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Congress Provides Certainty to Tax Laws -- For Now

Thu, 09 Oct 2025 16:49:37 GMT

By Anne Christopulos

Ever since tax rates were lowered in 2017, tax planning had to be accompanied by a caveat that the low tax rates established by Congress in 2017 may not continue after 2025. With the passage of the 2025 Budget Reconciliation Bill, we now know that Congress has made the lower tax rates permanent, or as permanent as anything that can be superseded by a future Congress. In addition, there are a variety of additional tax changes that we can now incorporate into our tax planning, although again with a caveat that some may not continue after a few years.

While higher income taxpayers enjoy the largest tax savings in dollar terms, because the lower tax rates are applied to their higher incomes, many senior taxpayers will realize significant tax savings from a new, although temporary, deduction. Also, many taxpayers whose state and local tax (SALT) deduction was capped at $10,000 may benefit from a higher limit; whether they do or not depends on if the higher cap brings their itemized deductions above the standard deduction.

The major losers in the new bill are the renewable energy industry and its proponents. Tax breaks for buying electric vehicles and solar panels, among other clean energy products, are being either reduced, phased out, or eliminated altogether.

Provisions from the 2017 bill made permanent or modified

The current tax brackets, lowered by the 2017 tax bill, will remain in place. All brackets, except the highest bracket (37%), will be inflation-adjusted after 2025. In 2026, there will be an extra year of inflation for the brackets below 24%.

The higher standard deduction instituted in the 2017 bill, together with the elimination of the personal and dependent exemptions, remain in place. Starting this year, the standard deduction has been boosted by $1,500, in addition to the inflation-adjusted amounts already scheduled.

The child tax credit increases to $2,200 per child under 17 and is made permanent, adjusted for inflation each year. It phases out for incomes above $200,000 (single) and $400,000 (joint filers). Both the child and the taxpayer now must have a Social Security number.

Beginning in 2026, the child and dependent care credit will increase from 35% to 50% of claimed qualifying expenses for lower-income taxpayers. The credit begins to reduce when Adjusted Gross Income exceeds $15,000, but will not fall below 20% regardless of income. The maximum amount of claimed expenses allowed is $3,000 (one child) and $6,000 (two or more children).

The 20% Qualified Business Income (QBI) deduction has been permanently extended, and the phase-in threshold, where the deduction begins to decline, will increase from $50,000 of taxable income in 2025 to $75,000 in 2026 for single filers, and from $100,000 to $150,000 for joint filers. Also, there is now a minimum $400 QBI deduction for anyone with at least $1,000 in QBI.

The higher estate and gift tax exemption will basically remain in place and is set at $15 million per individual beginning in 2026. It will be inflation-adjusted in subsequent years.

The cap on the State and Local Tax (SALT) deduction has been raised from $10,000 to $40,000. However, the $40,000 cap is reduced by 30% of each dollar over $500,000 in adjusted gross income (AGI) with a $10,000 floor. For example, if AGI is $600,000, the cap is reduced by $30,000 (30% x $100,000), bringing it back to $10,000. Taxpayers with AGI above $600,000 will still be able to deduct $10,000 in SALT. In 2030, the cap will be back to $10,000 for everyone, unless extended by Congress.

New tax provisions

There is a new $6,000 per person deduction for people 65 and older whose income falls below certain limits. The deduction phases out by 6 cents for every dollar over Modified Adjusted Gross Income (MAGI) of $75,000 for single filers and $150,000 for joint filers. It is scheduled to end after 2028, but some experts predict it will be extended beyond that year due to political pressure. (The existing $2,000 addition to the standard deduction for single filers and the $1,600 per person addition for married filers are still in place for people over 65.)

Starting in 2026, taxpayers who use the standard deduction and do not itemize will be able to deduct up to $1,000 (single)/$2,000 (joint filers) in charitable contributions. The contributions must be direct cash gifts to qualifying charitable organizations and not to donor-advised funds or private foundations. In addition, there will be a 0.5% income threshold for itemizers, meaning that deductible contributions will be reduced by 0.5% of the taxpayer’s contribution base, which for most people is their Adjusted Gross Income.

The tax benefit on itemized deductions for taxpayers in the 37% tax bracket will be limited to 35%, rather than 37%. This will be accomplished by reducing the total by 2/37, with an adjustment for taxable income that straddles the 35%/37% brackets.

A new deduction of up to $10,000 was created for auto loan interest for certain vehicles, and it is available to non-itemizers. The vehicle must be for personal use and assembled in the US. The deduction is phased out by $200 per $1,000 of Modified Adjusted Gross Income over $100,000 (single filers)/$200,000 (joint filers). This deduction expires after 2028.

There are now deductions for · qualified tip and overtime income that can be used whether deductions are itemized or not. The limit on tips that can be deducted is $25,000. The limit on overtime income is $12,500 and overtime income is defined as “overtime excess” payment, which means… Both deductions phase out above $150,000 (single)/$300,000 (joint) in Modified Adjusted Gross Income and are in place for the tax years 2025-2028 only.

Energy efficiency credits for EVs, hybrids, charging, and energy efficient home improvements under the Inflation Reduction Act will end for property placed in service after 2025. Energy efficient credits for home improvements, such as solar panels, made in 2025 can still be claimed on 2025 tax returns (i.e. filed in 2026), but this will be the last year they are available. The clean vehicle credit for electric vehicles purchased before September 30, 2025, may still be eligible for a clean vehicle credit up to $7,500 for a new EV or $4,000 for a used EV.

100% of expenses for business equipment are now permanently allowed to be written off if placed into service after January 19, 2025.

A new type of account was created, called the “Trump Account”. The federal government will provide a credit of $1,000 to each child born to an American citizen in the years 2025-2028. Additions of up to $5,000 can be made to the account by parents, or others, each year. Up to $2,500 (lifetime) can also be added by employers who might want to offer an additional benefit to their employees. The money cannot be withdrawn until the child reaches age 18, after which the account follows distributions rules in place for Traditional IRAs, which allow penalty-free (but not tax-free) withdrawals, within dollar limits, for certain purposes before age 59 ½, including education and a first-time home purchase. The money must be invested in a diversified fund that invests in mostly US-based companies. The accounts will not be available until 2026.

There are many other provisions in the bill, but the above list includes most that may be applicable to individual taxpayers.

Investing for Newborns

Parents and grandparents of newborns may be wondering whether they should save for their child’s education in a Trump account rather than a 529 account, a college savings program that was created in 1996 and is administered by each state. To answer that question, we can look at one basic difference between the two types of accounts.

With a 529, there are no income taxes on the withdrawals, as long as the money is used to cover qualifying expenses for education. Also, annual contributions are allowed up to the gift tax exclusion ($19,000 in 2025), with a lifetime cap in most state plans of at least $300,000.

With a Trump account, once the child reaches age 18, the account, in essence, becomes a non-deductible Traditional IRA. Earnings are tax-deferred and become taxable upon withdrawal. (Contributions, which are made after-tax, are, of course, not taxed when withdrawn.) After the $1,000 initial gift from the government, annual contributions are limited to $5,000, indexed for inflation.

There are many other differences, too. For example, with 529 accounts there are a variety of options for investing the money, which vary according to each state’s plan. With a Trump account, the money must be invested in a broadly diversified fund comprised of the stocks of mostly US companies until age 18.

The bottom line is that a 529 plan account is specifically for education, while a Trump account is a savings account that can give a child a head start on saving for retirement.

If you have any questions about taxes or other topics, reach us anytime at (833) 888-0534 x2 or info@westbranchcapital.com

The views and information contained in this article and on this website are those of West Branch Capital LLC and are provided for general information. The information herein should not serve as the sole determining factor for making legal, tax, or investment decisions. All information is obtained from sources believed to be reliable, but West Branch Capital LLC does not guarantee its reliability. West Branch Capital LLC is not an attorney, accountant or actuary and does not provide legal, tax, accounting or actuarial advice.

What is Estate Planning?

Wed, 20 Aug 2025 15:24:21 GMT

Estate planning is the process of preparing for the management of your affairs in case of incapacity and upon your death. It involves identifying suitable people to make decisions regarding your health care and finances if you become incapacitated and to facilitate your postmortem affairs after your death, as well as arranging for distribution of assets to your intended beneficiaries in an orderly and tax-efficient manner.

An estate plan typically includes creating the following documents:

A Health Care Proxy appointing an agent to make decisions regarding medical treatments.

A Living Will stating your preferences and wishes regarding medical treatments to provide guidance for your health care agent making decisions on your behalf, especially if you are facing life-threatening conditions.

A Durable Power of Attorney appointing an agent to manage your financial and legal matters.

A Last Will and Testament nominating a personal representative (aka “executor”) to administer your estate, including paying your debts and taxes and marshaling and distributing assets to your beneficiaries.

Beneficiary forms designating assets that pass outside the Last Will and Testament (e.g., life insurance policies and retirement plan death benefits).

Your personal circumstances and goals may require additional planning considerations and strategies:

Minor children. If you have a minor child, you need to nominate a guardian who will take responsibility for decisions regarding your child’s custodial care and educational, medical, and social welfare; moreover, you need to arrange for proper management of your child’s inheritance, which commonly involves establishing a trust—an arrangement in which you entrust your child’s inheritance in the name of a person or entity (called a “trustee”) to invest and distribute for your child’s benefit until your child attains the age of majority and is also mature and ready to receive the inheritance outright.

Beneficiaries with special needs . If you have an adult child living with a disability, your estate plan should address your child’s lifelong needs for advocacy, protection, and services and include a trust for proper management and use of the inheritance in your child's best interest.

Blended families . One out of two families is a blended family. This common situation requires thoughtful planning about who acts on behalf of aging parents and how best to provide for the surviving spouse and for children from a prior marriage.

Special assets . If you own intellectual property, expensive artwork, musical instruments, antiques, collectibles, firearms, pets (especially horses) and livestock animals, or assets located in other countries, you need to prepare enhanced instructions regarding valuation, care and handling, and disposition of these assets.

Family-owned or closely held businesses . Most companies in the United States are family- owned or closely held businesses. For owners of these businesses, their most valuable assets are their business interests, which means incapacity and death significantly affect the continuity and success of their enterprise. Careful succession planning is an essential part of estate planning for business owners.

Wealth-transfer taxes . Passing on your assets at death can trigger various types of wealth- transfer taxes (federal estate and generation-skipping transfer taxes and state estate and inheritance taxes), depending on the value of your estate, who inherits your wealth, and the state of your residence at death. Estate planning is an opportunity to evaluate the impact of taxes on your family and your business to implement strategies that can mitigate the burden, including making gifts during your life and incorporating charitable legacies. For proper tax planning, you need to enlist a team of professionals (investment advisors, appraisers, accountants, and attorneys) to advise you about your options and their risks and benefits.

When it comes to estate planning, there is no one-size-fits-all solution, and it is too important and consequential to you and your family and business to attempt it on your own without proper advice and legal drafting. A well-designed estate plan tailored to your personal needs and goals can alleviate the stress and challenges you and your family will experience in times of uncertainty and grief.

If you do not have an estate plan and need help getting started, West Branch Capital can recommend an experienced trusts-and-estates attorney to work with you and your family.

Reach us at (833) 888-0534 x2 or send a message to info@westbranchcapital.com

Disclaimer: The information provided in this guide does not, and is not intended to, constitute legal advice. All information in this guide is for general informational purposes only. Information in this guide may not include the most up-to-date relevant information. Readers of this guide should contact their attorney in the relevant jurisdiction to obtain legal advice with respect to any particular legal matter and should refrain from acting on the basis of information in this guide without first seeking legal advice from counsel in the relevant jurisdiction. West Branch Capital is not liable for any direct, indirect, legal, equitable, special, compensatory, incidental, or consequential damages of any kind whatsoever arising from access to, use of, or reliance upon the information in this guide. All liability with respect to actions taken or not taken based on the contents of this guide is hereby expressly disclaimed.

Source: Outside Counsel

Building Your Financial Compass with West Branch Capital on Empowered with Meg Ryan

Tue, 25 Mar 2025 19:45:40 GMT

FORT LAUDERDALE, Fla., March 25, 2025 /PRNewswire/ -- Discover how to chart a course for financial wellness and impactful investments on a program designed to illuminate paths to personal empowerment.

Public Television viewers will gain valuable insights into their financial future in an upcoming segment featuring West Branch Capital on Empowered with Meg Ryan. This segment addresses the common challenges individuals face in understanding financial complexities and highlights the role of a fiduciary

investment advisor in setting a course for financial wellness. The segment will examine how West Branch Capital guides clients through various life stages, emphasizing the importance of informed decision-making and long-term planning.

"West Branch Capital is delighted to have the opportunity to provide educational materials on Empowered with Meg Ryan – this program has a savvy audience and we are excited to provide insights that can help viewers turn complex questions into action items," stated Ayaz Mahmud, CEO and Founder of West Branch Capital.

The segment will delve into the critical aspects of financial planning, including:

Understanding Fiduciary Responsibility: Learning how to identify a fiduciary investment advisor and the legal obligations they uphold.
Demystifying Financial Jargon: Explaining the differences between fee-only and commission-based financial professionals, and the importance of conflict-of-interest disclosures.
Building a Solid Financial Foundation: Exploring the power of compounding, tax-efficient savings strategies, and the significance of retirement accounts like IRAs and 401(k)s.
Safeguarding Financial Health: Addressing cybersecurity concerns, protecting credit ratings, and the necessity of comprehensive estate planning.
Holistic Investment Strategies: Understanding how to balance diverse investment vehicles like stocks, bonds, and real estate to set personalized financial goals.
Risk Management and Budgeting: The importance of insurance, controlling expenses, and establishing realistic financial targets.

This segment underscores the importance of proactive financial planning and the benefits that come from working with a fiduciary investment advisor.

About Empowered with Meg Ryan:

Empowered is a Public Television program hosted by Meg Ryan that focuses on inspiring stories and educational content that empower viewers to make informed decisions about their lives and communities. The program aims to provide valuable insights into various topics, fostering a sense of empowerment and understanding.

About West Branch Capital:

West Branch Capital is a fee-only, investment adviser firm registered with the U.S. Securities and Exchange Commission (SEC). Committed to providing comprehensive financial planning and investment management services, they prioritize their clients' best interests by acting as fiduciaries, offering transparent advice and personalized strategies to achieve long-term financial wellness. Learn more at: https://www.westbranchcapital.com/

View original content: https://www.prnewswire.com/news-releases/building-your-financial-compass-with-west-branch-capital-on-empowered-with-meg-ryan-302405093.html

Trump Tariffs 2.0 -- A Bump in the Road for Equities?

JLong@westbranchcapital.com (Joan Long) — Fri, 31 Jan 2025 18:54:25 GMT

Tariffs are worthy of some attention because they can be impactful for the economy ...

By Ian Mahmud, Principal

On Truth Social after the election, then President-elect Trump said he would implement 25% tariffs on all products from both Canada and Mexico on “Day 1.” Trump more recently committed to a 10% tariff on all Chinese products sold in the United States. Trump commented to a reporter in the Oval Office that tariffs may be implemented “February 1.”

Tariffs are worthy of some attention because they can be impactful for the economy and because they can be enacted via executive order. Many economists and journalists have examined the potential impact of a 25% tariff on all products from Canada and Mexico, coupled with a 10% tariff on all products from China. The Washington DC based Tax Foundation, for example, estimates that the tariffs on Canada, Mexico and China would reduce long-run U.S. GDP by 0.4% (0.3% from the Mexico / Canada tariffs and 0.1% from the tariffs on China). Their analysis excludes the impact of any potential retaliatory tariffs.

However, we believe reviewing Trump’s tariffs from his last presidency is perhaps more helpful in understanding what may happen next and evaluating the potential impact on US equity markets. The tariffs during Trump’s first term focused on products from China and on steel and aluminum products from many countries.

China Tariffs : In March 2018, the Trump administration pursued tariffs on targeted products from China, including a tariff of 25% on up to ~$60bn in products. In September 2018, a 10% tariff was placed on an additional ~$200bn in products. In May 2019, the 10% tariff was increased to 25%. Over the following months, the administration continued to expand the number of targeted products and aimed to increase tariff rates. However, by December 2019, a “Phase One” trade deal was reached with China wherein many contemplated tariff increases were not implemented.

Steel and Aluminum Tariffs : In March 2018, a 25% tariff was implemented for all steel imports and 10% for all aluminum imports. Many countries were given exemptions from the tariff. Later in 2018, additional exceptions and tariff reductions were given. Australia was fully exempt and a quota system (rather than a blanket tariff) was implemented for steel products from Brazil and South Korea. A quota system was implemented in place of a tariff on aluminum products from Argentina. In May of 2019, the administration lifted all steel and aluminum tariffs from Canada and Mexico. Subsequently, there was some expansion in scope of these tariffs and tariffs on Canada were briefly re-imposed before being lifted again.

Stock Market Performance : The stock market did not perform well in 2018. For the year, the S&P 500 declined by 6.2% (excluding dividends). Many journalists and Wall Street analysts point to the US tariffs (and the resulting retaliatory tariffs) as an important driver for the market declines. However, we would also observe that the biggest swoon in the market occurred toward the end of 2018 when the Fed increased interest rates by a quarter point. In our view, the rate hiking cycle may have been more impactful for the market than the tariffs and concerns about their impact on GDP growth.

Further, the “Trade War” period can perhaps be best defined as beginning in March of 2018 when the initial China and steel / aluminum tariffs were imposed to the end of 2019 when the “Phase One” agreement was reached with China. By the end of 2019, the more serious escalation of tariffs generally came to a halt. During that time (from March 1, 2018 to December 31, 2019), the S&P 500 rose ~20%.

The implementation of tariffs during Trump’s last presidency was followed by negotiations and reductions in tariffs over time. Many of the tariffs did remain in place. However, tariffs were not far reaching or high enough to severely weaken the U.S. economy. Stocks for the leading U.S. companies were able to perform well, driven by a still growing economy, improving earnings and a more accommodative Fed.

This time around, Trump has said the tariffs would apply to almost all goods from three countries (Canada, Mexico and China), rather than just products sold by targeted industries. However, if history repeats itself, we could see the initial policy position followed by negotiation, de-escalation and reduction in tariffs over time. In the short-run, we might see the stock market react negatively to tariffs and retaliatory tariffs. Beyond that point, we think corporate earnings (which admittedly could be influenced by tariffs), Fed policy and potentially a further reduction in corporate tax rates will be the more important drivers for US equities.

Source: YCharts

If you have any question about tariffs or other topics, reach out any time (413) 256-1225 x2 or info@westbranchcapital.com.

IRS Finalizes 10-Year RMD Rules for Inherited IRAs

Thu, 30 Jan 2025 20:09:35 GMT

The IRS issued final rules in July 2024.

By Anne Christopulos

The Secure Act, which was passed in 2019 and updated in 2022, made major changes to the rules regarding required minimum distributions (RMDs) from retirement plans, including IRAs, 401(k)s, and 403(b)s. Under prior law, non-spouse beneficiaries of a Traditional IRA had the option of “stretching out” distributions over their own life expectancies. With a few, very narrow exceptions, including minor children, the SECURE Act requires most non-spouse beneficiaries to withdraw the entire inherited IRA within 10 years. Of course, a spouse who inherits an IRA will continue to be able to roll over the IRA money to his or her own IRA and treat it as such.

However, it was not clear until July 2024 if a non-spouse beneficiary would be required to make RMDs each year or could wait until the end of the 10-year period to withdraw it all. The IRS issued final rules in July 2024, as follows:

If RMDs had not begun by the original owner, which would be the case if the owner had not yet reached the age of 73 (rising to age 75 in 2033), no distributions are required until the end of the 10-year period. While waiting may be beneficial in maintaining the tax-deferred status of the money for as long as possible, withdrawing a large sum of money in the same year might put the beneficiary in a higher tax bracket.

If RMDs had started, the beneficiary must take at least an annual RMD based on his or her own life expectancy starting in the first calendar year after the date of death and continuing through year 9, using the factor shown in the IRS life expectancy tables. Any remaining money must then be withdrawn by the end of the 10th year. If the original IRA owner died in 2020, 2021, 2022, or 2023, the IRA beneficiary does not have to make up the missed payments, but must start annual withdrawals in 2025 and continue through year 9 of the original ten-year period, then withdraw the rest in year 10. The amount required is determined by using the life expectancy factor from the table and subtracting 1 for each year missed.

In addition to the surviving spouse, there are other exceptions to the 10-year rule:

Beneficiaries who are minor children of the original owner are not initially subject to the 10-year rule, but once they reach the age of 21, the rule applies.

A non-spouse beneficiary who is not more than ten years younger than the original owner or a beneficiary who is disabled or chronically ill can stretch annual withdrawals over their own life expectancy.

Important note: The original owner’s own RMD for the year of death must be withdrawn by the end of that year, if not already taken. If there are multiple beneficiaries, the amount can be split among them, either proportionately or not.

There is a 25% penalty for not making required distributions, which is reduced to 10% if corrected within two years.

