February 20, 2019
Sarah D. Buenger, MPAS®, MSPFP, CFP®
Director of Financial Planning
The true impact of tax reform varies by family and will continue to be revealed through the 2019 tax filing deadlines. At first glance, some families do not experience a tax reduction at all, but rather, an increase under the new laws. For example, a family of 5 with $14,000 in itemized deductions will lose $20,250 in personal exemptions and the $14,000 in itemized deductions while picking up $24,000 in standard deduction and $6,000 in new child tax credits for a net INCREASE to taxable income upon which the credit is taken. The overall impact is a tax increase, not tax savings as is broadly publicized.
The Fidelity article referenced in our newsletter does provide a nice summary of the actual impact of tax reform for retirees, age 65 or older, who are already drawing Social Security. Notably, the overall impact to retirees will be an increase in the use of the standard deduction. However, instead of blindly taking the standard deduction, it is still well worth the effort to utilize tax strategies like bunching itemized deductions every other year.
Carrying on with example two from the Fidelity article, if the fictional couple with itemized deductions worth $18,000 were to implement a bunching strategy, they could essentially shift the timing of their itemized deductions so that they can do standard in 2018, itemized in 2019, standard in 2020, and so on. Examples of ways to do this follow:
These are just a few examples that could allow our fictional couple to take the standard deduction for $26,600 in one year then potentially as much as $36,000 itemized deductions in the bunching year. In summary, it is still worth the tax planning to try to itemize. Before implementing any of the methods discussed above it is recommended that you have a conversation with your tax professional and financial advisor to be sure the strategies are beneficial to your specific situation.
In case you missed the e-mail, check out our TWA January E-Newsletter featuring a spotlight on our team member, Sarah Buenger and personal finance resolution tips!
Brien, Kathy, Kellie, Chris, Katie, and baby Jack attended the In My Shoes charity trivia night on February 2nd. Unfortunately, their team did not win this year (they won last year!). A good time was had by all for a good cause. To find out more about In My Shoes, a home for homeless pregnant women, visit www.liveinmyshoes.org
Brien and 2 student interns, Raoul and Spencer, represented Traditions Wealth Advisors at the Business Student Center Career Fair at Texas A&M University on January 30th. They spoke with many Aggies and collected resumes for student intern position opening for the 2019-2020 school year.
Brian Prescott and Spencer Fredericks (current Financial Analyst Interns at Traditions Wealth Advisors) pitch the internships to candidates for next year at the recent BSC Career Fair.
By: Brien L. Smith, CFP and Brian Prescott, Financial Analyst Intern/TWA
For the last decade the United States stock market has experienced unparalleled levels of calmness. That was until the early days of February when that peace was disrupted. This disruption can largely be attributed to a surprise increase in inflation and Federal Reserve interest rate increases. Nonetheless, financial markets quickly absorbed the new information and prices stabilized. However, as 2018 has progressed two problematic topics have dominated headlines, the US-China Trade War and the Yield Curve.
The stock and bond markets hate many things, however, the thing hated above all is uncertainty. They hate uncertainty in future prices, future policy, and future economic conditions. It is this uncertainty that can cause prices to fluctuate drastically. This brings us to the US-China Trade War which economists nationwide predominately agree; is not good. The biggest reason is that it will not only produce uncertainty in future policy, but also in future prices. Investors in the market do not know the extent that companies will be affected or how long the trade war will last. To date the price fluctuations associated with our trade war news has been minor but notable. However, if the trade war fully escalates then greater price fluctuations should be expected. Fortunately, that is a big if. But, should it come to fruition the prevailing expectation is that nobody will win the trade war, and American consumers will be the most damaged.
Additionally, another persistent headline this year has been the tightening of the interest rate yield curve. In other words, the interest rates between short-term and long-term bonds are almost equal. This is of great importance since historically when long-term interest rates are less than short-term rates a recession usually follows. However, just because the rates are almost equal does not mean that a recession is impending immediately. During the late 1960’s, late 1980’s and late 1990’s the economy saw interest rates tighten but then stay at those levels for many years of growth. This tightening is merely a signal that the economy is shifting but not that the expansion is over. Moreover, all recessions are not created equal and even if long-term interest rates drop below short-term rates it does not mean the next Great Recession will be upon us.
