusted gross income for the year is less than $110,000. For individuals filing joint returns, the amount is $220,000. Contribution limits get phased out after hitting the respective limits.

If reform passes, the House proposes that Coverdell Savings Accounts be converted into 529 plans. A 529 plan allows for much higher contribution limits, and earnings are not subject to federal tax when used for the qualified education expenses of the designated beneficiary. Contributions, however, are not deductible.

  • Achieving a Better Life Experience (ABLE) account. This is a savings account for individuals with disabilities and their families. For 2017, you can contribute up to $14,000. Distributions are tax free if used to pay the beneficiary’s qualified disability expenses, which may include some education expenses (IRS Publication 907, Fidelity—ABLE).
  • Charitable giving. Whether it is cash, stocks, or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income.  Did you know that you may qualify for what’s called a “qualified charitable distribution (QCD)?”  A QCD is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity (“Rules to Do an IRA Qualified Charitable Distribution”–www.kitces.com). The IRA owner must be at least 70½ when the distribution is made.

You might also consider a donor-advised fund. Once the donation is made, you can realize immediate tax benefits, but it is up to the donor when the distribution to a qualified charity may be made.

Regards,

Michael L. Schwartz, RFC®, CWS®, CFS

P.S.  Please feel free to forward this commentary to family, friends, or colleagues.  If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.

Michael L. Schwartz, RFC, CWS, CFS, a registered principal offering securities and advisory services through Independent Financial Group, LLC., a registered broker-dealer and investment advisor.  Member FINRA-SIPC. Schwartz Financial and Independent Financial Group are unaffiliated entities.

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