If you have questions about Required Minimum Distributions or any other topics, please reach out any time, (413) 256-1225 x2 or info@westbranchcapital.com

The Social Security Fairness Act

Thu, 30 Jan 2025 19:40:14 GMT

Repeal of the Windfall Elimination Provision

By Anne Christopulos

Many state and local employees received a long-desired gift this holiday season—the Social Security Fairness Act, which repealed the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). These rules reduced or, in some cases, eliminated Social Security benefits for nearly three million public sector employees. For many years, public employees in affected states had been seeking reform or repeal of these rules, which were enacted in 1983. The Act passed easily in both the House and the Senate.

Full repeal took even the staunchest advocates by surprise. This is what Mass Retirees CEO Shawn Duhamel said in 2023: “It’s clear that full repeal of WEP and GPO is, at best, a long shot…However, there remains an opening for reform of both WEP and GPO. Even the most fiscally conservative watchdogs agree that the current WEP and GPO formulas are flawed and need to change.”

The rationale for WEP had been to prevent retirees who were eligible for both public pensions and Social Security benefits from taking advantage of the progressivity of Social Security benefit calculations, which replace a higher percentage of career earnings for low-income recipients than for higher-income recipients. Typically for public employees who also worked enough at other jobs to qualify for Social Security, their lifetime earnings from those other jobs were at a level that made them look like lower-income workers, thus resulting in a higher wage replacement rate on those earnings. Under the WEP, a lower replacement rate was applied instead.

While the WEP applied to a government employee’s own work record, the GPO affected a government worker whose spouse earned Social Security benefits. It reduced the spousal benefit by two-thirds of the amount of their government pension and sometimes eliminated it altogether. The rationale for the GPO was that spousal Social Security benefits were designed to provide income to dependent or low-earning spouses, not to a spouse with substantial earnings in their own right.

Those arguing for repeal have said that the public pension and Social Security systems are separate and one should not influence the other. Another argument has been that retirees have often been taken by surprise and were not prepared for the reduction or loss of their Social Security benefits. Those who were more focused on reform than on repeal believed that the “fix” was too severe. Also, some pointed to the unfairness in the federal tax code, which fully taxes public pensions while Social Security benefits are not fully taxed, and for many, not taxed at all. Opponents of repeal have been worried primarily about its impact on the health of the Social Security system.

The Congressional Budget Office estimates that WEP repeal will increase average monthly benefits by about $360 per month and that GPO repeal will increase monthly benefits by an average of $700 for recipients with a living spouse and $1,190 for a surviving spouse. The effective date is December 2023, so there will be a one-time back payment for 2024. The repeal is expected to move up the date of exhaustion of the Social Security Trust Fund by six months, although payments into the system by current workers are expected to still provide 75%-80% of promised benefits.

If you have any questions about Social Security, please reach out any time. (413) 256-1225 x2 or info@westbranchcapital.com

Tax FAQs You May Be Wondering About

Fri, 08 Nov 2024 17:28:12 GMT

How do my income taxes affect my Medicare premiums?

Although most Medicare enrollees are paying a Medicare Part B premium of $174.70 in 2024, many people pay much more. Prior to 2007, everyone received the same 75% subsidy from the government and paid the same premium. Then IRMAA (Income Related Monthly Adjustment Amount) was implemented, which established a bracket system for both Part B and Part D (prescriptions). The higher your income, the lower the subsidy and the higher your Medicare premium. Because Medicare uses your tax return from two years prior to determine your premium for the coming year, your 2024 premium was based on your 2022 tax return.

The specific income figure used is Modified Adjusted Gross Income, which adds tax-exempt income to the AGI figure you see on your tax return. Sometimes, the higher premium comes as a shock, after a year of unusually high income, perhaps due to a capital gain from the sale of a home. But if that is the case, the higher premium will only be applied for one year, and once income declines, so will the premium. It’s important to know that if there has been a life-changing event that reduced your household income, such as retirement or the loss of a spouse, you can apply to have the premium lowered.

Are there ways to limit the higher premiums? There may be. First, avoid (if possible) making large withdrawals from your tax-deferred retirement plans, including Traditional IRAs and 401(k)s, in a single year, or taking a very large capital gain on a stock sale in a nonretirement account in any one tax year. Instead, try to spread the IRA withdrawals or capital gains over two or more years, or take a capital loss if you have any in your nonretirement account. You also may be able to make a tax-deductible IRA contribution to lower your AGI below the IRMAA threshold, as long as you had earned income during the year and qualify for a deduction.

Are my charitable contributions deductible?

Ever since the 2017 tax law increased the standard deduction (while eliminating the personal exemption), most people do not see a reduction their taxes as a result of making charitable contributions. However, there are some exceptions. Taxpayers whose total itemized deductions (medical expenses above a certain threshold, mortgage interest, state and local taxes up to $10,000, charitable contributions) exceed their standard deduction can lower their taxes with charitable contributions.

There is also something called a Qualified Charitable Deduction (QCD), available to IRA owners over age 70½. Under current tax law, you can instruct your IRA custodian to send your contribution directly from your IRA to the qualified charity or send you the check made out to the charity, which you can forward, rather than making the charitable contribution yourself. This has the same effect as a tax deduction because it lowers the amount of your taxable IRA distributions. It may also lower your AGI enough to reduce your Medicare premium or your capital gains rate. Withdrawals to make a QCD can count toward your Required Minimum Distribution for the year.

Additional points on charitable deductions: (1) Most of the provisions in the 2017 tax law expire in 2025, so in 2026 we could see reinstated personal exemptions and a return to lower standard deductions, which would make charitable contributions more likely to lower your tax liability. (2) Some states, including Massachusetts (cash contributions only) and New York, allow a charitable deduction against income for state income taxes.

How much of my Social Security income is taxed?

There is a rather complicated formula that determines the taxable portion of your Social Security benefits. The formula adds half of your Social Security income to your AGI plus your tax-exempt income to get provisional income. If that figure falls under $25,000 (single filer) or $32,000 (joint filer), none of the benefits are taxable, which is the case for about 60% of recipients, who have little or no income other than Social Security. The other 40% pay tax on between 1% and 85% of their Social Security income, but no more than 85%, regardless of how much additional income they have. As time goes on, more and more people pay tax on more and more of their SS income, because the formula does not get adjusted for inflation every year, unlike with most other tax figures and unlike with SS benefits themselves. Note: State taxation of Social Security varies, with some states, including Massachusetts, not taxing it at all.

What is the Net Investment Income Tax?

Most taxpayers do not pay this tax, which came into being in 2013 to help cover the cost of the Medicare program. The approximately 5% of taxpayers who are subject to the tax have AGI of over $250,000 (joint) or $200,000 (single). The 3.8% tax is applied to either (1) the amount by which AGI exceeds these thresholds, or (2) the amount of net taxable investment income, whichever is lower. The same strategies discussed above regarding Medicare premiums could also be employed to minimize this tax.

When I get a cost-of-living raise at work, will that push me into a higher income tax bracket?

While a large raise at work could push you into a higher income tax bracket, if your raise is roughly equivalent to the inflation rate, it should not affect your marginal tax bracket. Every year, most tax figures, including tax bracket boundaries and the standard deduction, are adjusted to reflect increases in inflation, as measured by the “chained CPI”, an alternative to the traditional consumer price index, which attempts to account for the effects of product substitution on changes in the cost of living. Some figures, such as maximums for IRAs and 401(k) contributions, are adjusted only in years when applying the CPI rounds the figure up to the next increment, usually $500.

What will happen to federal income tax rates and estate taxes in 2026?

If Congress does nothing, most of the provisions of the 2017 tax legislation will expire and revert to the higher tax rate structure that was previously in place. However, leaders of both major political parties are not in favor of raising tax rates for taxpayers with less than $400,000 in income. The parties disagree on taxes for taxpayers with incomes above $400,000. There are also differences between the two parties on future of the estate tax exclusion, which will rise to $13,990,000 per person in 2025 but will fall to about half that in 2026 without action by Congress. Annual gifting is one way to lower one’s taxable estate. The annual gift tax exclusion in 2024 is $18,000 per person per donee for 2024 and is adjusted for inflation in $1,000 increments.

As always, if you have any questions about taxes, please reach us any time at (833) 888-0534 x2 or info@westbranchcapital.com

About The Author

Anne Christopulos

Anne is a Managing Director and Financial Planner with over twenty years of experience in the financial services industry. After holding corporate management positions in finance and strategic planning in New York City, she moved to Boston to become the Product Manager for the IRA business at Fidelity Investments. Following that, she was Vice President, Retirement Investments, at Fleet Financial Services. A native of Cape Cod, she returned to the Cape in 2001 and made the transition to personal financial planning with Secure Future Financial Services in Dennis and Davis Financial Services in Orleans before joining West Branch Capital. Anne holds a B.A. in music and economics from Wellesley College and an MBA from Harvard Business School.

What Drives Portfolio Returns -- Equities or Bonds?

Thu, 07 Nov 2024 21:45:24 GMT

One of the most important questions to ask about any investment account is: “what percentage of the account is allocated to equities (stocks)?”

This is an important question, in general, because equity exposure will increase the volatility of the account. In a strong bull market (like we are experiencing currently), equity allocation is a major driver of positive returns relative to fixed income (bonds) or cash. During a stock market correction (decline), equity allocation will negatively impact performance relative to bonds or cash, therefore, in both instances contributing to large variability of the account value.

It is important to note that these points are generalizations, not rules. There are exceptions. For example, a highly speculative fixed income investment like a junk bond can be more volatile than a high quality defensive stock. Generalizations are best applied to broad market indices (e.g. the S&P 500 and the U.S. Aggregate Bond Index) or baskets of well-chosen high-quality stocks and investment grade bonds.

Because of the increased volatility of equities, they have an especially significant impact on any account during bull and bear markets. While past returns are no guarantee of future returns, equities have also delivered higher returns than fixed income over the long term historically.

In the WBC client portal, you can view the performance of your holdings by asset class (Equity, Fixed Income, others) by clicking “Reports” along the top bar, then selecting “Account Performance” under “Performance” and scrolling down.

Comparing Equity and Bond Returns

Two of the most widely used performance measures for US equities and US investment grade bonds are the SPDR S&P 500 ETF Trust (Ticker: SPY, which tracks the S&P 500) and the iShares Core US Aggregate Bond ETF (Ticker: AGG, which tracks the Bloomberg US Aggregate Bond Index). Based on these two measures, as shown in the table below, equities have outperformed fixed income significantly.

On a total return basis, equities have outperformed over the last 1, 3, 5, 10 and 20-year periods. Holding the S&P 500 for the last 20 years would have earned a 677% total return. This return is 598% higher than the total return from the bond index.

Table 1: Comparing Equity and Bond Total Returns

The table depicts total return measures meaning that they include dividends paid by equities and coupons paid by bonds in each respective index. These return numbers are not adjusted for inflation which is ~3% over the long term. The way to account for inflation would be to subtract the total inflationary impact over the time period from the return figure. Therefore, the inflationary impact adjustment would be the same for both asset classes.

Asset Allocation and Performance

The dramatic difference between equity and fixed income returns impacts portfolio returns. Consider the below table, which shows the total return of hypothetical portfolios with different blends of equity and fixed income. The performance figures for equity and fixed income use the same indices shown in the prior section (SPY and AGG). Over the 20-year historical timeframe, a 100% equity portfolio outperformed the commonly used “60/40 portfolio” by 239%. It is also worth noting that certain individual securities (which also carry increased volatility) can perform significantly better or worse. Apple stock, currently the largest company in the US as measured by market capitalization, is up 32,893% over the 20-year time period on a total return basis.

Table 2: Comparing Historical Returns for Different Equity Allocations (the remainder is allocated to fixed income). Note: The math here is simplified, using a weighted average of each return benchmark.

The magnitude of these differences helps underscore why it is so important to keep equity allocation in mind when understanding account performance. For example, if you are viewing the performance of workplace 401(k) portfolios, you would generally expect one which is 100% allocated to equity funds to have performed better than one with a 60%/40% mix over a long term horizon (such as 10 or 20 years). Conversely, the 60%/40% portfolio might have outperformed during a bear market for equities.

In practice, it can be difficult to determine the equity / fixed income mix of 401(k) accounts. The plans often do not provide the overall account mix to you even if you own only all-equity and/or all-fixed income funds. Adding complexity are target date funds, which generally change the equity and fixed income mix as the funds near their target date year. Similarly, “asset allocation” funds do not always make it easy to identify their asset mix. It is often necessary to review the prospectuses or other fund materials to determine how the funds are allocated – then aggregate for a total portfolio mix.

Equity Portfolio Volatility

Looking at only the long-term performance numbers of equities and fixed income glosses over a key drawback of equities – higher volatility and corresponding declines. While the returns of equities have been superior over the long term, they have also been much more volatile. In 2022, for example, the SPY declined by 19% (offset by a bit less than ~1.5% in dividend income). The AGG declined as well (by 15%), but this was offset by ~4% in bond income. Historically, the drawdowns” (declines from a previous peak) have been more significant for equities than fixed income.

Comparing Equity Returns

Things get more interesting when comparing returns between different investments in the same asset class. Equities are categorized by size (e.g. small cap, mid cap, large cap, mega cap), geography (e.g. United States, Developed Markets, Emerging Markets, Asia ex. Japan), and sector (e.g. technology, industrials, and consumer). Often, they are also given additional classifications for how they might be expected to perform in different economic conditions (e.g. cyclical, counter-cyclical, defensive).

Over the past 10 years for example, US technology stocks have outperformed the broader US index and large caps stocks have outperformed small cap stocks. Digging deeper, certain individual securities with wide business moats and strong growth prospects can outshine their benchmarks, as indicated by the reference to Apple performance above.

Overall, different asset classes will have different impacts on performance depending on market conditions. Increased fixed income exposure can reduce portfolio volatility – especially important if you are focused on wealth preservation or have higher equity exposure in other accounts. Fixed income can also generally provide a higher level of portfolio income relative to equities. Ultimately, how well a portfolio is performing for you depends on the asset allocation decision you make with your financial needs in mind rather than the absolute return figure – as well as your tolerance for any given level of volatility, especially during corrections or bear markets. Everyone likes when the volatility is to the upside, but not the volatility to the downside.

Note: Source is YCharts. Figures as of 10/23/2024.

If you have any questions about this topic, please reach us at (833) 888-0534 x2 or info@westbranchcapital.com

About The Author

Ian Mahmud

Ian is a Principal at West Branch Capital, bringing 10 years of experience in the financial services industry to the firm. Ian started his career at Barclays in Investment Banking focused on Equity Capital Markets. He then joined the Research Department, as an equity analyst on a three-person Institutional Investor Top 5 ranked team in the country, covering the Medical Technology Sector. He covered the Healthcare Sector as a Coverage Investment Banker at Credit Suisse and most recently was a Mergers & Acquisitions Investment Banker at Centerview Partners in New York. After graduating from Milton Academy, Ian earned a B.A. in Economics (Magna Cum Laude, Phi Beta Kappa, Recipient of the College Key) from Bates College. At Bates, he was the President of the Debate Team, ranked 9th in the world. Ian holds an M.B.A. with a Finance Track Certification from MIT Sloan School of Management. He enjoys golf, tennis and skiing.

How to Protect Against Inflation

Wed, 28 Aug 2024 20:59:19 GMT

The monthly CPI (Consumer Price Index) data released for June 2024 showed that the rate of inflation had declined again to 2.97%. With inflation easing and the US economy showing some signs of weakness, the market is now turning its attention to a potential rate cut by the Fed.

Inflation, as measured by the CPI, peaked at a high of 9.1% in June of 2022 and remains above the Fed target rate of 2%. What does the inflation volatility over the last three years (when monthly US inflation averaged ~5.6%) tell us about how different asset classes have performed as a hedge against inflation? While many asset classes are touted as “inflation hedges” in the media, equities (stocks) represented a reliable protection against inflation through this recent bout with high inflation.

Treasury Inflation-Protected Securities (TIPS)

TIPS are issued with maturities of 5, 10 and 30 years and pay interest semiannually. The coupon rate is fixed. These US Government securities offer protection against inflation by adjusting the underlying principal, semiannually, in an amount equal to the change in the CPI. The dollar amount of the semiannual interest payments, therefore, change (increasing or decreasing with the CPI). Because TIPS, like other Treasury securities, are fully backed by the US government, they are considered safe investments.

Given these securities are specifically designed to adjust for inflation, it would be easy to conclude that TIPS performed well during inflationary environments in the past – like the last three years for example. However, the annualized return of the Bloomberg TIPs Index over the last three years is a loss of ~1%. How is this possible? The reason is that TIPs do not protect against interest rate risk. In a rising inflation rate environment interest rates also tend to rise causing all bond prices (including TIPS) to decrease, offsetting the benefit of principal adjustments, therefore delivering negative returns.

Corporate Bonds

How do other fixed income assets like corporate bonds fare in an inflationary environment? Because corporate bonds are exposed to both interest rate and inflation risk, they can perform even more poorly than TIPs in an inflationary environment. The annualized three-year return on the Bloomberg US Aggregate (an index of US investment grade corporate bonds) is a loss of ~3%. In addition to interest rate and inflation risks, corporate bonds carry credit risk (the risk that the issuer will default) and call / reinvestment risk (the risk that a higher yielding bond will be called by the issuer). Credit risk is especially important in an inflationary environment because “chasing higher yields” to stay ahead of inflation can mean lending to less creditworthy issuers and, therefore, putting the principal amount invested at risk. Corporate credit is company and industry specific as well, and a slowing economy can add to the downside, especially for weaker credits.

Gold

Gold is commonly cited as one of the best hedges against inflation. It is also viewed as a defensive, “safe haven” investment. The underlying spot price of gold is set by futures markets, but there are other options for investing in gold. The industry selling gold coins and bullion (physicals) to retail investors engages in widespread and aggressive marketing. Scams, misleading / dishonest marketing and hidden markups are rampant. There is a lack of liquidity (a wide “spread” between the bid and offer, that is, the price you buy and sell the physicals) and high commissions to acquire or sell gold, as well as storage costs. The bottom line for buying and storing gold bullion or coins: caveat emptor.

Another option for investing in gold are precious metal ETFs (e.g. GLD). These funds are backed by physical metals held in secure vaults. These ETFs cannot be redeemed for the physical commodity but are traded on an exchange and track the value of the underlying precious metals. Over the last three years, the annualized performance of the price of gold has been ~9%. This is strong performance and supports the view that gold can be a hedge against inflation, at least for short time periods. But gold needs other variables to help its performance such as domestic or global macro uncertainty and supply and demand at any given time.

Equities

Equity ownership in businesses can serve as a hedge against inflation for multiple reasons including: 1) companies passing along price increases to consumers for the value of their services and or products, 2) other drivers of margin improvement (including negotiating with suppliers or increasing internal efficiencies), and 3) new innovation which commands higher price points and better profit margins independent of inflationary pressure.

It is true that certain companies are better suited to handle inflationary pressures than others. Companies without brand or market power who compete on price can encounter challenges. Nonetheless, equity investments, especially in companies offering value to their customers and maintaining good profit margins, have reasons to perform well in an inflationary environment.

This view has been empirically borne out over the last three years. The performance of the S&P 500 over the last three years was an annualized ~8% despite a myriad of equity market headwinds (e.g. Fed rate hikes, geopolitical risks and recession fears).We’ve also observed the stellar performance of companies in our client portfolios which have benefited from a wave of new technological developments. The underlying drivers and the performance over the last three years support our view that equities are a good protection against inflation.

All figures in article are as of 6/30/2024.

If you have any questions about this topic, please reach us at (833) 888-0534 x2 or info@westbranchcapital.com

About The Author

Ian Mahmud

Midyear Bond Update

Wed, 28 Aug 2024 20:55:13 GMT

As the second quarter began, interest rates resumed their uptrend after having declined earlier this year. Several inflation readings indicated inflation had stopped falling, with some measures showing upticks in price pressures. The Federal Reserve has a dual mandate of maximum employment and price stability. While prices have come down, inflation remains above the Fed’s target of 2%. After ten interest rate increases the economy remains firm with only employment showing some signs of softening. The Federal Funds rate at 5-5.25% is the highest in over 22 years.

However, by mid-May signs of cooling inflation ignited a bond rally. Bond prices rose sharply and pushed down the yield on the 10-year US treasury note. The yield on the 10-year ended the quarter at 4.35%. This is down from close to 5% in the first quarter and as high as 4.7% early in the second quarter. At the Fed’s meeting in June officials indicated they expect only one rate cut this year; down from as many as six cuts expected by investors in January. Despite the possibility of just one rate reduction, bond prices marched higher as investors believe that the recent streak of surprising price jumps, during the first few months of the year, was more of an aberration than a break in the trend of inflation moderating.

The rapid increase in interest rates has little historical precedent. The full impact of the Fed’s actions has not yet worked its way through the economy. When the Fed raised rates in the past, it often lifted them to the point that the job market weakened, causing the economy to slow which then led them to reverse course and cut rates. Despite high interest rates, this has not occurred. Reasons cited are strong income growth, record stock prices fueling portfolio gains and driving consumer optimism, and excess savings from pandemic relief funds. The yield curve remains inverted but less so with the two- to ten-year spread at -40 basis points compared to -106 basis points one year ago. When short term rates are higher than long term rates it implies investors’ preference to lock in long term rates with the expectation that the Fed will ultimately reduce rates. Typically rate reductions are in response to a weakening economy which is a precursor to a recession. The timing of a recession is uncertain, but we think it is likely to occur sometime later this year or early in 2025.