It is evident that the financial markets and economy have shifted into a mid-late expansion phase, possibly even a pure late expansion phase. Historically, surges in technology stock returns have implied a complete shift into the late expansion phase. At the time of this newsletter Facebook, Apple, Amazon, Netflix, Google, and Microsoft stock returns accounted for 4.31% of the S&P 500’s 4.97% return. In other words, six technology companies are carrying the S&P 500 index. Additionally, another good predictor of our current expansion phase is the unemployment rate. Which given our current incredibly low rate of 4% further implies a shift into the pure late expansion phase.
Therefore, we can infer that perhaps the markets are in a pure late expansion phase. Does this mean the we are about to hit a recession? The short answer is, not necessarily. Just because our expansion has lasted a long time does not imply that an immediate recession is more probable. Recessions do not happen on their own, they need a spark. It is true that the spark could be a trade war or interest rates. However, it is equally true that these could be minor bumps on the road to continued years of strong growth. Thus, recession predictions should be taken with a grain of salt and examined carefully.
By Ricardo Alonzo-Zaldivar and Andrew Taylor AP BCS EAGLE Wednesday , June 6, 2018.
Medicare will run out of money sooner than expected, and Social Security's financial problems can't be ignored either, the government said Tuesday in a sobering check upon the programs vital to the middle class.
The report from the program trustees says Medicare will become insolvent in 2026--three years earlier than previously forecast. It's giant trust fund for inpatient care wont be able to fully co
ver projected medical bills starting at that point.
The report says Social Security will become insolvent in 2034--no change from the projection last year.
The warning serves as a reminder of the major issue to languish while Washington plunges deeper into partisan strife. Because of the deterioration in Medicare's finances, official said the Trump administration will be required by law to send Congress a plan next year to address the problems, after the president's budget is submitted.
Treasury Secretary Steven Mnuchin said in a statement that there is time to fix the problems. "The programs remain secure," Mnuchin said, Medicare "is on track to meet it obligations to beneficiaries well into the next decade."
"However, certain long-term issues persist," the statement added. "Lack luster economic growth in previous years coupled with an aging population, has contributed to the projected shortages for both Social Security and Medicare."
Social Security recipients are likely to see a cost of living increase of about 2.4% next year, said government number crunchers who produced this report. That works out to be about $31. a month.
At the same time, the monthly Medicare "Part B" premium for out-patient care paid by most beneficiaries is projected to rise by about $1.50-$135.50.
Both the cost-of-living increase and the Medicare outpatient premium are not determined until later in the year, and the initial projections can change.
More than 62 million retirees, disabled workers, spouses and surviving children receive Social Security benefits. The average monthly payment is $1,294 for all the beneficiaries Medicare provides health insurance for about 60 million, most of whom are age 65 and older. Together the two programs have been credited with dramatically reducing poverty among older people and extending life expectancy for Americans. Financed with payroll taxes collected from workers of employed, Social Security and Medicare account for about 40 percent of the government spending, excluding interest on the federal debt. But demands on both programs are increasing as America ages.
Unless lawmakers act, both programs face the prospect of being unable to cover the full cost of the promised benefits. With Social Security that could mean sharply reduced payments on tight budgets. The report says that the total annual cost of Social Security is projected to exceed total annual income for the first time since the Reagan era, meaning the program will have to tap into reserves.
For Medicare, insolvency would mean the hospitals, nursing homes and other provides of medical care would be paid only a part of their agreed upon fees.
Medicare is widely seen as a more difficult problem that goes beyond the growing number of baby boomers retiring. It is also unpredictability of health care costs which can be jolted by high priced breakthrough cures, and which regularly outpace the overall rate of economic growth.
Family CFO embraces – and encourages clients to acquire – a financial planning philosophy that was stated in part by George S. Clason, author of The Richest Man in Babylon. In the chapter "Seven Cures for a Lean Purse," Clason describes the seven habits of financially astute people: