How to save $60,000 on your taxes

This week my office helped a local business owner take a large step in saving over $60,000 on his taxes and put it into his retirement plan instead.  Give me a call at 215-886-2122 and we can see how we can help you put money in your pocket instead of the IRS.

Estimated 30 Million to be unhappy at tax time

It is estimated that 30 Million people will not have a happy experience when filing their 2018 tax return as they continue to accept the extra monies that appear in their paycheck that the government caused to happen when they put out new withholding tables after the new tax law. If you filed a new W-4 as we suggested months ago, you should be fine. If not please be prepared to pay the IRS next April.

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