We expect interest rate reductions will come if either inflation retreats closer to the Fed’s target of 2% or the economy weakens, and a recession looms. If inflation declines closer to 2% and the economy avoids a recession, then a soft landing will have been achieved meaning low inflation without an economic slowdown. In this scenario the Fed will reduce rates but cautiously to avoid stoking inflation. Stocks should do well, and interest rates will decline slightly. A soft landing is not our expected outcome. If the rate reduction is due to an economic recession, then stocks may come under pressure while bond yields should decline as the Fed will reduce rates more aggressively. We believe this is the more likely outcome.

Why it may be an opportune time to extend out on the yield curve, and a review of Breakeven Yields

Interest rates have risen at an unprecedented pace. One year ago, we looked at breakeven yields on three maturities of US treasury securities; that is, how high do rates need to go up in one year to breakeven or not lose money on that maturity? Here is what we calculated:

The above table shows a two-year bond purchased on 6/30/23 where the 4.9% yield to maturity would need to increase to a yield greater than 10.18% in one year for it to result in a negative return. The other maturities are shown above. These levels were not reached on 6/30/24 (last column) and only the 10-year came close. Essentially, at that time, the bulk of the losses in bond prices had already occurred.

Now with the Fed about to lower rates we can look at returns that can be achieved one year forward by investing in each of these maturities. Since the yield curve should steepen as the Fed reduces short term rates, we will assume a normal upward sloping curve will develop in one years’ time.

* Total return is price change plus coupon payment over one year.

This chart shows that when the Fed eases and yields decline, the yield curve will steepen (short rates declining faster than long term rates). The greatest potential return will come from the longer end of the curve. The more yields decline the greater the advantageous return from longer term securities. Therefore, it may appear risky to extend out on the yield curve, but when rate cuts do occur, longer maturities will perform best even as their yields decline less. While investors should remain cautious given current economic and inflation trends and Fed policy intentions, a modest pivot to maturity extension may be in order.

Since we are in a presidential election year it may be instructive to look at how the Fed might behave. In general, the Fed will be more cautious with major policy changes but will not sit on the sidelines during an election year. It wants to avoid the appearance of influencing the political process. It will continue to pursue its dual mandate of price stability and maximum employment. Any significant policy action would be the result of clear evidence of the need to raise or lower rates. In most election years, the Fed has either raised or cut rates. Since interest rates are already at recent high levels, we are not likely to see interest rate increases. Cuts are more likely given the Fed’s stated intentions. The Fed will be transparent to ensure communication of its intentions and that they are based on economic considerations, not political.

Who wins the election will also matter for Fed policy. A potential Trump victory may result in large tax cuts swelling the deficit and fueling inflation. Imposing sweeping tariffs could also add to inflation. Investors and the Fed will react accordingly.

If you have any questions on this topic, please reach us at (833) 888-0534 x2 or info@westbranchcapital.com

About The Author

James K. Ho

Jim has over thirty years of investment management experience. He is a Managing Director and Principal of the firm. Prior to West Branch Capital, Jim was a fixed income Portfolio Manager at John Hancock Advisors. Previously, he managed the John Hancock Tax Exempt Income Trust. Prior to joining John Hancock Advisors, Jim was a Senior Investment Officer at The New England (MetLife), where he managed multiple bond portfolios, including taxable and tax exempt mutual funds and separate accounts. Jim holds an M.B.A. from Columbia University, New York, as well as an M.S. in Applied Math and B.S. in Applied Math and Economics from the State University of New York at Stony Brook. He is a Chartered Financial Analyst and a member of the Boston Society of Security Analysts.

New (and Old) Tax Breaks for Homeowners

Tue, 30 Apr 2024 20:51:47 GMT

It’s no secret that homeowners can qualify for favorable tax treatment. Mortgage interest is tax-deductible during home ownership, and all or a portion of any capital gains on a personal residence is exempt from taxation when it is sold. These benefits have enabled many Americans to not only achieve the dream of homeownership, but also buy a more costly home than they would have without the tax breaks and build wealth for their own future and for that of their heirs.

However, in the current environment, the tax breaks may not be as widespread as many people think. Also, there are additional tax breaks, especially for energy-related home improvements, that may not be widely known or understood. It’s worth taking a look at them to see what we may be missing…or not.

The Home Mortgage Interest Deduction

Tax savings from the mortgage interest deduction is not as common as many people might think because mortgage interest can only be taken as an itemized deduction. Under current tax law, the standard deduction, which is available to taxpayers whether they have a mortgage or not, is, for most people, higher than the total of a homeowner’s itemized deductions. According to the Tax Policy Center, only about 10% of taxpayers currently itemize their deductions compared to about 30% before the 2017 tax bill, which roughly doubled the amount of the standard deduction while eliminating the personal exemption. (Most of the provisions of the 2017 tax law are set to expire after 2025, but many of them may be extended by Congress.

Another factor reducing the use of itemized deductions has been the level of interest rates. Until early 2022, the 30-year fixed mortgage rate was mostly below 5% for almost two decades and even dropped for a short time below 3%, enabling new buyers and refinancers to lock in low payments, which has had the effect of bringing their total itemized deductions below the standard deduction. Also lowering the total of itemized deductions for some homeowners is the limit on the dollar amount of state and local taxes that can be deducted.

As a result, the deductibility of mortgage interest mostly benefits homeowners with large mortgages and high incomes. The higher one’s tax bracket, the greater the tax savings, which is a function of the size of the deduction and the marginal tax rate. Some economists have proposed that the mortgage deduction be replaced with fixed dollar credit available to those at any income level.

Capital Gain on the Sale of a Personal Residence

For many years and until 1997, there were no capital gains taxes on the sale of a personal residence so long as the proceeds were “rolled over” to another personal residence within a certain length of time. Once a homeowner was over age 65, there was a one-time capital gains exemption of $125,000.

Under current federal tax law, home sellers can no longer avoid taxation by “rolling over” their gain to a new home. But home sellers of all ages can apply a more generous exemption to the amount of the gain. It is $500,000 for a married couple filing a joint return and $250,000 for a single taxpayer, so long as the house was the owner’s personal residence for at least two out of the last five years. Any gain above that is taxed at capital gains rates. (There are exceptions for job-change required home sale or divorce situations if other requirements are not met.) The capital gain can be reduced by adding the costs of qualifying home improvements over the years to the original price of the home, which increases the cost basis. That’s why it is very important that any documentation from home improvements be saved.

Home Office Deduction

If someone uses a space in their home exclusively for their home-based business, there is a deduction available equal to the share of house expenses allocatable to that space, including mortgage interest, insurance, utilities, repairs, and depreciation. But depending on the method used to calculate the deduction, there may be a capital gains tax on the depreciation amount when the house is sold.

Home Improvements for Medical Reasons

Modifications to a home that are prescribed by a doctor and do not increase the value of the home may be tax-deductible. These might include expenses such as wheelchair ramps, stairlifts, widening of doorways and hallways, but would not include the cost of an elevator or lap pool, for example, which would increase the value of the home. These modifications, along with other medical expenses, are deductible as itemized deductions only to the extent that the total exceeds 7.5% of adjusted gross income.

Energy-related Improvements

In recent years, a goal of government policy has been to improve energy efficiency and address climate change, resulting in a variety of tax credits for energy-saving home modifications, especially conversions to renewable sources of energy. The Inflation Reduction Act, passed by Congress in 2022, made some previously available tax credits more generous and added new ones. The myriad of projects that qualify for tax credits and the specific credits that apply to each have given rise to web sites and apps that can help a homeowner decide which improvements to make and when to make them. There are also tax benefits offered by many states.

The Residential Clean Energy Credit was increased from 26% to 30% of the cost. This applies to the installation of solar panels, certain types of solar roofing, solar-powered water heaters (but not for hot tubs and swimming pools!), wind turbines (up to 100 kilowatts of power), geothermal heat pumps, hydrogen fuel cell property (up to $500 for each half-kilowatt of capacity), and battery storage technologies. The installation of an alternative energy charging station is subject to a cap of $1,000.

Another change was the replacement of the lifetime $500 credit for energy-efficient improvements with a $1,200 annual credit using the Energy Efficient Home Improvement credit. This is a 30% credit that applies to (1) the installation of Energy Star-certified items, water heaters, and furnaces, to which there is a $600 annual cap, and (2) other energy-saving improvements, such as adding insulation that meets specific standards or replacing windows (up to $600) and exterior doors (up to $250 per door and $500 per year). There is also a 30% (up to $150) credit towards a home energy audit. Because the maximum $1,200 is applied annually, phasing in these improvements over time can maximize the total credit amount. A separate aggregate annual credit limit of 30% (up to $2,000) applies to the installation of electric or natural gas heat pumps and water heaters and biomass stoves and boilers.

Important Note: These tax credits are not refundable, i.e. they can reduce an existing tax liability to zero but the rest of the credit cannot be taken in cash. However, tax credits can be carried over and applied to future years. Also, there are ways to “create” taxable income against which the credit can be applied, such as by withdrawing money from a Traditional IRA or converting Traditional IRA money to a Roth IRA.

For additional information on Energy Efficient Home Improvement Credit and Residential Clean Energy Credit, visit this IRS link .

As always, if you have any questions about Tax Breaks for Homeowners, please reach us any time at (833) 888-0534 x2 or info@westbranchcapital.com

You might also like our Keep Your Homeowners Insurance Up to Date article.

About The Author

Anne Christopulos

Keep Your Homeowners Insurance Up to Date

Tue, 30 Apr 2024 20:48:18 GMT

When you sign up for a homeowners or condominium owners insurance policy, you take the first step in protecting what may be one of your largest assets. It is important to be knowledgeable about the appropriate amount of coverage needed and the extent of the coverage provided by your insurance contract.

The homeowners policy is a package that covers your dwelling, other structures on the premises, unscheduled personal property on and away from the premises, loss of use, personal liability coverage, and the medical coverage of others.

Nearly all insurance companies require that your policy be issued for at least 80% of the replacement cost of your home. Failure to maintain proper coverage may result in sharing in a partial loss as a penalty.

The correct amount of coverage is determined at the time the policy is written. Then it is your responsibility to be sure your policy continues to provide appropriate protection. Most insurers will increase your coverage by a certain percentage each year to keep pace with inflation. However, it is important for you to periodically review your homeowners coverage and make any necessary changes that result from inflation in your area and adjust for additions or improvements made to your home.

Your homeowners policy also provides protection for the contents of your home. It’s a good idea to keep an inventory of personal property in a safe deposit box so that, in the event of a loss, you won’t have a problem listing the items to be replaced. The contents portion of your policy has specific limitations on items such as money, jewelry, furs, silverware, artwork, and securities. Be certain to refer to your policy for a full description of the limitations. In some instances, you can buy additional coverage if the basic coverage is insufficient.

When selecting coverage, evaluate the different policy forms. You can choose between a basic broad form policy that protects you against a list of named perils such as fire, hail, lightning, wind, explosion, and vandalism or an all-risk policy that protects you against all losses except those specifically excluded in the policy. The exceptions include: damage by birds or insects; wear and tear; landslide and earthquake; cracking from settling; flood and surface water; and damage by domestic animals or rodents.

You may wish to consider a higher policy deductible and elect to purchase the slightly more expensive all-risk contract with the premium saved. In addition to protecting your property against serious loss to the physical structure, your homeowners policy may also provide protection for legal liability in varying amounts.

In view of sizable legal awards that can potentially be granted, you may wish to protect yourself even further with a personal umbrella policy.

As you assess your coverage requirements, keep a sharp lookout for ways to you’re your premiums. By installing smoke detectors, fire extinguishers, deadbolt locks, or a central alarm system, you can reduce your costs by a reasonable amount. Evaluate your coverage limits periodically and make changes when appropriate.

As always, if you have any questions about homeowners insurance, please reach us any time at (833) 888-0534 x2 or info@westbranchcapital.com

You might also like our New (and Old) Tax Breaks for Homeowners article.

About The Author

Ayaz Mahmud

Ayaz brings almost thirty years of investment management experience to West Branch Capital. He serves as the firm’s Chief Executive Officer. Ayaz founded West Branch Capital in 2004 after spending over twenty years as a top wealth advisor at premier global investment banks: Kidder Peabody, Smith Barney and Lehman Brothers. At Lehman Brothers, he helped build the Wealth Management Group in Boston and co-managed the Equity and Fixed Income Middle Market Institutional Trading Desks. Ayaz has managed client portfolios throughout his career. Ayaz holds an M.A/M.B.A and a B.A/B.S from Syracuse University.

Massachusetts Health Connector – Open Enrollment Ends on January 23

Tue, 16 Jan 2024 21:45:08 GMT

This Health Connector expansion could benefit Massachusetts residents who are under age 65 and not covered by an employer health plan. The income limits for eligibility for a health insurance credit are up to $72,900 for a single person and $98,600 for a couple. Open Enrollment ends on January 23, 2024. Please view this MA Health Connector article for more information.

As always, if you have questions about financial planning and expenses, please contact us any time at (833) 888-0534 x2 or by email .

About The Author

Ayaz Mahmud

Bond Market Update

Tue, 16 Jan 2024 21:41:39 GMT

The Federal Reserve’s fight against inflation appears to be finally paying dividends. From a high of over 9% in early 2022 the consumer price index (CPI) has come down into the low 3% range; in November core inflation (which excludes the volatile components of food and energy) was reported a 3.1%. While still above the Fed’s target of 2%, inflation has improved substantially. Bond yields reacted positively with yields declining to levels at or below year end 2022 levels. Yields had reached recent highs in October with the 10-year yield moving above 5%. Equity prices have gotten a boost as well from the expectation of lower interest rates.

Here is a recap of yield levels this year for US Treasury securities:

The Fed has two mandates— inflation and employment. The focus has been on bringing high inflation down. Now that prices are heading lower, the focus shifts to preventing a recession by keeping employment firm. The Fed last increased interest rates in July when the Fed Funds rate settled at the current level of 5.25 – 5.5%. At its most recent meeting in December, Fed chair Powell indicated it will pivot toward rate cuts, with as many as three quarter point reductions in 2024. This change in direction clearly indicates the final rate rise is behind us. However, the timing of the first reduction and the pace of the cuts is still dependent on future growth and inflation numbers.

There is no guarantee the economy will escape recession. Interest rates remain at levels not seen in over 20 years and the effects of high rates may still negatively impact interest rate sensitive sectors of the economy. We expect a modest economic slowdown. Inflation may decline further with continued easing in supply chain pressures. But lower rates and rising stock prices could fuel growth and potentially lead to higher prices, especially in housing and services.

The Fed’s next move is certain to be lowering interest rates. But with its dual mandate of inflation and employment we do not expect aggressive rate cuts until the economy and/or employment weakens. The move in interest rates may have gotten ahead of itself: the rapid decline in yields to current levels leaves limited room for further gains until the Fed begins to cut rates and there is more clarity on the magnitude and timing of rate reductions.

If rate cuts materialize, the yield curve will shift downward with short term rates declining rapidly as these cuts materialize. The inverted yield curve of today could be positively sloped by mid-year. Bonds will provide good total returns especially longer-term bonds. The table below displays potential returns as yield moves down and the curve normalizes even if it does not return to a positive slope.

As shown, as rates fall and the yield curve normalizes the greatest price appreciation will come from longer term bonds even with a much smaller yield decline.

The year 2023 ended with a powerful rally in equity markets and sharp a decline in bond yields. This move was in reaction to the Fed indicating a shift from tightening to easing interest rates. However, the Fed indicated three ¼% reductions in the Fed Funds rate while the markets have extrapolated a more aggressive easing campaign, with some forecasters calling for as many as six cuts. Investors need to protect against any uptick in inflation combined with continued firm economic growth which could end in disappointment. In that case a negative market reaction could follow.

Real Rates

When purchasing a fixed income security at a fixed rate of interest, that rate does not account for inflation. It is important to know what the real return an investor is getting when factoring in inflation. This is why real rates matter.

When you buy a fixed income security you receive what is known as the nominal rate of interest; the interest shown for notes and bonds. A treasury security purchased at 100 cents on the dollar (or at par value) with a coupon of 5% will pay a nominal interest rate of 5%. However, this rate does not account for any decrease in purchasing power from inflation.

Since Inflation erodes the value of a fixed income security, investors need to look at real rates. Real rates refer to the rate of return after accounting for inflation, representing the actual growth in purchasing power an investor can expect to achieve after adjusting for inflation. Essentially…

Real Rate = Nominal rate minus inflation rate

It is the nominal interest rate minus the rate of inflation during the same period. Real rates are crucial for understanding the true value or return of an investment, as it considers the impact of inflation on the purchasing power of money. High real rates imply a higher return above inflation, while negative real rates mean the return is lower than the rate of inflation resulting in a decrease in purchasing power. For example, if the yield on a security is 5% and inflation is 2% then you are earning a real return of 3% over and above inflation.

The recent fall in inflation means short term real interest rates have been rising. This is the result of the Fed having kept nominal short-term rates unchanged while inflation has fallen. If the Fed continues to keep nominal rates high and inflation keeps falling, then the further rise in real rates will constrain the economy as it represents a form of tightening of monetary policy. Therefore, the Fed must walk a fine line between keeping nominal rates high enough to prevent the economy from overheating while realizing that as inflation falls real rates will rise and could cause a recession unless it reduces nominal interest rates.

How can fixed income investors protect against inflation?

One way to protect against inflation when investing in bonds is to buy treasury Inflation-protected securities (TIPS). This is a specific type of government bond issued by the U.S. Treasury that is designed to protect investors against inflation. TIPS work as follows:

The TIPS bond principal rises with changes in the Consumer Price Index (CPI) and does not go down even if CPI declines.
The Coupon rate remains constant.

Therefore, the inflation adjustment comes from the increase in principal value with higher inflation and a higher coupon payment based on the higher principal value. This feature ensures that the purchasing power of the bond remains relatively stable over time, making TIPS a popular choice for investors seeking protection against inflation.

In essence, while real rates focus on the actual return adjusted for inflation, TIPS are a financial instrument specifically structured to counter the effects of inflation by adjusting their value based on changes in the CPI. TIPS can provide a more direct hedge against inflation compared to other investment options, but their returns are still influenced by the level and direction of interest rates.

As always, if you have any questions about the bond market, you can reach us at (833) 888-0534 x2 or by email.

About The Author

James K. Ho

Bond Market Update

Wed, 18 Oct 2023 20:37:51 GMT

Interest rates continued to march higher in the third quarter. In July the Federal Reserve raised the Fed Funds rate for the tenth time to a range of 5.25%-5.5%. The labor market remains firm with the unemployment rate to 3.8%. Although inflation has declined, it is still not near the Fed’s target of 2%. The battle to bring inflation down is being complicated by higher energy prices due to OPEC+ withholding production, a still firm economy, strong labor markets, and high interest rates which trickles into inflation of goods and services.

Fed officials are concerned about the risk of raising rates too little and allowing high inflation to grow entrenched and raising rates too much and causing a severe downturn. A recession in the next six to nine months is still a strong possibility. The full impact of the ten interest rate increases has yet to be felt. The yield curve remains inverted, although less so, an event which typically is a precursor to recessions. If an economic slowdown were to occur, then we can expect a pivot to rate cuts. However, absent a recession, which should be preceded by a climb in the unemployment rate, short term interest rates may remain at current levels for an extended period. The Fed did not raise rates at its September meeting but in his statement, Fed chairman Powell indicated rates will stay higher for longer. This has spooked both bond and equity markets. Bond yields rose significantly near quarter end as a result.

Here is a recap of yield levels this year for US treasury securities:

As this chart shows, the yield curve’s inversion is not as extreme. The 2– to 10-year spread is now -47 basis points versus -106 basis points at the end of June. With the Fed almost done with rate hikes there is less risk of much higher short-term rates. The more extreme move in the 10-year can only be explained by heightened fears of inflation and possibly a supply demand imbalance for US government securities; the Fed has been reducing its holdings of treasuries through both maturities and outright sales while at the same time the government’s growing deficit has increased the supply of treasuries.

Total returns on all types of bonds have been negative this year. We have emphasized shorter maturity bonds as interest rates moved higher. The worst returns have been on ultra long bonds. Take for example the US Treasury 1.25% due May 15, 2052, which today trades at a price less than $50 down from $100 less than 3 years ago. A return even worse than you would experience in the stock market. A sharp reversal in interest rates would of course see these bonds increase significantly in price.

While the current level of yields exceeded our expectations, we feel current interest rate levels are at or near the peak for this cycle. Short term rates at a 22 year will eventually work their way into slowing the economy. The sharp increase in longer term rates will act as a mechanism to slow growth and is in effect acting as another rate increase. Therefore, while it may be an extended period before rate cuts, absent a further spike in inflation, it does not mean interest rates have to rise much further.

Going forward we see four factors which can negatively impact the economy and contribute to causing a recession:

Costly labor agreements as highlighted by the auto workers and Hollywood workers’ strikes, among others.
A potential government shutdown once the current budget agreement expires in mid-November.
Recent resumption of student loan payments impacting consumer spending.
Oil shocks from recent world events, a negative for a variety of reasons.

While not all of these may occur; even one or two, combined with historically high interest rates, could slow growth enough in the next six to nine months for the Fed to begin to reduce interest rates. A pivot to rate cuts if a recession were to occur would lead to at least a modest decline in interest rates.

A look at Bond Yields

With rising interest rates, bonds are now back in the spotlight. When yields were low, investors looked at bonds more for protection as opposed to high income. Now with higher yields, people are looking at bonds for both return of principal and high earnings. When buying bonds or bond funds it is important to know that there are many kinds of yield, and they are all calculated differently. These include current yield, yield to maturity, yield to call, yield to worst, and SEC yield.

Let’s look at each of these and highlight any shortcomings:

Current yield – this is calculated by taking a bond’s coupon divided by its price. This yield accounts only for the coupon income with no consideration given for a discount or premium bond which would result in capital gain or loss if held to maturity. It also ignores the time value of money where a dollar today is worth more than a dollar in the future.

Yield to maturity – this is the most common measure used to bond yields. It does consider the time value of money and is an accurate measure of a bond’s yield.

Yield to call – for bonds that can be redeemed prior to maturity, this is the yield on a bond to its first call or redemption date. For bonds purchased at a premium you will most likely earn the yield to call (which would be lower) not the yield to maturity since these bonds have a good chance of being redeemed prior to maturity.

Yield to worst – For individual bonds it is helpful to compare the yield to maturity to the yield to call to see which will result in the lowest yield. This is known as the yield to worst. In the above case, the yield to call would be the lower expected yield.

Note: The above measures of yield are less relevant for bond funds since bond managers rarely hold bonds to maturity.

SEC yield – this metric was introduced by the Securities and Exchange commission and is designed to give investors a meaningful way to compare yields on bond funds. It is a measure of a fund’s income over the past 30 days.

Just as there is no single way to value equities, the same is true of yield calculations for bonds. Using only one measure of yield could mean a bond investor misses out on important signals particularly when yields are changing rapidly. For example, with the recent rapid rise in yields the focus for individual bonds should be on yield to maturity as yield to call will not be a factor in most cases.

As always, if you have questions about the bond market or other topics, reach us at (833) 888-0534 x 2 or by email .

About The Author

James K. Ho

Estate Taxation: An Ever-Changing Landscape

Tue, 17 Oct 2023 20:33:01 GMT

Estate taxes combine both of Benjamin Franklin’s often-quoted certainties: death and taxes. However, estate taxes are far from a certainty for most Americans. Federal estate taxes are levied on estates valued at more than $12.92 million per person in 2023, and that figure will rise in 2024 with the annual inflation adjustment. Most states do not even have an estate tax, and those that do have thresholds ranging from $1 million to $11 million. In 2020, only about 1,900 federal estate tax returns were taxable, which was less than 1% of all deaths that year. In fact, death triggers one of the most generous tax breaks in our tax code: the step-up in basis, which resets the cost basis of inherited assets to the market value on the date of death, which effectively wipes out any capital gains as of that date.

Why do we even have an estate tax? The IRS describes the estate tax as a tax on the right to transfer property at death. But shouldn’t people be able to leave their assets as they wish, without the state taking a share? Proponents of the estate tax argue that eliminating it would exacerbate wealth inequality and weaken our democracy. But haven’t taxes already been paid on the assets? While that’s partially true, a Treasury study in 2014 found that almost half of the fair market value of estates were unrealized capital gains that had not been taxed. It can be assumed that in estates large enough to be subject to estate taxes, that proportion would be even higher. Some opponents of the estate tax point out that it is complicated and so riddled with loopholes that the very wealthy can avoid much of the tax with the help of their attorneys.

Estate taxes are a revenue-raising measure for the governments that levy them, but the amount of revenue raised has been shrinking over the years as the threshold for applying them has been increased. The Congressional Budget Office reported that federal estate taxes contributed $16 billion in 2020 compared with $24 billion in 2001, which would be far higher if adjusted for asset inflation over the past 20 years.

History of the Estate Tax

Federal estate taxes were established in 1916, although they had been used in certain circumstances prior to that. A gift tax was added later to prevent avoidance of the estate tax through gifting during lifetime. In recent years, estate taxes have become a political football. Since the year 2000, we have seen the federal exemption rise from $675,000 per person to the current $12.92 million. In one year, 2010, the federal estate tax was totally eliminated, which enabled some families, such as the heirs of long-time New York Yankee owner George Steinbrenner, to reap a windfall, while surely mourning their loss. Soon politics will come into play again. In 2026, the current $12.92 million exemption, which will have risen to almost $14 million with the inflation adjustments, is set to revert back to approximately half that, because most provisions of the tax bill passed in 2017 will expire. There will undoubtedly be much discussion in Congress as expiration approaches, with some in favor of letting the exemption drop to lower levels and others pushing to retain the higher exemption or even eliminate the tax altogether.

One group that supports the continuation of the estate tax is the charitable community. Charitable contributions are deducted from the estate value prior to the tax calculation, thereby lowering the tax liability. Some people with estates large enough to face estate taxes may prefer to direct a portion of their estate to a charity than allow that portion to be subject to estate tax. Studies referenced by the Tax Policy Center have found that elimination of the estate tax could result in a 15-30% reduction in charitable bequests, which comprise about 8% of all charitable donations.

State Estate Taxes

Only 12 states plus the District of Columbia have an estate tax, in which the estate is taxed before the heirs receive their shares, and six states levy an inheritance tax, which applies to the heirs after they receive their bequests. The trend has been to lessen the impact of estate taxes over the years primarily by raising the thresholds for estate taxation. The Massachusetts legislature has just passed a tax reduction bill which will raise the estate tax exemption from $1 million to $2 million and will eliminate the “cliff” effect so that only assets in excess of $2 million will be taxed. In New York, the threshold for estate taxation is $6.58 million in 2023. In both states, there are progressive tax rate schedules with rates ranging from 3% to 16%.

Estate Planning

At the very least, anyone with substantial assets should meet with an estate planning attorney, who can provide advice on the best way to organize their holdings, whether their estates will be subject to either federal or state estate taxes. If there is a probability that estate taxes will apply, the attorney can help create a plan that will minimize the impact and ensure that the full exemption is utilized for both spouses. (In particular, Massachusetts taxpayers with estate plans based on the lower $1 million threshold should have their planning documents reviewed.)

For those with a projected estate value above $7 million ($14 million for a couple), time may be running out to take advantage of the currently high federal exemptions, assuming they will expire after 2025. Gifting as much as the full exemption before 2026 may be one way to do that. According to recently published IRS statistics, wealthy Americans gave away $182.6 billion in 2021, more than double the $75.2 billion in 2020. Almost $100 billion of those gifts were made via irrevocable trusts.

There are other, less extreme actions that can be used to lower the value of a potentially taxable estate, either at the federal or state level. One is to gradually give away assets during one’s lifetime, limiting the amount to no more than the annual maximum gift tax exclusion, which is $17,000 per person in 2023. That means a couple can gift up to $34,000 to each person and to as many people as they wish without triggering a gift tax. Lifetime gifts above the annual exclusion will be included in the taxable estate at death. Note that highly-appreciated assets may not be good candidates for gifting because the low cost basis transfers with the asset; better to allow them to be inherited at death when the cost basis can be stepped up to market value.

Roth conversions of Traditional IRAs provide a way to not only lower the value of a taxable estate through “prepayment” of income taxes upon conversion, but also help avoid the possibility of double taxation. That could occur if tax-deferred money is subject to estate tax and then is later taxed when the beneficiary withdraws the money, although the beneficiary may be able to recover at least a portion of the estate tax paid on their own tax returns. While Roth IRAs may be subject to estate tax, beneficiaries can withdraw from them tax-free.

As always, if you have questions around estate taxation or other topics, reach us at (833) 888-0534 x2 or by email .

About The Author

Anne Christopulos

Bond Market Update

Tue, 25 Jul 2023 19:16:08 GMT

Interest rates resumed their uptrend in the second quarter after having declined earlier this year. The collapse of two large banks had given hope to investors that the Federal Reserve would refrain from further rate increases and even potentially lower rates. Fed officials feared their past rate increases, together with recent banking industry stresses, would create a sharper than anticipated slowdown. Banks’ potential to tighten credit standards, because of the bank failures, might also lead to reduced lending essentially helping the Fed do its job. However, this did not come to pass as the economy continued to expand and inflation remained well above the Fed’s 2% target level. A tight labor market combined with signs of stronger auto sales and a rebounding housing market influenced the Fed to raise rates in May, for the tenth consecutive time, to a new level of 5-5.25% for the Fed Funds rate. The rate increase campaign paused in June essentially to allow time to see how the previous rate actions would impact the economy. Recent economic numbers indicate higher rates are needed.

The yield curve remains extremely inverted with the two- to 10-year spread at -106 basis points. When short term rates are this much higher than long term rates it implies investors’ preference to lock in long term rates in expectation the Fed will ultimately reduce rates. Yield curve inversions are a precursor of a recession. The timing of the recession is uncertain but is likely to occur sometime later this year or early in 2024.

The rapid increase in interest rates has little historical precedent. The full impact of the Feds actions has not yet worked its way through the economy. When the Fed raised rates in the past, it often lifted them to the point that the job market cracks, plunging he economy into a recession that leads them to quickly reverse course and cut rates. Until this occurs, we can expect the potential for additional rate hikes.

Breakeven Yields

Interest rates have risen at an unprecedented pace. It is instructive to look at how much investors can get hurt from further increases in interest rates. One way to do this is to look at how high yields of different maturities must go in one year for an investor to break even.

The above table shows a two-year bond today purchased at a 4.9% yield to maturity would need to increase to a yield greater than 10.18% in one year for it to result in a negative return. The other maturities are shown above. We do not expect yields to reach these levels. While it has been a difficult period to be invested in bonds, the bulk of losses may already have occurred. As stated above, with the current extreme level of yield curve inversion, a recession can be expected at which time the Fed will reduce rates. While all bond prices will rise as yields decline, the greatest beneficiary will be longer term bonds since their prices are most sensitive to changes in interest rates.

Why it may be an opportune time to extend out on the yield curve…

It may be an opportune time to invest in longer term bonds. An inverted yield curve simply reflects the bond market’s view on the stance of monetary policy. The shorter-maturity part of the yield curve is driven more by the level of, and expected changes in, central bank policy rates. While the level of short rates does influence the longer-maturity part of the curve, those yields are more driven by expectations of economic growth and inflation.

During monetary tightening cycles, the Fed pushes policy rates up to levels that will eventually begin to restrain growth and lower inflation expectations. Additional rate increases would therefore tend to put more upward pressure on shorter-term Treasury yields, while slowing growth/inflation expectations which would keep longer-term yields more stable. Eventually as markets price in a slowdown and subsequent rate cuts, the Treasury curve will reverse the inversion. Consider the following chart:

This chart shows that as yield declines and the yield curve steepens (short rates declining faster than long term rates) the greatest potential return will come from the longer end of the curve. Therefore, while it may appear risky to extend out on the yield curve, when rate cuts do occur, longer maturities will perform best even as their yields decline less. While investors should remain cautious given current inflation trends, a modest pivot to maturity extension may be in order.

As always, if you have questions about the bond market, you can reach us any time at (833) 888-0534 x2 or info@westbranchcapital.com .

About The Author

James K. Ho

Securing Their Future – Investing for Kids

Tue, 25 Jul 2023 19:11:18 GMT

There are specific financial products and special considerations for planning and investing when there are children in our lives, including grandchildren, nieces and nephews, or other children with whom we have a personal connection. These may start at the birth of a child and continue to the time in our lives when we are planning our legacy.

Life insurance

Often the first financial product new parents purchase is life insurance on their own lives to provide financial protection for their children. Typically that is term insurance, which is affordable and can be timed to cover the years until children are in the working world and providing for themselves. Your insurance agent can help you determine what type of policy and how much to buy.

College Savings

t is never too early to start to put away money for college. Fortunately for college savers, there is a very tax-efficient vehicle for that—the 529 plan, which can grow untaxed and from which money can be withdrawn tax-free for qualified education expenses. Each state offers a program, although one need not reside in the state that sponsors the plan selected. If your state offers a state tax deduction, you may want to use your own state’s plan, but other than that, you can choose a state plan based on the costs and investment options offered. Grandparents who want to help should be aware that starting in the 2024-2025 school year, qualified distributions from a grandparent-owned 529 plan no longer must be reported on the FAFSA, the form most colleges require for financial aid applicants. The website savingforcollege.com is a useful resource for researching 529 plans.

Retirement Plan Beneficiaries

Children can be named as primary or contingent beneficiaries on retirement plans, such as IRAs and 401(k)s. Typically, one’s spouse is the primary beneficiary, with the children named as contingent beneficiaries, who will inherit the money if the primary beneficiary is no longer alive. However, there are family situations that may be better served by alternatives to that arrangement, and an estate planning attorney should be consulted. When naming beneficiaries, you may also want to add a per stirpes designation, which will allow the inheritance to pass on to the named beneficiary’s children if the named beneficiary is no longer alive.

Teaching Children About Money

Today’s financial products are more numerous and complex than ever. The sooner that children can be taught to be responsible with money and how to evaluate financial products, the better. For children as young as three, there are picture books that introduce basic principles of money in an easy-to-understand way. If given a simple savings account or a certificate of deposit (CD), children can learn first-hand about the basic investing concept of compounding interest. Parents can use a child’s familiarity with everyday products to explain that through stock ownership, any of us can own a piece of a company like Apple or McDonalds. Many financial websites have features that let you design and track a “fantasy” portfolio without using real money. To enable a child to personally experience the ups and downs of the stock market, a small brokerage custodial account, with an adult as custodian, can be opened and invested in companies the child knows and likes. Fidelity offers a “Youth Account” for 13 to 17-year-olds, that has no minimum balance or account fees and lets the parent oversee the teen’s activity.

Roth IRAs

Once a child begins earning taxable income from an after-school or summer job, a Roth IRA can be opened. If the child is a minor, the account can be a custodial Roth IRA. The Roth’s earnings and qualified withdrawals are tax-free, and contributions (but not earnings) can be withdrawn tax-free if the money is needed at any time.

The maximum amount that can be contributed to a Roth in 2023 is $6,500, but it cannot be more than the child’s earned income for that year. Whatever the amount, it can be valuable as a teaching tool and as an important first step in saving for retirement. It won’t be long before the child may be asked not only how much they want to contribute to their 401(k) or 403(b) plan, but how it should be invested. For most people, the days of an employer establishing a pension plan, funding it, and deciding how to invest the money are long gone. Now that responsibility has fallen on the employees themselves, and your child will someday be among them.

Estate Planning

If children are your intended heirs, it is a good idea to understand how certain types of assets are treated upon inheritance. For example, while a spouse can inherit your Traditional IRA or 401(k) and treat it as his or her own, a child as a non-spouse beneficiary must withdraw the entire amount over ten years and pay income tax on the withdrawals at their personal tax rate. If the withdrawals are large enough, they could push the child into a higher tax bracket, possibly at their peak earning years. Therefore, it’s usually more tax-efficient to leave Roth IRAs or non-retirement accounts to children. The cost basis of a stock or other security in non-retirement accounts is “stepped up” to the market value as of the date of death, which zeroes out any capital gain up to that point.

If your estate is large enough that it might be subject to either federal or state estate taxes, you can gradually remove assets from your estate by gifting up to $17,000 (in 2023) annually to each of your children and/or your grandchildren without being required to report the gifts on your tax return. The federal estate tax exemption is currently $12.92 million per person and will increase with inflation through 2025, but in 2026 it is scheduled to be cut in half with the expiration of the 2017 tax law, unless Congress votes to retain the higher amounts.

As always, if you have questions about investing for kids, you can reach us any time at (833) 888-0534 x2 or info@westbranchcapital.com .

About The Author

Anne Christopulos

Social Security — How Secure Is It?

Wed, 19 Apr 2023 19:08:13 GMT

If one was to read only the headlines of articles written to describe the future of our Social Security system, one could be excused for being alarmed. Some people, especially younger people when polled, even believe that they will never see a penny from Social Security when they retire someday. The topic of Social Security’s long term viability becomes major news every year when the administrators publish their latest projections.

According to the most recent forecast, the current surplus, referred to as the Social Security Trust Fund, is expected to be depleted in 2033. The trust fund was built up over time because for many years the money collected from payroll taxes exceeded the money paid out in benefits. However, the money collected is now falling short of the money paid out. The money in the trust fund is being used to make up for that shortfall.

The reason usually cited for the current shortfall is the falling ratio of workers to retirees. However, in a report of the Advisory Council on Social Security, the actuaries pointed out that the worker to retiree ratio was not the primary cause. The shortfall is also the result of higher disability take-up, slower wage growth, a growing share of earnings above the taxable wage base, and a growing share of compensation going toward health insurance and other untaxed benefits.

Once the trust fund is depleted, the program will be able to pay out only about 77% of scheduled benefits. So we can put to rest the idea that there will be no money to pay benefits at all. There will still be workers paying into the system, just not enough to pay 100% of scheduled benefits. The system does not operate like a typical corporate pension plan. It is primarily a pay-as-you-go system in which there is a monetary transfer from current workers to current retirees. The first recipients paid into the system for only five years before receiving benefits.

We have been here before. In fact, the Social Security surplus was on the verge of depletion when, in 1981, President Reagan established a bipartisan commission chaired by Alan Greenspan to study the options and make recommendations. Hanging over the process was the future stress on the system presented by the eventual retirement of the Baby Boom generation. Among the commission’s recommendations adopted by Congress were to gradually increase the full retirement age from 65 to 67, accelerate the payroll tax rate increases that had been previously scheduled, initiate partial taxation of Social Security benefits on higher income recipients, and bring newly-hired federal employees into the system.

Not infrequently, the ability of Democrats and Republicans to come together in the 1980s and address a future crisis is referred to as a model of bipartisanship that seems impossible to replicate in the current political environment. Instead, it has become a political football. It’s clear that people (voters) do not want to see their benefits cut, nor do they want to pay more in taxes. No wonder that Social Security has been called the “third rail” of politics. However, a recent survey conducted by the Program for Public Consultation at the University of Maryland provides some evidence that Americans are more receptive to small increases in both the payroll tax and the retirement age in order to preserve the system than politicians seem to think.

The Social Security actuaries have projected that an increase in revenues equal to less than 1% of GDP will be sufficient to cover promised benefits over the 75-year planning period. Certainly, raising the payroll tax rate is one way to raise revenues. The percent of wages subject to the payroll tax reached its current level of 12.4% in 1990. Half of that is paid by employees and half by employers, with the self-employed paying the full 12.4%. Raising it to 16%, which would bring the employee portion up from 6.2% to 8% of wages, would solve most of the problem, and a smaller increase would be a partial fix. A strong argument against increasing it is that it would hurt lower-income workers, many of whom already are subject to a higher average tax rate than many higher income workers, when payroll taxes are added to income taxes.

Another proposal is to raise the wage base to which the rates are applied or even eliminate the cap altogether. In 2023 that base is $160,200, which increases each year as salaries rise. A variation of that is to leave it where it is, but then re-apply the rate to wages above a certain level, such as $400,000, as proposed by President Biden, and perhaps phase it out again at a still-higher level. One rationale for expanding the wage base is that the total share of wages escaping the tax has risen from 10% in the 1980s to 20% today.

Some proposed solutions involve reducing benefits. One is to again raise the full retirement age beyond 67, which will apply to people born in 1960 or later. To ease the impact on workers who need to retire earlier, the early retirement age, at which lower payments are received, could be maintained at age 62. Another proposal is to lower the cost-of-living adjustment that is applied each year. The impact on retirees may not be severe initially but over time it would take its toll on lower income recipients. Benefits for higher income recipients could be reduced indirectly by expanding the proportion of benefits that is subject to income taxation, currently no more than 85%. That would bring additional revenue into the system.

Some argue that no change be made to the payroll tax rate or the wage base and that that general tax revenues should fill the gap. They point out that it would be no different than how we pay for other federal programs and that the cost is only a very small percent of the nation’s GDP. But that would entail shifting funds from other programs, raising income taxes, or increasing the federal debt. It also would involve changing the law, which requires the program to be self-funding.

Other ideas revolve around increasing the number of workers paying into the system. For example, the workforce could be increased and the ratio of workers to retirees raised by admitting more working-age immigrants, especially if the current worker shortage persists. Or newly-hired state and local employees could be brought into the system, as was done in 1984 with federal employees, which would bring more funds in at a time when they are needed. While many state and local employees already participate in Social Security, there are still some public employees at the state and local level who do not.

There was a time not too long ago that retirement planners looked at the “three-legged stool” with the three legs being a company pension, Social Security, and personal savings. Company pensions have almost become extinct, leaving workers to bear the burden of funding and managing their employer-sponsored retirement plans, such as 401(k) and 403(b) plans, if they even participate at all. That makes people more dependent on the other two legs of the stool, especially Social Security, given the meager personal savings that many people retire with. Congress can only procrastinate for so long, and may continue to do so until the program is on the brink, as it was in the 1980s. But the importance of Social Security income is greater than ever.

If you have questions about Social Security or any other topics, please reach us at (833) 888-0534 x2 or info@westbranchcapital.com .

About The Author

Anne Christopulos

Bond Market Update

Wed, 19 Apr 2023 19:05:26 GMT

Early in the year bond yields declined along with an improved stock market on hopes the Federal Reserve would slow its pace of rate increases. After raising rates at the fastest pace since the 1980s, inflation and economic growth appeared to have slowed. Investors interpreted the Fed’s .25% rate increase in February, down from as high as .75% previously, as a sign there could be a pivot to rate cuts later this year. However, subsequent economic data showed inflation numbers remaining elevated and a resilient economy. Labor markets are extremely tight with the recently reported unemployment rate at a historically low 3.5%. Investment markets reacted negatively. With inflation running in the high single digits interest rates began to retrace their steps and moved higher.

Here is a recap of yields in the first quarter:

In early March two large banks, Silicon Valley Bank and Signature Bank, were both shut down by the FDIC. These two banks became insolvent not from investing in risky products but from investing in us treasury and government guaranteed mortgage-backed securities that were mismatched in maturity to their large uninsured deposit base. Silicon Valley Bank catered to the tech industry which, with recent troubles, companies’ saw their cash holdings decline. Signature Bank catered to Crypto firms which also had cash flow issues. The Fed’s campaign to slow the economy and bring inflation down led to large unrealized losses in these securities as rates climbed. When customers demanded their money back, forced sales were made at significant losses resulting in the inability to meet withdrawal demands. The FDIC stepped in to protect all depositors but did not to save the banks. The Fed, recognizing the risk its interest rate increases created, raised rates by a modest .25% in March. While bank stocks have come under pressure, we feel the government’s actions should prevent a systemic problem developing. Most banks do not have a concentrated deposit base that these banks had.

This event led to a flight to safety in the bond market. Yields on treasury securities declined as investors perceived these events would lead to a moderation of Fed policy with potentially a cut in short term rates later this year. The 2-year treasury yield reached a peak of 5% during the quarter and the 2 years to 10-year spread reached a negative 130 basis points at its widest. After the banking crisis yields declined rapidly as investors sought safety. The 2 to 10 years spread stood at a negative 56 basis points at quarter end, and as the chart above shows yields have come down. In contrast corporate bond spreads widened in most cases and only the highest quality companies were able to take advantage of these lower rates during this period.

The rapid increase in interest rates has thus far had only a modest effect on bringing inflation down. The Fed’s primary goal is to get inflation close to 2%. While recent economic numbers have shown some signs of cooling in producer prices and retail sales it is uncertain whether this trend will be sustained; recently reported price increases have been in the 4-5% range. The Fed is caught between maintaining financial market stability and controlling inflation. The recent turmoil in the banking sector could cause smaller local banks to lose deposits and pull back on lending. The result could be a credit crunch leading to slower household and business borrowing, spending, and investing. This increases the risk of recession.

The US Treasury yield curve is sending a warning about the economy. The 2-year/10-year yield curve – which had been flattening for the past two years and inverted in mid-2022 – has steepened since the recent banking tumult. The spread between the 10-year and 2-year has narrowed to -47 basis points from -130 basis points on March 10th. An inverted yield curve – whereby shorter-dated bonds yield more than longer-dated ones – is considered a reliable recession indicator, reflecting the expectation that monetary policy tightening will hurt the economy. The recent steepening is a signal that investors expect a pivot to rate cuts as a recession takes hold.

The question facing investors is whether they should heed the signal from the recent steepening yield curve or ignore it as a false signal.

The answer depends on whether the Fed will follow through with rate cuts. We feel while the Fed is near the end of the tightening cycle, but it is unlikely to deliver the rate cuts that are currently priced in for 2023. The banking issue appears to be contained, and with the inflation still elevated the Feds job is not done. If this scenario unfolds it will lead to a bear flattening of the yield curve whereby rates rise with short term rates rising more than long term rates.

Could the banking crisis develop into a systemic problem?

The recent bank failures raise the question of what about other banks. Do they have similar issues? The answer is many banks have risks that are not apparent to most investors, but the Feds recent actions should prevent further problems. While most banks do not have the concentrated uninsured deposit base that Silicon Valley Bank and Signature bank had, the securities portfolio of many institutions have similar risk profiles.

The securities holdings of banks are classified by each individual bank into three categories:

Trading
Available for sale
Held to maturity

Securities classified as trading are marked at their market prices and any increase or decrease in value is reflected in the bank’s earnings. Available for sale securities are carried at market prices but any change in value is only recorded as a reduction in equity and is not reflected in earnings. Held to maturity securities are not marked at their fair value but maintained at their original purchase price regardless of price changes.

As interest went up in the last year only the decline in the value of securities classified as “trading “were reflected in bank earnings. When Silicon Valley bank and Signature bank were forced to sell their “available for sale” and “held to maturity” securities large losses, which had not been recognized previously were realized.

Other banks have similar unrealized losses in their securities portfolio. However, the Federal Reserve has created a facility called “Bank Term Funding Program”. This lending program allows banks to receive advances from the Fed for up to a year by pledging their debt securities holdings as collateral. Effectively this will prevent banks from having to sell their holdings at a loss if they were to face large deposit redemptions. With this facility in place, it is most likely the banking crisis will be contained and not become systemic.

If you have questions about the bond market or any other topics, please reach us at (833) 888-0534 x2 or info@westbranchcapital.com .

About The Author

James K. Ho

Bond Market Update

Mon, 13 Feb 2023 20:02:10 GMT

The year 2022 saw interest rates increase across all maturities as inflation soared to levels not seen in several decades. What had been considered transient inflation due to supply chain constraints/bottlenecks turned out to be intransient. To rein in inflation, the Federal Reserve embarked on a series of interest rate increases beginning early in the year. The Fed Funds rate which had been close to 0% in early 2022 has risen through a series of rate hikes of .75% and a recent increase of .5% to a level of 4.25-4.5%. While goods and services inflation have eased somewhat, with November’s annual CPI at 7.1% down from over 8% in prior months, other factors continue to weigh on the inflation outlook. Specifically, wage inflation remains a concern; in November, average hourly earnings were up 5.1% and the unemployment rate held steady at a low 3.7%. In December, wage growth slowed but the unemployment rate declined further to 3.5%. With demand for workers exceeding supply, wage inflation remains a source of concern. Shelter (housing and rent) costs have come down but remain persistently high. The Fed wants to get inflation down to 2% and has indicated the Fed Funds rate may go as high as 5% to reach its goal. It is willing to risk an economic recession to accomplish this. Any signs of stronger growth or exuberant equity markets could hinder the Fed’s efforts to cool inflation. Therefore, prices need to slow more significantly, or higher rates may be in store.

The yield curve or yields from short to longer term bonds is typically positive as investors demand more yield to commit to a longer timeframe. However, that difference has become extremely inverted, meaning short term rates today are much higher than longer term rates. At year-end, the two-year US treasury yield was 4.43% while the 10-year yield was 3.87%, putting the two-year 56 basis points higher than the 10-year. As the chart below shows, this difference was +78 basis points in the other direction at the beginning of 2022. The six-month bill to the 10-year inversion at 88 basis points at year-end is even more dramatic:

When inversions this extreme occur, it typically signals investors’ desire to lock in longer term rates in expectation that the Fed will ultimately lower rates. Whether this occurs will ultimately depend on the path of inflation. Historically inversions of this magnitude have resulted in slowing economic growth which should lead to slowing price increases.

While the yield curve points to a coming recession, and an end to Fed tightening will eventually occur, the goal of 2% inflation appears far away. Therefore, it is more likely the Fed will deliver higher rates rather than the rate cuts the market is expecting.

What fixed income strategies should be pursued?
The major risk going forward for bonds is inflation staying persistently high forcing the Fed to raise rates more than the markets currently expect. Other central banks around the world are also in the process of raising their interest rates. After a period that saw negative interest rates in many countries, currently only Japan is left with negative interest rates. The path of least resistance in the short- to intermediate term is for higher rates. A further increase in yields will negatively impact companies through higher borrowing costs. Higher mortgage rates would further crimp housing, and consumer spending could decline as credit card and auto loan rates increase. The result could be increased delinquencies and defaults on debt and ultimately a recession.

Fortunately, at the present time inflation expectations remain low. This can be observed by looking at the 10-year breakeven inflation rate. This is a metric we have referred to in the past. As a refresher, it is the difference between the nominal 10-year treasury yield and the yield on a 10-year treasury inflation protected security (known as TIPS). Currently the breakeven rate stands at a low 2.3% which is close to the Fed’s inflation target. This number means that investors expect inflation to average 2.3% per year over the next 10 years. To put it another way, an investor who buys the TIPS note today would need inflation to average 2.3% per year for the next 10 years to break even— any higher level of inflation and they are ahead. In general, this gauge has been a good predictor of future inflation. While inflation today is still high, prices for items such as gas, used cars and rental costs are coming down. The 2% desired level of inflation appears far away but some comfort can be taken in the breakeven number which indicates it could ultimately be achieved.

Fed chairman Jerome Powell has made it very clear he is willing to sacrifice an economic slowdown to prevent inflation from becoming embedded in the economy. Knowing this, investors should prepare for higher short-term rates. However, when there is any sign that inflation in coming close to the 2% level, bond maturities should be extended and credit risk increased to take advantage of potentially declining long-term yields and narrowing credit spreads.

Fixed Income Strategies
6–12-month time horizon…

With treasury bills in the 4% plus range, build a ladder maturity portfolio in treasury bills from three months to one year.
With a looming recession, concentrate corporate bond holdings in high quality companies rated “A” or higher. This can be accomplished through individual bonds or through a diversified high-quality fund such as IGSB (iShares 1-5 year investment grade corporate bond fund).
Avoid high yield bonds. While high yield bond spreads over treasury securities appear attractive, a slowing economy will hurt lower quality companies causing spreads to widen.
Keep overall bond maturities short in the two– to five-year range

When reported inflation approaches 3%, there can be some confidence the end of Fed tightening may be in sight. At that point…

Extend bond maturities out to 10 years through building a bond ladder of 2- 10 years using individual bonds.
Focus purchases on individual Investment grade corporate bonds with credit ratings in the BBB or higher range.
Alternatively use IGIB (iShares 5-10- year investment grade corporate bond fund) along with IGSB to build a diversified portfolio. LQD (iShares investment grade corporate bond fund) which a longer maturity can be used for those willing to take more maturity risk.
Build a modest position in high yield bonds rated BB or higher. An improving economy will benefit lower quality credits. This can be accomplished using HYG (iShares high yield corporate bond fund).

These suggestions may be appropriate for some clients, but there are other funds to choose from which may be just as good. Never has it been more critical than today to monitor the inflation picture to determine what actions the Fed may take next.

As always, contact us anytime with your bond market or other questions by email or by calling (833) 888-0534 x2.

About The Author

James K. Ho

Paying for Long-Term Care

Thu, 13 Oct 2022 18:58:57 GMT

As you navigate retirement and the aging process for yourself or a family member, it can be daunting to figure out how to cover the costs of Long-Term Care (LTC). In addition to the tips discussed here, please also see our “Retirement Basics” guide . LTC costs could approach $500,000 (and possibly exceed) in some states. Let’s discuss how it can be funded if you do not currently have LTC insurance.

(1) Choose the appropriate LTC solution. Aside from a nursing home, other options include hiring a home health agency, adult day services and moving to a residential group home or an assisted living facility. Assisted living can be less expensive than a nursing home if the person doesn’t have medical needs. Look at this as controlling the expense, choosing the right option can help save money in the long run.

(2) Fund it yourself . If you are not currently in an LTC situation, live on less so you can save and set aside more money periodically to invest, whether in a 401(k), an IRA or a non-retirement investment account. Also look at other assets or income streams that you have such as:

(a) Social Security or a pension can pay for care. Many people can use their Social Security check to first pay this bill. It is guaranteed income, and this, paired with other guaranteed income such as a pension, can help fund LTC costs.

(b) Retirement account withdrawals. Monies withdrawn from a retirement account will increase your taxable income, however the LTC expenses may provide a medical expense deduction. This article “Deduct Expenses for Long-Term Care on Your Tax Return” from Kiplinger discusses the topic. Effectively, you could turn your retirement account into a tax-free health savings account.

(c) A home sale or a reverse mortgage. If neither spouse is living at home, a sale may be the solution. However, if one spouse is still living in a home, a reverse mortgage might be an option to help pay expenses for the other’s LTC.

(3) Apply for Medicaid . The rules for Medicaid assistance (limited to people with low incomes and assets) differ in every state. The federal government will pick up the tab for long-term care services, but only if you have limited income and your countable assets are typically less than $2,000 as an individual or less than $3,000 per couple. Asset transfers in the past few years may be problematic. Due to the state variations, a lawyer’s assistance may be prudent.

(4) Look into the Veterans Aid and Attendance program . This little-known Veterans Administration offering provides up to $1,830 per month for anyone who has served as little as 90 days in the military during a time of war and up to $1,176 for a surviving spouse. There are requirements related to income and asset maximums. It can significantly reduce the LTC burden. Once you’ve been approved for a Veterans Affairs pension, apply for the benefit by writing to your Pension Management Center.

(5) Look at insurance solutions . There may be several insurance solutions possible which depend on how close you are to needing LTC.

(a) Get LTC insurance through a group plan. If you take a job that offers LTC coverage as a benefit, you can be enrolled regardless of your health history. Enroll in it because then you may have the opportunity to carry it forward with you when you leave the company.

(b) Invest in a LTC care annuity. With an annuity, you pay a lump sum, and in return you get a specified amount of income paid to you at set intervals for the rest of your life. LTC annuities offer special provisions to help pay for LTC expenses. Refer to this article for more information – “ 5 Things you Need to Know about Annuities and Long-Term Care. ”

(c) Consider a hybrid life insurance/LTC policy. While LTC insurance providers are interested in your likelihood of needing assistance with daily living, life insurers are focused on whether you are likely to die at an early age. It may be easier for some people with chronic conditions to qualify for life insurance, and if so, some policies come with an LTC rider.

(d) Buy a policy for short-term care. Unlike LTC policies that can provide years of coverage, short-term care policies typically will cover you for a year or less. The benefits are smaller than a traditional LTC product, but may still provide some help.

(e) Look for whole life insurance policies and savings bonds. Cashing in savings bonds could help with LTC expenses. If an older whole life policy has cash value that won’t be needed, the policy could be used for an LTC life settlement where the proceeds from the sale are used to fund LTC expenses.

(f) Activate a chronic illness rider. If there is a term life or permanent life insurance policy with a chronic illness rider, you might have another funding source. The triggers for chronic illness riders are often the same as the triggers for LTC – you can’t do two of six activities of daily living without assistance or you need assistance for cognitive impairment.

(6) Consider your faith community . Some religious affiliations and congregations have foundations for members needing help paying for LTC.

The key thing to remember is that even without LTC insurance there are ways of addressing this need for both yourselves and your parents. After recognizing this, the next step is to seek help from qualified individuals during what can be a very stressful time. Better yet is to recognize this need and to have a plan before the costs are imminent. In an upcoming newsletter, we will discuss the various types of LTC insurance that are available to be a part of that plan.

As always, if you would like help with this topic or anything else, reach us anytime at (833) 888-0534 x2 or info@westbranchcapital.com

About The Author

Michael DuBois

Mike is a Managing Director and Personal Risk Management Specialist. Mike brings forty years of insurance industry experience to West Branch Capital. He will focus on advising clients on annuities, life insurance, retirement products, disability income, long-term care insurance and other insurance products. He will evaluate the quality of the options available to clients and make independent and objective recommendations as part of the firm’s holistic advisory approach to clients’ wealth and risk management needs. In keeping with the firm’s tradition, he will not “sell” any insurance products or policies. Prior to his retirement as an actuary from MassMutual in 2019, he was a regular speaker at actuarial conferences, served as an advisor on studies by the Society of Actuaries (SOA) and participated in the education and examination committees of the SOA. Mike is a graduate of Rensselaer Polytechnic Institute, a Fellow in the SOA (FSA) and a Member of the American Academy of Actuaries (MAAA).

How Investments are Taxed

Thu, 13 Oct 2022 18:53:12 GMT

If you are asked which marginal tax bracket you are in, there are usually two answers: one rate for ordinary income and a lower rate for qualified income. Investment income can be either ordinary or qualified. Let’s take a look at how investments are taxed and how they can affect your federal tax liability. Remember that we are discussing federal income taxes and that state income tax policies will vary.

Note that what follows applies to investments in taxable accounts, not to investments held in retirement accounts. Regardless of the types of investments held, Traditional IRAs, 401(k)s, and 403(b)s will be free of taxation until money is withdrawn, when it will be taxed at ordinary income tax rates. Qualified withdrawals from Roth accounts are tax-free.

Interest from bonds and bond funds

Interest from taxable bonds, bond funds and exchange-traded funds (ETFs), and other interest-bearing vehicles, such as CDs and savings accounts, is generally taxed at ordinary income tax rates in the year it is earned. Interest from Treasury bonds is not taxed at the state and local level. Interest from municipal bonds issued by state or local authorities is not taxed by the federal government or by the issuing state, but may be taxable by other states.

Dividends from stocks and mutual funds

This is where things can be a little confusing. Plain vanilla dividends from most individual stocks are usually “qualified” and therefore are taxed at lower, more favorable tax rates by the federal government. This also carries over to mutual fund dividends to the extent that they are generated from common stocks held within the mutual funds. However, there are some stocks dividends that are not qualified and are taxed at ordinary income tax rates. These are usually from companies such as real estate investment trusts (REITs) and master limited partnerships (MLPs), as well as some foreign companies that pay no federal income tax. Dividends from preferred stocks also may be taxed at ordinary rates or qualified rates, depending on the type of issuing company.

Capital Gains

When you sell a security at a gain, you will pay a capital gains tax at either your ordinary income tax rate, if you held the security for less than a year, or at the lower, capital gains rate, if you held the security for at least a year. If your 2022 taxable income is less than $83,350 (joint) or $41,675 (single), which closely corresponds to a marginal tax rate of 12% or less, your long term capital gains rate is 0%. That means you can “harvest”, or sell, gains without being taxed, as long as your gains do not raise your taxable income above those thresholds. If your 2022 taxable income is between $83,350 and $517,200 (joint) or between $41,675 and $459,750 (single), your capital gains rate is 15%. Above that they will be taxed at a 20% rate.

You have some control over the timing of your capital gains (and losses) when you own individual securities. This allows you to take gains or losses to minimize your tax liability, if done at the right times. However, you may incur capital gains taxes due to mutual fund distributions, even though you didn’t sell any of your mutual funds. That’s because mutual fund managers must distribute their fund’s capital gains each year.

Actively-managed mutual funds are not tax-efficient, whether they are held in a taxable account or a retirement account. In a taxable account, you are likely to be subject to capital gain taxes each year, while in a retirement account you are not benefiting from the lower tax rates enjoyed by qualified dividends and long term capital gains.

Exchange-traded funds and indexed mutual funds are also required to distribute their capital gains each year. However, due to low turnover in holdings, as well as certain practices ETF managers can use to minimize taxable capital gain distributions, the gains are generally not significant.

Net Investment Income Tax

Your investment income may be subject to an additional tax on your investment income if you have net investment income and your adjusted gross income (AGI) exceeds $250,000 (joint) or $200,000 (single). If that is the case, a 3.8% tax is applied to the lower of two figures: either your net investment income or the amount that your AGI exceeds those income thresholds.

Annuities

Non-qualified annuities, which are funded with after-tax money, are tax-deferred until withdrawn. If the annuity is “annuitized”, meaning that if periodic withdrawals are set up for a period of time or for life, part of each withdrawal is tax-free and the rest is taxed at ordinary income tax rates. If ad hoc withdrawals are made, they are fully taxed at ordinary rates until the only money remaining in the annuity is your basis, consisting of the original investment and any subsequent after-tax additions.

Qualified annuities, which could be IRAs or other retirement plans, are funded with pre-tax money and are therefore fully taxable at ordinary tax rates when withdrawn.

As always, if you would like help with this topic or anything else, reach us anytime at (833) 888-0534 x2 or info@westbranchcapital.com

About The Author

Anne Christopulos

Secure Act 2.0–The Sequel

Fri, 22 Jul 2022 18:50:26 GMT

According to the professional services firm, PwC: “A quarter of US adults have no retirement savings and only 36% feel their retirement planning is on track. Even for those who are saving, many will likely come up short. We estimate the median retirement savings account of $120,000 for those approaching retirement (age cohort 55 to 64) will likely provide less than $1,000 per month over a 15-year retirement span. That’s hardly enough, even without factoring in rising life expectancies and increasing healthcare costs.”

There was a time when corporate America played a significant role in financing retirement for their employees. Although traditional defined benefit plans are still common in the public sector, the Department of Labor reports that only about 12 million workers in the private sector have them today, which is less than half the number in 1975, although the workforce has more than doubled. During the same period, the number of active participants in defined contribution plans, such as 401(k)s, which are primarily funded by the employees themselves, has grown from about 11 million active participants in 1975 to over 85 million today. Yet even among full-time workers, less than 60% actively participate in their employer-sponsored plan, even though 75% have access, according to the Bureau of Labor Statistics. A recent Bankrate survey found that 36% of all adults have never had any retirement account at all, even an IRA, which doesn’t require an employer sponsor.

This is the situation members of Congress are trying to address as they write new legislation being referred to as Secure Act 2.0. It was in 2019 that the original Secure Act was passed by Congress. Its most notable elements were (1) the elimination of the Stretch IRA*, which had allowed non-spouse beneficiaries to spread withdrawals from their inherited IRA over their life expectancy, but now have to deplete the account within 10 years, and (2) the postponement of required minimum distributions from IRAs and other retirement plans from age 70½ to age 72, which benefits those who can afford to leave their tax-deferred retirement accounts untouched for longer. There were a few provisions that were designed to increase retirement plan participation, but Secure Act 2.0 goes further.

In creating rules for retirement plans, Congress attempts to balance the desire to make them more attractive for taxpayers in the form of tax breaks, but not sacrifice income tax revenue more than is necessary. In the original Secure Act, requiring retirement account heirs to withdraw money sooner acts to accelerate tax collection, while postponing required distributions for IRA owners postpones tax collection for a little while longer. The provisions included in the proposed legislation tweak the rules to break down barriers that may be preventing more people from saving for retirement, without having a major negative impact on tax collection.

Increasing Participation

One well-publicized barrier is college debt. It is not surprising that a recent ETrade from Morgan Stanley study found that 63% of investors under age 34 said that education costs or paying down loans are barriers to saving for retirement. Workers who are so burdened with college loan payments that they cannot afford to make contributions to their employer’s 401(k) may be missing out on their employer’s matching contribution. To address that problem, the new legislation would allow for an employees’ college loan payment to substitute for a retirement plan contribution and qualify them for the employer’s match.

Also part of the proposed legislation is a requirement that newly-established plans (but not existing plans) would be required to “auto enroll” employees at a certain contribution rate, such as 3%. The employee would have to opt out if they do not wish to, or can’t afford to, participate. To help address the affordability problem, another provision would allow retirement plan participants to self-certify their need for hardship withdrawals from the plan. Also, the penalty on early withdrawals, up to $1,000 per year, would be waived. Alternatively, the legislation could allow the employee to contribute to an “emergency savings account” up to a certain amount, with the excess above a certain amount flowing into the qualified plan.

Another group of people with a low participation rate are part-time workers. Congress would further loosen the criteria for the participation of part-time workers to require 500 hours in two years rather than 500 hours each year for three consecutive years in the original Secure Act. Also, it would take effect in 2023 rather than 2024.

Increasing Contribution Amounts

Although most people do not max out their retirement plan contributions, for those who are nearing retirement and can afford to contribute more, the annual catch-up for participants in employer-sponsored qualified plans who are in their early 60s could be increased to $10,000 from the current $6,500. In SIMPLE IRA or SIMPLE 401(k) plans the increase is to $5,000. This could be an important benefit for people who were perhaps unable to maximize their contributions when they were younger, due to their lower salaries, or the costs of raising children, but now have extra income they can put away for retirement.

However, all catch-up contributions, available to those at least 50, would have to be Roth contributions, which offer no deduction but are tax-free upon withdrawal. This will prevent taxpayers in high tax brackets, who are more likely to be able to afford the larger contributions, from receiving a large upfront tax deduction for their catch-up contribution. (Taxpayers in lower tax brackets are less likely to make catch-up contributions and do not benefit as much from the deduction.) But while losing the deduction will be disappointing to some participants, it may be a better strategy anyway in the long run, if it turns out that today’s tax rates won’t last. Unlike Traditional IRA and 401(k) withdrawals, Roth withdrawals will not be taxed and don’t even have required withdrawals, allowing wealthier taxpayers to benefit from tax-free investing or longer and perhaps leave a tax-free gift to their heirs.

Required Minimum Distributions

Where the original Secure Act raised the age at which minimum required distributions must begin, from 70½ to 72, Secure 2.0 would raise it further to 75, either gradually starting next year or not until 2032, depending on how the House and the Senate reconcile their respective bills. Although most retirement account owners are not in a position to leave their accounts untouched for longer, for those that can afford to do so, they can enjoy a few more years of tax-deferred growth and postpone taxation. They can also have a few more years to convert their Traditional accounts to Roth accounts.

However, waiting to withdraw from Traditional IRAs may not be the optimal strategy for everyone who can afford to wait. Depending on the situation, withdrawing from retirement accounts before it is required may be a more tax-effective strategy for the owner, as well as for the eventual heirs of the accounts, especially if the accounts are converted to Roth IRAs. There are many factors to consider, including marginal tax rates for both the owner and the future heirs, other income sources, and the possible effect on higher Medicare premiums and Social Security taxation. One factor may be the IRA owner’s plans to make Qualified Charitable Distributions from their IRA, which, in effect, provide a tax deduction for charitable contributions that may otherwise not be available as a result of the higher standard deduction.

Secure 2.0 may also include a reduction in the penalty for failing to take the required distribution from 50%, which is rarely assessed, to 25%, and may waive RMDs altogether for anyone with less than $100,000 in retirement plan assets.

Other Potential Provisions

The proposed legislation contains many other changes, including penalty-free distributions from qualified plans to pay for long term care insurance premiums, easier portability for job changers by standardizing rollover forms, and the modification of RMD rules to increase the availability of life annuities in qualified plans and IRAs.

Possible Changes NOT in 2.0

Some members of Congress are concerned about the exploitation of the tax benefits of retirement accounts by the wealthy. This has become a sensitive issue with the recent publicity surrounding the revelation that some super-rich people have built up retirement accounts worth tens of millions (and even billions) of dollars. To address that issue, the Build Back Better legislation, passed by the House but stalled in the Senate, would prohibit additional plan contributions and require minimum distributions if a high-income individual’s total plan balance exceeds $10 million. (The legislation defines high income as taxable income over $400,000 (single) or $450,000 (joint).) Further, high-income individuals would no longer be able to make Roth conversions. Also included is the elimination of the so-called “Backdoor IRA”, which allows taxpayers whose income is too high to qualify to contribute to a Roth IRA to instead contribute to a non-deductible Traditional IRA then immediately convert the account to a Roth IRA.

Status of Secure Act 2.0

The House passed its version of Secure Act 2.0 legislation in March with an overwhelming bipartisan majority. The Senate has two bills that easily passed out of their respective committees and will be combined to form the Senate’s Secure Act 2.0 legislation. Then the two versions of Secure 2.0 will be reconciled to form a final bill to be voted on in each chamber.

As always, if you have questions on the Secure Act or other topics, reach us any time at (833) 888-0534 x2 or by email .

About The Author

Anne Christopulos

The Top 529 Education Savings Plans of 2021

Wed, 09 Feb 2022 19:46:25 GMT

Parents, as you begin the process to plan and save for college expenses, you may find this article by Morningstar on The Top 529 Education Savings Plans of 2021 a helpful resource. We also have some useful tips and suggestions in this guide .

If you have questions on this or other aspects of financial planning, reach us any time at (833) 888-0534 x2, or send us an email .

About The Author

Ayaz Mahmud

Bond Market Corner

Mon, 24 Jan 2022 19:43:02 GMT

The bond market continued to surprise investors during the fourth quarter. Despite investors’ fears of higher interest-rates, longer term bond yields have maintained their low levels. The 10-year US treasury reached a high of 1.66% during the quarter before declining to 1.52% as fears over the Omnicom variant stoked fears of slower growth. Although this rate has moved up modestly during the year it has been under 2% for over 2 1/2 years. Throughout 2021 the Federal Reserve has been buying $120 billion of treasury and mortgage-backed securities each month. As a result of stronger recent economic numbers, including improved employment and higher inflation, the Fed has announced a reduction in its bond buying program that would result in it ending by March of 2022. At that time, it would have the flexibility to raise interest rates if necessary. The recent Fed meeting minutes showed the rate rise has broad support among Fed members. This is much sooner than investors had expected, and the bond market’s reaction has been to push up short term interest rates anticipating this action.

The Fed has a stated goal of achieving maximum employment and keeping inflation at slightly above 2%. The goal of 2% inflation has clearly been achieved. The belief has been that recently reported inflation numbers, which reached as high as 6% in November, is transitory and due primarily to supply chain and labor issues stemming from the pandemic. However, inflation has not subsided, and now the view is high inflation, while transitory, may persist for longer. Furthermore, supply chain issues could come to the forefront again if new variants extend the economic pause from the pandemic. Further supply chain issues could fuel higher prices. In response to the risk of inflation persisting and increasing the Fed has decided to accelerate its reduction in bond buying and potentially accelerating an increase in interest rates. The Fed will prioritize inflation and hike short term interest rates to keep it under control, even if the economy were to slow or employment fail to achieve its goals. Failure to restrain inflation could lead to a wage price spiral where workers expecting higher prices demand higher wages which in turn results in companies raising prices to compensate. Raising interest rates typically slows economic growth by increasing borrowing costs and pushing consumers to spend less, thereby cooling inflation as well. The impact of the Fed raising short term interest rates typically leads to a flatter yield curve whereby short-term rates rise more than long term rates. We have already seen this even though no action has been taken. For example, the two-year treasury yield was .29% at the end of September and the 10-year yielded 1.52%. This was a positive spread difference of +123 basis points (BPS). At year end the two-year was .73% and the 10-year unchanged at 1.52%—a difference of only +79 BPS.

Our view is the Fed will raise short term rates at least three times in 2022. With the Fed Funds rate currently at .25% the new range by year end could be .75%-1%. The yield curve has already adjusted somewhat to this potential increase. Further curve flattening will be modest unless the economy were to slow significantly, and inflation were to decline closer to the Fed’s 2% target. More likely longer-term yields can be expected to increase. We have already seen this with 10-year yield increasing over 20 BPS since year end to 1.73%. If inflation does prove to be transitory then a 10-year yield of 2% would present a good entry point for bonds.

In the current low-rate environment investors’ insatiable appetite for yield remains unabated. One way to see this is to look at bonds with credit risk. The yield of a bond, which factors into what an investor’s return will be, depends partially on the creditworthiness of the underlying bond issuer—the riskier the entity, the greater the yield. Most bonds with credit risk are priced at some yield premium, known as credit spread, over US treasuries which are considered risk-free. As investors search for higher yields, this premium has declined. Junk or high yield bonds might be the best example of today’s yield drought. These highly leveraged companies historically have provided a significant premium over treasuries to compensate investors for the risk of default. Yield levels of 9% to 11% were not uncommon even a few years ago. Recently, junk bond yields slipped below 4% showing the willingness of investors to overlook credit risk to gain higher income. The yield premium on junk bonds reached a recent historic low of 250 BPS. This shrinking risk premium is true up and down the credit spectrum and across borders and bond markets, a phenomenon supported by central banks’ accommodative monetary policies. This is certainly something to be wary of as the vulnerability of risk assets is underscored by this phenomenon.

Fixed Income strategies for rising interest rate environment
Interest rates may not go up significantly in the immediate future, but they certainly are not going to decline much more and will eventually head higher. Some strategies fixed income investors can use to protect against rising rates— (1) Invest in floating rate bonds. These securities will adjust their coupons higher as short-term rates increase thereby protecting principal in as rates rise. The easiest way to invest in these securities is through floating rate funds offered by many fund companies; (2) Buy inflation protected bonds. The nemesis of fixed income securities is inflation; it eats away at a bond’s value as bond coupons are fixed and as inflation increases, the value of these fixed payments declines. Inflation protected bonds also have fixed coupons, but their principal adjusts higher as inflation rises. Therefore, the investor potentially receives more principal at maturity as well as higher interest payments during the holding period, as the coupon payments will be based on a higher principal amount during the bond’s life; (3) Stick to higher quality bonds. A long period of low rates has pushed many investors into lower rated bonds in search of yield. As the Fed raises rates, riskier debt may feel more pressure as investors dial back. Currently the yield differential between high and lower quality bonds is historically narrow, meaning it doesn’t pay to take on more risk; (4) Build a bond ladder. Building it with maturities from one to eight or even 10 years will allow an investor to capture today’s yields but also afford the opportunity to capture rising rates as bonds in the ladder mature. This is best done through a portfolio of individual fixed income securities. High quality corporate bonds would be most suitable here; (5) Roll down the yield curve. So long as the Treasury yield curve is positively sloped (long rates higher than short term rates), each passing year will result in a bond being priced of a shorter maturity treasury with a lower yield since its maturity is one year less. The result is a higher bond price just from the passage of time. A well-built bond ladder will allow an investor to advantageously roll down the yield curve.

These are just a few strategies to protect against higher interest rates. Of course, the best defense is to hold cash and have no potential for capital loss. However, given our expectation of modest rate increases combined with today’s low interest rates, a cash portfolio would have a high opportunity cost in lost income.

As always, if you have any questions about fixed income strategies, call us at (833) 888-0534 extension 2 or request an introductory meeting here .

About The Author

James K. Ho

7 Common Estate Planning Mistakes

Mon, 24 Jan 2022 19:40:01 GMT

Estate planning is more than having a will or a trust, a power of attorney and a medical directive, which most of us do with the guidance of an attorney. Sometimes we make estate planning decisions which may not involve an attorney and we may not understand the consequences. And that means we may make mistakes.

Some of these “mistakes” are made with the best of intentions. An aging parent may want to show their love while they are still living to a child by gifting them stock, or a share in their house, or even their whole house. Or they want to remove an asset from their ownership to someday qualify for Medicaid should they require nursing home care. Or they may think that removing an asset from their estate will lower estate taxes, which few people are even currently subject to at the federal level. Or perhaps they think it will make things easier and less costly for their family by keeping the asset out of probate. Whatever the motivation, it is important to understand the full implications of such actions. In some situations, some of these actions may be appropriate, although they make this list because they are usually not appropriate and could be costly.

(1) Adding a joint owner, such as an adult child, to your account. There is usually nothing wrong with making a child the joint owner of a small checking account for the sake of convenience—in order to pay bills after death, or even late in life when we may be incapacitated. But adding a joint owner to a large account may be fraught with danger. First of all, it may be considered a gift, which may require you to report it as such to the IRS, even if there is no gift tax due. If it is a joint account with right of survivorship, that child will automatically take ownership of the entire account when you die, which may not be your intention if you have more than one child. Even if the account is held in a joint tenancy or as tenants in common, where you each may own half, that child will receive their half when you die while your half will become part of your estate.

Depending on how the account is set up, your child may have equal access to the funds, which may present problems if money becomes an issue for your child. Another danger is that the account could be exposed to any creditors that your child may have, including a spouse in a divorce action. Also, if there are highly appreciated stocks in the account, only your half will be given a “step up” in basis upon your death and your child will keep your low tax basis on their half which would result in higher capital gains taxes when the stock is sold.

In some states, an account can be designated as a “convenience account” in which case the account will become part of the decedent’s estate even though there is a joint owner. A better option is to use a durable power of attorney to authorize your child (or another person) to act for you in financial matters. You can decide if it should take effect immediately or only if you become incapacitated. And, like other documents, it should be revisited periodically to ensure that you are still comfortable with the person you selected to be your agent.

(2) Gifting your house to your child. As a completed gift this would require the filing of a gift tax return. One consideration is that giving away ownership to your home results in the loss of access to your home equity, should you need cash someday from a home equity line or reverse mortgage. If your house is worth much more than what you paid for it, remember that you are also gifting the tax basis and creating a large capital gain for your child, whereas if the house is inherited upon your death, the tax basis is stepped up to the market value. Also, if your child were to be in a divorce situation, the house could be considered a marital asset. And if your child dies while you are living there, you could be at the mercy of your child’s spouse, who could become the new owner. If your intention is to protect your house from long term care expenses, work with an estate planning attorney.

(3) Naming your estate as your IRA beneficiary. If your estate is the beneficiary of your IRA, the IRA funds will go through probate and be distributed according to the terms of your will. Not only could it add to the expenses of probate, but if any withdrawals are made from the IRA while it is held by the estate, they will be taxed at the much higher estate tax rates. More importantly, it could be costly in income taxes for your non-spouse beneficiaries, who would have to withdraw their shares of the IRA within five years. Non-spouse designated IRA beneficiaries who receive their shares directly from the IRA may be able to spread out their withdrawals over ten years, which can save income taxes as well as take advantage of the tax-deferred nature of an IRA for a longer period of time.

(4) Not updating your beneficiaries. It is important to review both the primary and contingent beneficiaries of your insurance policies, IRAs, 401(k)s and other retirement accounts regularly, but it is critical to do so if there has been a divorce or a death. If you have children and grandchildren a “per stirpes” beneficiary designation can ensure that if one of your children dies before you, that child’s children will receive his or her share, if that is your intention. You may even want to have an estate planning attorney draw up a customized beneficiary designation to ensure that your wishes are implemented, particularly if there is an issue with a particular child or grandchild. If you have a beneficiary with a special needs trust, the trust, rather than the person, should be named as the beneficiary.

(5) Not funding your revocable trust. Once your attorney has created your trust, you must then retitle your assets to be in the name of the trust. Otherwise, those assets will become part of your estate and will be probated and distributed according to the terms of your will instead of your trust. Of course, your IRA or other retirement plan cannot be titled in the name of your trust. You do have the option of making your trust a beneficiary, but in most cases that is not a good idea. However, there may be individual circumstances that may warrant naming your trust as a beneficiary, such as if there is an heir with credit (or other) issues, in which case your estate planning attorney can advise you.

(6) Not coordinating your retirement plan, life insurance, and trust beneficiaries with your will. It is crucial to understand how each of your assets will transfer after your death. Otherwise, your assets may not be distributed as you intend. For many people these days, the bulk of their investments are in IRAs and other retirement plans and are distributed to the beneficiaries that have been named in those accounts. The instructions in your will and trust are irrelevant to the distribution of retirement plan assets, unless your will or trust is the beneficiary, which is usually not the best practice.

(7) Not having a will or other documents. You may be reading this and thinking, “I’m OK. I have a will, power of attorney, health care proxy and medical directive, and even a trust.” But do the other important people in your life also have them? If your parent has not created a power of attorney and becomes incapacitated mentally, you may have to go to the trouble of getting a guardianship, which can be very costly. If your parent has not provided a medical directive, and you and your siblings do not agree on your parent’s course of care, your family relationships can be irrevocably damaged.

Sometimes a person may be reluctant to get certain planning documents. One approach may be to point out to them that estate planning is not just for death but also for possible incapacitation, whether physical or mental. Estate planning means that you care about the people in your life enough that you don’t burden them with decisions and complications that may be very difficult for them at an already emotional time.

As always, if you have any questions about estate planning, call us at (833) 888-0534 extension 2 or request an introductory meeting here .

About The Author

Anne Christopulos

Charitable Giving in 2021 and Beyond

Fri, 17 Dec 2021 19:33:40 GMT

Giving Tuesday” was November 30th this year, but you have until December 31st to make charitable contributions that qualify for a 2021 tax deduction. With the increase in the standard deduction starting in 2018, many people no longer have been able to reduce their tax bill with their charitable donations because their standard deduction now exceeds the total of their itemized deductions. However, philanthropy, whether on a small scale or large, still plays a part in many of our lives, regardless of any tax break for which we may qualify. And tax benefits still exist, especially in 2021.

Take Advantage of Special Gifting Opportunities in 2021
The Cares Act that was passed in response to the coronavirus crisis includes a provision that, in 2021, taxpayers can take a $300 (single)/$600 (joint) charitable deduction even if their total itemized deductions do not exceed their standard deduction. So make sure to give a record of your charitable contributions to your tax preparer.

Another provision in the Cares Act allows taxpayers to deduct 100% of cash contributions to public charities in 2021 up to 100% of Adjusted Gross Income (AGI), rather than the normally-allowed 20%-60%, depending on the type of contribution and type of charity. Therefore, bunching several years’ worth of contributions to one or more charitable organizations into 2021 may be a particularly good strategy this year for donors planning large gifts because it may provide a larger deduction than in normal years. However, this temporary rule change only applies to cash gifts made directly to the charitable organization and not to non-cash gifts or donations made to a donor-advised fund or a private foundation.

Bunch Charitable Contributions into One Year
For taxpayers whose itemized deductions are close to their standard deduction, they may consider bunching two or more years of contributions into one year and taking the standard deduction in the other year(s).In 2021, the standard deduction is $12,550 single/$25,100 joint. If you are age 65+, the figures are $14,250 single and $27,800 joint. So, for example, if a couple under age 65 filing jointly has $26,000 in itemized deductions, including $6,000 in charitable contributions, only the last $900 of that exceeds their $25,100 standard deduction. If they are in the 22% marginal tax bracket, itemization will save them only $198 in taxes in 2021 and $22 in 2022, when the standard deduction rises to $25,900, for a two-year total savings of $220. But if they double their 2021 contributions to $12,000, their itemized 2021 deductions will exceed the standard deduction by $6,900 and itemization saves them $1,518 in taxes. Then next year they can skip their contribution and take the standard deduction. Bunching may be especially valuable in the last year before retirement, when one’s marginal income tax rate is typically higher than it will be in retirement.

Use Charitable Contributions to Offset Income from Roth Conversions
If you are considering a Roth conversion before the end of the year, you may be able to offset part or even all of the additional taxable income created by the conversion by making charitable contributions. When you convert all or part of a Traditional IRA into a Roth IRA, the amount of the conversion is taxable income at ordinary income tax rates. Any charitable contributions you are able to make in excess of your standard deduction can offset additional income from the Roth conversion and reduce your tax liability.

Contribute Appreciated Securities
A taxpayer can contribute an appreciated stock or other security that has been held for at least one year to a qualified charity and take the fair market value as an itemized deduction up to 30% of the Adjusted Gross Income. When this is done, no capital gains taxes apply to the donor. This may be particularly beneficial to someone who has a very large position in one stock and is reluctant to pare back that position out of fear of capital gains taxes. Note: Some securities, such as restricted or privately traded securities, real estate, collectibles, or cryptocurrency, may have additional requirements and limitations.

Consider a Donor Advised Fund…
A Donor Advised Fund (DAF) is like a personal charitable savings account that is controlled by a nonprofit, referred to as a sponsoring organization, that invests the assets and manages the account. Two such sponsoring organizations are Fidelity Charitable and Schwab Charitable. A DAF allows donors to make an irrevocable charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time. Donors can contribute cash, securities, or other assets to the fund as frequently as they like, and then recommend grants to their favorite charities whenever it makes sense for them. The annual limit for contributions to DAFs is 60% of AGI. DAFs offer a good vehicle for bunching contributions in a single year, as described above, because you do not have to specify the charity at the time of the contribution.

…or a Private Foundation
Highly philanthropic people who want to make substantial charitable contributions and leave a legacy to be carried on by future generations may want to consider setting up a private foundation. A private foundation is managed by its own board of directors, receives most of its financial support from and is normally controlled by its founders, and must make charitable distributions throughout the taxable year. A private foundation is a tax-exempt organization, but must pay a nominal excise tax on net investment income. Although it typically makes grants to public charities, it can also run programs, provide services, and conduct direct charitable activities, as well as provide aid to individuals and families for disaster relief and hardship assistance. Setting up a private foundation will likely require the assistance of a CPA or attorney. The annual limit for contributions to private foundations is 30% of AGI.

Note on Donor Disclosure
Names of donors to public charities and donor advised funds are not required to be disclosed to the public. However, identities of contributors to private foundations are not exempt from disclosure.

About The Author

Anne Christopulos

The World of Insurance

Thu, 04 Nov 2021 18:23:09 GMT

By definition, insurance is “coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril.” A specified contingency or peril is a risk. In essence, insurance provides people with peace of mind against risks. Every contract provides different protection at different costs, and should be reviewed on its own to determine if it meets your needs. This is an overview on the various types of insurance, which we will explore more fully in future articles.

When considering insurance, determine the risks that you and your family have, and take time to understand them. Next, assess how much risk you can handle (or self-insure) versus how much should be covered by an insurance company. Where they exist, deductibles and co-pays adjust the level of self-insurance that you have. Finally, it is important to trust that the company providing the insurance will be there to fulfill its obligations. This trust can be enhanced by ensuring the company has good financial strength ratings from a third-party rating agency. Some common examples of coverage:

Health
Auto
Homeowners
Umbrella
Life insurance
Disability
Long term care

Everyone should have health insurance which covers medical costs. In many cases, health insurance is provided as an employee or government benefit and covers both minor and major risks. Since major health expenses can create substantial financial hardship, this is the first insurance anyone should be certain they have. Medical plans can have varying levels of deductibles that impact the cost of medical care when you receive it. Higher deductible plans generally have lower premiums. A high deductible medical plan has you paying for a large portion of your care, but has the insurance company covering catastrophic losses. This is an example of increasing your self-insurance. Dental, prescription and vision insurance are variants of health insurance.

If you own an automobile, this insurance covers the risks of owning and operating it. The only two states that do not require auto insurance are New Hampshire and Virginia. This insurance covers people hurt in a car accident and damages to the car and other’s property.

If you own a home or rent a residence, homeowner’s (or renter’s) insurance covers the risks associated with it. Property damage is the most common use of homeowner’s coverage, but the liability portion covers you should someone be injured on your property. Renter’s insurance covers the personal property of the renter. If there is a mortgage, most lenders require homeowner’s coverage. Dependent on the location of the residence, there may be additional coverages that should be considered such as flood insurance. Flood damage is not covered by normal homeowner’s insurance.

If you have substantial assets, consider umbrella liability which provides coverage beyond that provided in automobile and homeowner’s contracts. This protects other assets that individuals own so they are protected in the event of a lawsuit. This can be an important coverage to avoid asset loss.

To protect against the loss of an individual’s income, life insurance provides a benefit on death and disability income insurance provides a benefit on a sustained disability. Life insurance can also provide funds to cover final expenses.

There are two primary types of life insurance. Term insurance provides pure protection for the insured for a specified period of time. It is an efficient way to address the need for income replacement. It is generally less expensive for younger individuals and can be the best way to address pre-retirement needs; term insurance provided by employers (group life insurance) can be a good foundation for this need. Whole life insurance combines a savings element with pure protection to level the cost of protection over an individual’s lifetime. Both term and whole life insurance have their place in a financial plan.

Just as death can result in a loss of income, disability can as well. Disability income insurance provides for the replacement of that income in the event that the insured is unable to work. Disability can be either short-term (usually 6 months or less) and long-term (more than six months). Some employers provide group disability income protection.

To protect your assets from being exhausted by a stay in a long-term care (LTC) facility, consider LTC insurance. Depending on the policy’s terms, LTC insurance covers nursing home stays as well as home care equivalents. Most states have minimum requirements for LTC contracts, which if met, will allow access to Medicaid benefits without a need to exhaust an individual’s assets.

As always, if you have insurance questions please reach out to us at (833) 888-0534 .

Michael DuBois and West Branch Capital do not sell insurance products but can assist in your insurance analysis needs. Mike can be reached at mdubois@westbranchcapital.com .

About The Author

Michael DuBois

The Impact of Divorce on Retirement Planning

Thu, 04 Nov 2021 18:19:45 GMT

For many people, planning for a comfortable retirement is a long term challenge. A divorce can make it even more challenging. What had been a joint effort, with shared assets and expenses, now becomes an individual undertaking, with each spouse needing to cover the costs of a household and having fewer resources to tap.

The Role of a Financial Advisor

As soon as divorce seems likely, perhaps before even securing the services of an attorney, a divorcing spouse should consider meeting with a financial advisor, in particular with a Certified Financial Planner, who has the broad-based education to examine all the financial aspects of the divorce. An advisor can help prepare the spouse for the meeting with the attorney (or mediator) by furnishing her or him with the information needed to make the meeting as productive as possible. Be aware that an advisor who has been working with the two spouses as a couple will have a conflict of interest and will therefore find it necessary to sever the relationship with one spouse in order to advise the other spouse.

Relative Financial Positions
Divorcing spouses will likely be going into the divorce with an imbalance of income and assets. One may have worked less, own fewer retirement assets in their own name, and have lower earnings expectations in the future. And even after retirement, the disparity can continue well into the future. For example, if one spouse, usually the wife, took time out from, or perhaps abandoned, her career, in order to raise children, her Social Security benefit can be much lower. If the marriage lasted at least 10 years, and she doesn’t remarry, she will be entitled to only half of her ex-husband’s benefit, unless she is entitled to more on her own earnings record. If the marriage has lasted close to but not quite 10 years, perhaps the divorce could be delayed.

The court’s objective is to try to equalize the post-divorce financial positions as much as possible, so it is crucial that the judge has all the information with which to do so. In some marriages, spouses may not even be aware of each other’s individual financial assets. And some retirement assets, such as a pension plan, are less transparent than others, such as a 401(k) plan. Once all retirement assets are identified, it may be a good idea for the non-participant spouse to ask the plan administrators to put the accounts on hold and not allow withdrawals or loans, at the start of the divorce process.

Division of Marital Property
In most cases, only assets that are deemed marital property are divided in a divorce. Assets owned prior to the marriage are usually awarded to the original owner, while assets accumulated during the marriage are subject to division by the court. For example, the marital portion of a 401(k) plan may be the difference between the balance as of the marriage date and the balance as of the date of divorce, or whichever ending date is negotiated by the divorcing parties. If one spouse is covered by an employer-sponsored pension plan, that plan may be prorated if that spouse was already enrolled as of the date of the marriage.

Before the divorce terms are finalized, a divorcing spouse should consult a financial advisor or tax professional who can make her or him aware of the tax implications of a divorce. Most retirement assets are tax-deferred, so in a sense the current balance understates the true value, which reflects taxation upon withdrawal. A million dollar Traditional IRA has a lower after-tax value than a million dollar joint brokerage account. And a Roth IRA, which is not taxed at withdrawal, is more valuable than a Traditional IRA of the same dollar balance. It is important to take future taxation into account when the assets are being divided.

Qualified Domestic Relations Order (QDRO)
Once the marital property portion of retirement assets is determined, the court will decide how it is to be divided. The court may divide one spouse’s plan in a certain way in order to the equalize post-divorce retirement assets. Or it may be that each spouse retains their own retirement assets, and other assets are divided in order to equalize the settlement. But if it is necessary to divide retirement assets, a court order known as a QDRO is used. It is important to know that the QDRO is a separate order from the divorce judgment and must be separately obtained. Technically, a QDRO is used only for private employer-sponsored plans, such as company pension plans and 401(k)s, but there are similar documents that are utilized for other types of retirement accounts, such as IRAs and federal/state/municipal plans.

Usually the spouse who will be receiving the retirement assets is responsible for filing the QDRO. That process generally starts with that spouse’s attorney, who may write it up or may have it written by a QDRO provider. Once written, it is reviewed by the other spouse’s attorney and, if possible, sent to the retirement plan administrator for further review before it is sent to the court for issuance. A certified copy of the QDRO is then submitted to the plan administrator for final approval and implementation. Template QDROs should be avoided, because they are often written to favor the participant spouse in a retirement plan. A separate QDRO is required for each retirement account.

The QDRO should be filed promptly or the nonparticipant spouse may lose benefits due to the retirement, termination, withdrawal from plan, remarriage, or death of the participant spouse. If the plan is a defined contribution plan, such as a 401(k), the QDRO should make it clear that the filing spouse is an alternate payee. If it is a defined benefit plan, like a pension plan, the alternate payee should be designated as the surviving spouse.

Retirement assets that are transferred to a spouse under a QDRO are not taxed upon transfer, but are taxed when they are withdrawn or distributed. The receiving spouse can roll over the assets of a defined contribution plan, such as a 401(k), to his or her own plan to avoid immediate taxation. However, if some or all of the retirement assets received are not rolled over and are therefore subject to taxation, the 10% early withdrawal penalty will not apply if the spouse is under 59 ½. (The 10% penalty does apply to IRAs, which are not covered by a QDRO.) If any assets are rolled over and then withdrawn, the 10% penalty will apply. An ex-spouse who has received a share of pension payments may not be able to access the money until the participant spouse retires or reaches the plan’s earliest retirement age, which may be 50 or 55.

The QDRO should specify an “as of” date for separation of assets due to the changing value of the plan’s assets. That date could be the date of divorce or could be another negotiated date. The QDRO should also specify a percent division of the asset, rather than a dollar amount, which would involve a risk to either party from fluctuating market conditions. In addition, loan balances should not be overlooked, and there should be language that prohibits withdrawals before assets are separated.

Tax Implications
If the receiving spouse elects to take possession of all or a portion of his or her share of retirement assets rather than rolling it over to his or her own plan, it will usually be more tax-efficient to receive it over multiple years to avoid paying income taxes at a higher marginal tax rate.

The 2017 tax bill changed the tax treatment of alimony, or spousal support. Prior to that, the spouse making the payment could deduct the payment, and the receiving spouse had to declare it as taxable income. For divorces finalized after January 1, 2019, spousal support is treated the same as child support. The payer can no longer deduct the payments, and the recipient no longer declares it as income.

Another tax consequence is that after the divorce, each will file an individual tax return, until remarried, which may result in the higher-earning spouse being in a higher tax bracket and the lower-earning taxpayer being in a lower bracket. If a divorce is final on or before 12/31 of the tax year, a joint return cannot be filed for that year and each must file as a single taxpayer.

Retirement Planning after Divorce
Obviously, any retirement planning that was done while married will no longer apply after divorce. It is important that recently divorced individuals work with a financial advisor to develop a new plan that incorporates their new reality to ensure that a comfortable retirement is not jeopardized in the wake of a divorce.

About The Author

Anne Christopulos

Using a Charitable Remainder Trust to Leave Your IRA to Your Children…And To Charity

Mon, 26 Jul 2021 17:37:42 GMT

IRA accounts, which for many of us started as annual $2,000 contributions in the early 1980s, have grown to be major factors within the estate planning process. It was recently estimated that more than $19 trillion sits in Traditional IRA accounts as of 2020. At Fidelity Investments alone, there are more than 300,000 IRA accounts with at least $1 million. Naming beneficiaries for IRAs, as well as for 401(k) plans, now requires careful consideration, especially with the changing rules for taking distributions from inherited IRAs, as well as with changing income tax rates.

For many people, naming their spouse as their primary beneficiary is usually the best option, because spousal beneficiaries can simply roll over inherited IRA assets into their own IRA. However, the decision becomes more complicated if the beneficiary is not a spouse. The SECURE Act of 2019 eliminated the “Stretch IRA”, which allowed non-spouse IRA beneficiaries to take distributions from their inherited Traditional IRA over their lifetime. The new rules require that IRAs inherited by non-spouse beneficiaries, with a few exceptions*, must be fully distributed within ten years. Given that many non-spouse IRA beneficiaries, often the IRA owner’s children, are in their prime earnings years when they receive their inherited IRA, this can be costly from a taxation standpoint. For example, an inherited IRA worth $500,000, if taken in equal amounts over the ten-year time period, could add $50,000 per year to the beneficiary’s taxable income and possibly push the beneficiary into a higher tax bracket.

If you have large Traditional IRA or 401(k) balances that you want to leave to your children, and you also would like to leave some money to a charity, you may want to talk to your estate planning attorney about naming a Charitable Remainder Trust (CRT) as the primary beneficiary of your retirement account and naming your children as income beneficiaries of the trust. A CRT is an irrevocable trust that distributes a percentage of assets each year to individual beneficiaries over their lifetime or for a period of up to 20 years. After that, whatever remains in the trust goes to the charity. The trust could pay a regular income stream to your children over their lifetime, with a predetermined charity receiving any assets remaining in the trust after the death of the beneficiaries.

A CRT can be particularly beneficial if the beneficiaries are relatively young, although not so young that the trust does not meet the requirement that at least 10% of the initial value of the assets pass to the charity. It is important to note that the CRT must have no other assets. The payouts can be specified as a percent of the initial value of the trust (Charitable Remainder Unitrust, or CRUT) or can be recalculated each year (Charitable Remainder Annuity Trust, or CRAT) as the value of the trust assets changes, with a minimum payout percentage of 5%. The advantage of a CRAT is that the payouts will reflect inflation and there is no risk of the trust being exhausted.

As the IRA owner, you could select the charity or charities, or you could specify that the beneficiaries make the selection. You also may select the trustees of the trust, which could include a beneficiary of the CRT, who may also have the power to remove and replace any co-trustees. The trust can require that any replacement trustee not be someone related or subordinate to a beneficiary.

One consideration that may be important to some owners of large IRAs is concern over a son or daughter receiving a large amount of money at one time and possibly being ill-equipped to handle it responsibly. Another factor may be the desire to provide protection from the beneficiary’s creditors or from marital property in the event of a divorce. Also, if the IRA owner has a large enough estate that estate taxes will be assessed, the estate receives a tax deduction for the value of the remainder interest that will go to the charity. Note that there is significant uncertainty surrounding the size of the estate tax exemption, which is currently in the $10-11 million range but could possibly fall to $5-6 million or even lower, depending on what Congress does.

Here is how a CRT works. Upon the IRA owner’s death, the trust is funded with 100% of the value of the IRA. There is no immediate income taxation because of the tax-exempt status of the charity. The beneficiary is taxed at ordinary income rates upon receipt of each annual distribution. Once all the pre-tax IRA money is distributed, taxation of payouts is based on the nature of the income within the trust, which could be at ordinary income rates, capital gains rates, or may even be tax-exempt. But the highest tax rate items are deemed to be distributed first.

It is very difficult to compare the ultimate after-tax value of using a CRT versus simply naming the children as beneficiaries, which would require them to distribute all the money within 10 years, because there are so many unknowns. However, it is possible that a CRT may result in higher after-tax results over time for the family as a whole. There are many factors that come into play: how long the beneficiaries live and their marginal income tax rates; the possible tax savings of the charitable contribution if the IRA owner’s estate is large enough to trigger estate taxes; the types of investments the CRT holds and the investment return; the selected payout rate. The after-tax benefit of the CRT could conceivably outweigh the 10-year rule if any of the beneficiaries are grandchildren with longer life expectancies, as long as they are old enough that the CRT is in compliance with the minimum payout rule.

Establishing and administering a CRT does entail some cost and complexity. In addition to the fee charged by the estate planning attorney, a CRT has to file annual income tax returns on Form 5227. Also, the trustees may receive fees for serving as trustees.

*Exceptions are an eligible minor, a person less than ten years younger than the original owner, or the disabled or chronically ill. Once a minor reaches the age of majority, the 10-year rule then applies, although the age of majority can be extended until age 26 if in school.

More information can be found on the westbranchcapital.com Home Page. Simply scroll to the “Do I need a Trust?” button for a helpful guide. Any time you require assistance with Trusts or other matters, give us a call at (833) 888-0534 x2.

About The Author

Anne Christopulos

Why the Inflation Rate Doesn’t Tell the Whole Story

Mon, 26 Jul 2021 17:31:14 GMT

Markets, economists and policymakers have been fretting about inflation for months, worried that the trillions of dollars being spent in recent and future government stimulus programs could overheat the economy and send prices soaring.

On May 12, 2021, the worrywarts seemed to have their fears confirmed when the April consumer price index shot up a seasonally adjusted 0.8%, the biggest jump since 2008. The year-over-year inflation rate of 4.2% is double what the Federal Reserve has set as its target .

Should consumers be concerned? As a finance expert, I believe the answer to this question lies in a closer look at what actually goes into the main way the US measures inflation.

What is inflation? Inflation is defined as the change in the price of everything from a rib-eye steak and a bar of Ivory soap to an eye exam or tank of gas.

In the US, the most commonly used measure of inflation is based on the consumer price index. Simply put, the index is the average price of a basket of goods and services that households typically purchase. It’s often used to determine pay raises or to adjust benefits for retirees. The year-over-year change is what we call the inflation rate.

Since this is an average across a range of categories, the main number masks lots of key details and big month-to-month swings in various goods and services. For example, airline fares jumped a seasonally adjusted 10% in April – partly recovering from their pandemic plunge – while shelfstable fish and seafood declined 3.5%.

Food and energy prices in particular can be very volatile, and, for that reason, policymakers often focus on what is known as “core inflation,” which excludes those numbers.

A moderate amount of inflation is generally considered to be a sign of a healthy economy, because as the economy grows, demand for stuff increases. This increase in demand pushes prices a little higher as suppliers try to create more of the things that consumers and businesses want to buy. Workers benefit because this economic growth drives an increase in demand for labor, and as a result, wages usually increase – as the latest jobs report suggests is beginning to happen.

Workers with higher wages then can go out and buy more stuff, part of a “virtuous” cycle that keeps the economy humming. Inflation isn’t really causing all this to happen – it is merely the symptom of a healthy, growing economy.

But when inflation is too high – or too low – a “vicious” cycle can take its place. If left unchecked, inflation could spike, which would likely cause the economy to slow down quickly and unemployment to increase. The combination of rising inflation and unemployment is called “stagflation,” and is feared by economists, central bankers and pretty much everyone else.

It’s what can cause an economic boom to suddenly turn to bust, as Americans saw in the late 1970s . The Fed managed to reduce inflation to normal levels only after driving up short-term interest rates to a record 20% in 1979.

What’s behind the increase in the inflation rate? So, how can we determine if this is happening now? Let’s take a closer look at what makes up the consumer price index.

Much of the increase in April was driven by used car and truck prices, which jumped 10% during the month, by far the biggest increase of any category that makes up at least 1% of the index. As has been reported, that was largely due to a surge in buying by rental car companies, which sold off much of their inventories early in the pandemic, as well as the global chip shortage that has reduced production of new vehicles. Other price increases, such as for lumber and some electronics, are also tied to short-term supply chain problems.

Increased demand from consumers who have received stimulus checks is another possible cause of price increases, but it’s harder to quantify the effect.

Most categories were much lower. Food prices grew 0.4%, driven by demand for takeout, and energy was down 0.1% – though that was before May’s East Coast pipeline problems .

Because the consumer price index is made up of a range of goods and services, it’s often the case that changes in the index – and therefore inflation – are being driven by just one or two parts of the economy, as opposed to an across-the-board price change. In the case of April prices, transportation-related items like used vehicles and airfares and energy services like electricity were the biggest drivers. And these appear to be transitory increases.

Nothing to fret about – for now This is why most economists don’t think the U.S. is heading into a new period of high inflation. Instead, there is evidence of pent-up demand, particularly for services that were unavailable during the height of the pandemic in the U.S., which may result in some short-term jumps in prices.

There are signs that inflation will be a bit high for another month or two, but it should return to more normal levels of around 2% per year by the end of 2021. The Fed is banking on this as well.

So, back to our initial question: Is there any reason for alarm?

I don’t think so, nor do most economists or the Fed. Others, especially investors, disagree. We won’t know who is ultimately right for some time.

Meanwhile, consumers can expect to pay a bit more this summer if they’re finally planning to take a vacation after a year stuck at home, buy a used car to travel the country or build a new home. But even at higher prices, these are all signs of the return of a well-functioning economy – and normal life.

If you have questions about inflation or other concerns, reach West Branch Capital any time at (833) 888-0534 .

Article shared with permission from Financial Media Exchange and Author Richard S. Warr.

About The Author

Ayaz Mahmud

US Economic Revival

Fri, 16 Apr 2021 17:26:55 GMT

On the third business day of every month, IHS Markit releases a Purchasing Managers’ Index (PMI) for more than 40 worldwide economies. The US Services PMI is based on monthly questionnaire surveys collected from over 400 U.S. companies and cover topics like new business, employment and expectations going forward. And since the services sector accounts for more than 75% of U.S. GDP, the report is closely watched.

On April 5th, IHS Markit ran the headline screaming: “Fastest rise in business activity since July 2014 as new order growth reaches six-year high” and then wrote:

“March PMITM data indicated a substantial increase in business activity across the U.S. service sector, and one that was the steepest for almost seven years. Contributing to the marked upturn in output was the fastest expansion in new business for six years, reflecting strengthening client demand. Firms also registered a renewed rise in new export orders. Meanwhile, rates of input cost and output charge inflation reached fresh record peaks, as firms sought to pass on steep rises in input prices to clients.

Meanwhile, sentiment among service providers about business in the year ahead improved, helping drive employment growth to a three-month high.

The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 60.4 in March, up from 59.8 in February and above the earlier released ‘flash’ estimate of 60.0. The rate of output growth signaled was the fastest since July 2014. Service providers often stated that the stronger expansion in business activity was due to greater client demand and the easing of virus containment restrictions in some states.

At the same time, new business increased further in March, with the rate of growth accelerating for the third successive month. The pace of the upturn in client demand was the quickest since March 2015. Firms attributed the expansion to greater spending by existing customers as well as the acquisition of new clients, often through more sales and marketing activities. Others suggested that higher confidence stemming from the vaccine roll-out had driven up customer spending.

Total sales were also supported by a renewed increase in new export orders, which rose for the second time in the past four months due to increased demand following easing lockdown restrictions in some markets.

On the price front, input costs soared in March. The rate of inflation accelerated to the fastest since data collection for the services survey began in October 2009. Anecdotal evidence widely linked the uptick in costs to higher prices for key inputs such as PPE, paper, plastics, fuel and transportation.

Subsequently, firms sought to pass on higher costs to clients through a sharper rise in selling prices. A number of companies also stated that stronger client demand allowed a greater proportion of the hike in costs to be passed through. The resulting rate of charge inflation was the quickest on record.

Meanwhile, business expectations regarding the outlook for output over the coming year improved in March. The degree of confidence was robust overall and among the strongest for six years. Optimism was commonly attributed to the ongoing vaccine roll-out and hopes of a substantial boost to new sales if social distancing measures are further eased during 2021.”

More Data Later This Week

More economic data will be released later this week, including Jobless Claims on Thursday and final PPI data on Friday.

Sources: markiteconomics.com and FMeX

About The Author

Ayaz Mahmud

Investing for a Child: UGMA/UTMA Accounts vs. 529 Plans

Tue, 16 Mar 2021 18:27:02 GMT

UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts allow the transfer of financial assets to a minor without establishing a trust. (UTMA and UGMA accounts are basically the same, with UTMA accounts allowing for the inclusion of additional asset types, like real estate. Most states replaced their UGMA statutes with UTMA statutes, but a few states still only allow UGMA accounts.)

529 plans are education savings plans with tax and financial aid benefits that are sponsored by individual states and the District of Columbia. A person can use any state’s plan, but there may be tax benefits to using the plan offered by one’s own state.

Account Ownership

UTMA and UGMA accounts are held in the name of the minor, but controlled by a parent or other relative until the child reaches the age of majority, which varies by state.

529 plans are owned by a parent, grandparent, or other adult, with the child being the beneficiary.

Impact on Financial Aid

UGMA/UTMA accounts are reported as a child’s asset on the FAFSA (Free Application for Federal Student Aid), which reduces financial aid eligibility by 20% of the asset value.

529 plans are usually reported as a parental asset and reduce financial aid eligibility by up to 5.64% of the asset value.

Tax Advantages

UGMA/UTMA contributions are made with after-tax dollars. The first $1,100 of a child’s unearned income each year is tax-free. The next $1,100 is taxed at the child’s rate. Anything over that is taxed as the parent’s income.

Many states plus the District of Columbia allow 529 deductions from state taxes, but in most states, deductions are allowed only for contributions to the home state’s plan. Seven states allow a deduction even if the taxpayer has contributed to 529 plans in other states: Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania. Seven states with a state income tax do not allow deductions for 529 plan contributions: California, Delaware, Hawaii, Kentucky, Maine, New Jersey, and North Carolina. The remaining states either offer a state income tax deduction or credit, or have no state income tax. The amount of the deduction allowed varies by state. (Note: State laws can change, so be sure to check for the latest tax rule for your state.)

Earnings in a 529 plan are not taxed and funds can be withdrawn tax-free as long as they are used to pay for qualified educational expenses.

Contributions to both custodial accounts and 529 plans are subject to gift tax rules. In 2021, the gift tax exclusion is $15,000, which is the amount that can be gifted per donor per beneficiary. (A married couple counts as two donors.) However, 529 rules allow five years’ worth of gifting in one year, which entails special tax reporting.

Spending Flexibility

Funds in an UGMA/UTMA account can be used for anything that benefits the child, such as clothes for school and summer programs.

To avoid income taxes and other penalties, funds in a 529 plan must be used for specific educational expenses, including tuition, fees, books, supplies, room and board, and a computer. Also, 529 funds can be used to repay the beneficiary’s student loans up to a lifetime limit of $10,000. An additional $10,000 can be used to repay student loans held by each of the beneficiary’s siblings. Funds in 529 plans can also be used to pay for private school tuition for kindergarten through 12th grade, but there is a limit of $10,000 per year. Any other 529 withdrawals are subject to income taxes and other penalties.

Note: Saving money in a custodial account in addition to a 529 plan could help when it comes to paying for non-qualified expenses, such as application and testing fees, transportation costs during college, health insurance, medical bills and other miscellaneous expenses.

Investment Options

Funds in an UTMA account can be invested in anything.

Each state’s 529 plan offers its own menu of investment choices, which generally include age-based portfolios, which have a pre-set combination of mutual funds, and individual portfolios, which allow the account owner to design a portfolio from a variety of funds. Fund expenses vary from state to state. You can also research the plans available in your State .

West Branch Capital offers investment management of both custodial accounts and 529 plans. Give us a call or send us a message if you have any questions.

About The Author

Anne Christopulos

The Biden Agenda – What Can We Expect?

Tue, 02 Feb 2021 18:20:47 GMT

When Joe Biden was elected in November, there was a question of how much policy change there could actually be under the new Democratic president if the Republicans still controlled the Senate. Now, following the elections in Georgia, the odds have increased that at least a portion of President Biden’s agenda will be passed by Congress. Of course, the 50-50 balance of Republicans and Democrats in the Senate, potentially only tipped by the vote of Vice-President Kamala Harris, means that it will not be easy for legislation to pass. The existence of the filibuster imposes a 60-vote requirement for most legislation, although budget-related legislation under the process of “reconciliation” only requires a simple majority. Here’s a look at what we might see under the Biden administration, while keeping in mind that whoever wins in 2024 may have other plans and things could change again.

Higher Taxes for Some…
Many of the provisions in current tax law that were put in place by the Tax Act of 2017, such as lower tax rates and higher estate tax exemptions for individual taxpayers, are set to expire in 2026, but the Biden plan would seek to end some of them sooner. If Congress agrees, people with taxable income above $400,000 would see higher tax rates as well as a cap on their itemized deductions. The top marginal rate, which now applies to taxable income above $628,000 for joint filers, would increase from 37% to 39.6%, where it was prior to 2018. The top tax rate on long term capital gains and qualified dividends could be increased from 20% to the taxpayer’s ordinary income tax rate of 39.6% for those with more than $1 million in income. In addition, wages above $400,000 would be subject to the 12.4% Social Security payroll tax, split between the employer and the employee, although wages between the current cap of $142,800 and $400,000 would not be affected.

The estate tax exemption per person, which is $10 million in 2021, would fall back to the pre-2018 level of $5 million before the current schedule to do so in 2026, and it could possibly fall to $3.5 million, where it was in 2009. Also, the step-up in basis for inherited stocks, homes, and other assets could be eliminated, likely with an exemption of perhaps $1 million.

Under the Biden plan the corporate tax rate would be raised from 21% to 28%, which is still much lower than the previous rate of 35% in effect prior to 2018. (Note: Under the 2017 Tax Act, the 21% corporate tax rate was one provision that would not automatically expire in 2026.)

…Tax Benefits for Others

While the above steps are intended to close the wealth gap from above, other proposals are intended to help people at middle and lower income levels. One such proposal is to increase child and dependent care tax credits. First-time homebuyers could receive a tax credit of up to $15,000 and receive it at time of purchase. If the proposal is passed to forgive a portion of student loan debt, Biden’s plan would exclude the forgiven amount from taxation.

Other provisions are to increase tax benefits for people who pay for long term care insurance with retirement savings and to give a $5,000 tax credit for family members or other loved ones who provide long term care to the elderly. As part of Biden’s climate change initiative, he would like to restore the full electric vehicle tax credit and provide more tax relief for taxpayers who improve the energy efficiency of their homes. And as a benefit to taxpayers in high tax states, the Biden plan would eliminate the $10,000 cap on itemized deductions of state and local taxes, which wasn’t set to expire until 2026.

Modifications to Retirement Plans
The Biden plan would replace the tax deduction for contributions to retirement plans such as Traditional 401(k)s and 403(b)s with a tax credit of a certain percentage, perhaps 25%, that would apply to all contributors, so that everyone, regardless of tax bracket, would receive the same monetary benefit. Currently, the benefit is much greater for people in high tax brackets than for people in lower tax brackets. For example, a $5,000 contribution saves $1,750 in federal taxes for a taxpayer in the 35% tax bracket but only $600 for someone in the 12% bracket. Under the Biden plan, the same $5,000 contribution would save $1,250 in taxes for each contributor. Under another proposal, expanded tax credits would be available for small businesses that offer retirement plans.

The Biden administration is expected to reverse actions taken by the Labor Department under President Trump to discourage the use of ESG funds in employer-sponsored retirement plans. ESG funds invest in accordance with certain environmental, social, and governance criteria.

Enhanced Social Security Benefits
Biden’s plan would change the index used to calculate the annual Social Security COLA increase to something called “CPI-E”, which would track inflation for people over age 62. Based on historical data, this would result in a slightly higher benefit. Also, Biden would like to institute a higher minimum benefit that would be equal to 125% of the Federal Poverty Level. He would also like to increase the monthly benefit for people who have been receiving benefits for more than 20 years, when many may be exhausting their savings. Also, monthly benefits for surviving spouses may also be raised to partially compensate for the benefit reduction that happens after the death of a spouse.

Reforms to the Opportunity Zone Program
In response to criticisms that the benefits of the Opportunity Zone program have not adhered as much to distressed communities as intended and have even been linked to projects such as luxury apartments and hotels, the Biden plan would amend the program. It would ensure that tax benefits to investors would only be allowed if there are clear economic, social, or environmental benefits to a community, particularly one that is underserved. In addition, there would be incentives for partnerships between investment funds and community organizations to produce plans that can provide financial benefits to low-income residents in Opportunity Zones, including job creation and affordable housing.

About The Author

Anne Christopulos

Protecting Your Financial Information Online

Tue, 02 Feb 2021 17:46:55 GMT

More consumers are conducting financial transactions online and may become vulnerable to tracking, hacking, identity theft, phishing scams, and other cyberspace risks. While nothing can guarantee complete safety on the Internet, understanding how to protect your privacy can help minimize your exposure to risk.

Here are some ways to safeguard your information:

Read privacy policies. Before conducting any financial transactions online, carefully read the privacy policies of each institution that you plan to do business with to find out how secure your financial information is. If you do not understand the legal jargon, email or call customer service to request a simplified explanation of the privacy policy.

Avoid using weak PINS and passwords. When deciding PINS, passwords, and other log-in information, avoid using your mother’s maiden name, your birth date, the last four digits of your Social Security number, or your phone number. Avoid other obvious choices, like a series of consecutive numbers or your home town. Also, do not use the same PINS and passwords on multiple sites.

Look for secured web pages. Use only secure browsers when shopping online to safeguard your transactions during transmission. There are two general indicators of a secured web page. First, check that the web page url begins with “https.” Most urls begin with “http;” the “s” at the end indicates that the site password will be encrypted before being sent to a third-party server. Second, look for a “lock” icon in the window of the browser. (It will not be in the web page display area.) You can double-click on this icon to read details of the site’s security policy. Be cautious about providing your financial information to websites that are unfamiliar. Larger companies and well-known websites have developed policies to protect the rights and financial information of their customers. So, resist the temptation of providing personal information to unknown companies.

Utilize Two-Factor Authentication. Most financial custodians require two-factor or multi-factor authentication to access accounts. That is, adding a second layer of protection when logging in, such as a text code or push notification.

Keep your operating system up-to-date. High-priority updates are critical to the security and reliability of your computer, and offer the latest protection against malicious online activities. When your computer prompts you to conduct an update, do it as soon as possible.

Update antivirus software and spyware. Keep both your antivirus and your spyware programs updated regularly.

Keep your firewall turned on. A firewall helps protect your computer from hackers who might try to delete information, crash your computer, or steal your passwords or credit card numbers. Make sure your firewall is always on.

Do your homework. To learn more tips for securing your computer and protecting your private information when conducting financial transactions online, visit www.getnetwise.org , www.onguardonline.gov , or www.wiredsafety.org .

In addition, the Federal Trade Commission (FTC) works on behalf of consumers to prevent fraudulent, deceptive, and unfair practices in the marketplace. To file a complaint or to obtain more information, visit www.ftc.gov or call 1-877-FTC-HELP (1-877-382-4357).

As the Internet continues to evolve, new risks, along with additional protective measures, will be revealed. However, it is up to you to safeguard your financial information online through education and awareness.

About The Author

Ayaz Mahmud

Charitable Giving in 2020 and Beyond

Mon, 07 Dec 2020 19:37:15 GMT

An update to this 2020 article was posted for 2021 Charitable Giving

“Giving Tuesday” was December 1st this year, but you have until December 31st to make charitable contributions that qualify for a 2020 tax deduction. With the increase in the standard deduction starting in 2018, many people no longer have been able to reduce their tax bill with their charitable donations because the total of their itemized deductions no longer exceeded their standard deduction. However, philanthropy, whether on a small scale or large, still plays a part in many of our lives, regardless of any tax break for which we may qualify. And tax benefits still exist, especially in 2020.

Take Advantage of Special Gifting Opportunities in 2020
The Cares Act that was passed in response to the coronavirus crisis included a provision that, in 2020, taxpayers can take a $300 (single)/$600 (joint) charitable deduction even if their total itemized deductions do not exceed their standard deduction. So make sure you have a record of your charitable contributions and give it to your tax professional.

Another provision in the Cares Act allows taxpayers to deduct 100% of charitable contributions in 2020 up to 100% of Adjusted Gross Income, rather than the normally-allowed 50%, 30%, or 20%, depending upon how the IRS classifies the organization receiving the donation. Therefore, bunching several years’ worth of contributions to one or more charitable organizations into 2020 may be a particularly good strategy this year for donors planning large gifts because it may provide a larger deduction than in normal years. However, this rule change only applies to cash gifts made directly to the charitable organization and not to non-cash gifts or donations made to a donor-advised fund or a private foundation.

Make Charitable Contributions in Alternate Years
For taxpayers whose itemized deduction do not quite reach their standard deduction, they may consider bunching two or more years of contributions into one year and taking the standard deduction in the other year. In 2020, the standard deduction is $12,400 single/$24,800 joint. If you are age 65+, the figures are $13,700 single and $27,400 joint. So, for example, if a couple filing jointly has the maximum of $10,000 in state and local taxes, $10,000 in mortgage interest, and usually makes $5,000 in charitable contributions, for a total of $25,000 in itemized deductions, only the last $200 of that total represents a deduction above their $24,800 standard deduction. So, assuming they are in the 22% marginal tax bracket, over two years that may save them only $44 in taxes, all due to 2020, because in 2021 the standard deduction rises to $25,100. But if they contribute $10,000 this year, the additional deduction this year rises to $5,200 and saves them $1,144 in taxes. Then next year they can skip their contributions and take the standard deduction.

Make a Qualified Charitable Distribution
If you have reached age 70½, you can make a Qualified Charitable Distribution (QCD) of up to $100,000 from your Traditional IRA to a qualified charity. This reduces federal taxable income, like a tax deduction, even if you use the standard deduction. You must move the money directly to the charity from the IRA. If you are already taking Required Minimum Distributions (RMDs), which you do not need to take this year due to the Cares Act, you can withdraw from your Traditional IRA anyway, and offset the increase in your taxable income by making a QCD. A QCD has the additional benefit of reducing taxable income in future years by reducing future RMDs.

Consider a Donor Advised Fund…
A Donor Advised Fund (DAF) is like a personal charitable savings account that is controlled by a nonprofit, referred to as a sponsoring organization, that invests the assets and manages the account. Two such sponsoring organizations are Fidelity Charitable and Schwab Charitable. A DAF allows donors to make an irrevocable charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time. Donors can contribute cash, securities, or other assets to the fund as frequently as they like, and then recommend grants to their favorite charities whenever it makes sense for them. DAFs offer a good vehicle for bunching contributions in a single year, as described above, because you do not have to specify the charity at the time of the contribution.

…or a Private Foundation

Highly philanthropic people who want to make substantial charitable contributions and leave a legacy to be carried on by future generations may want to consider setting up a private foundation. A private foundation is managed by its own board of directors, receives most of its financial support from and is normally controlled by its founders, and must make charitable distributions throughout the taxable year. A private foundation is a tax-exempt organization, but must pay a nominal excise tax on net investment income. Although it typically makes grants to public charities, it can also run programs, provide services, and conduct direct charitable activities, as well as provide aid to individuals and families for disaster relief and hardship assistance. Setting up a private foundation will likely require the assistance of a CPA or attorney.

If you would like assistance with your end-of-year planning or charitable giving, give West Branch Capital a call today at (413) 256-1225 x6, or send us a message any time.

About The Author

Anne Christopulos

What is Fiduciary Duty?

Wed, 02 Dec 2020 19:30:30 GMT

Fiduciary duty is a legal concept requiring individuals in certain professions – including lawyers, trustees, and investment advisers – to prioritize their clients’ best interests over their own. A fiduciary obligation arises whenever the relationship with the client (often referred to as the “beneficiary” or “principal”) involves a special trust, confidence and reliance on the fiduciary to exercise his/her discretion or expertise in acting on the client’s behalf.

In the case of investment advisers, the fiduciary relationship imposes two broad duties towards their clients:

Duty of Care: Advisers must, at all times, (i) provide advice that is in the client’s best interest, (ii) seek best execution and (iii) act and provide advice and monitoring over the course of the relationship.
Duty of Loyalty: Advisers must (i) make full and fair disclosure to its clients of all material facts related to the advisory relationship and (ii) eliminate or at least expose all conflicts of interest which might incline her/him—consciously or unconsciously—to render advice which was not disinterested.

Are All Financial Professionals “Fiduciaries”?

The short answer—no. The term “fiduciary” is not a singular title or designation given to an individual such as “CFA” (Chartered Financial Analyst) or “CFP” (Certified Financial Planner). Whereas all investment advisers are fiduciaries, broker/dealer representatives are held to a lesser legal standard of care called the “suitability standard,” which requires them to offer advice and product recommendations that are merely suitable for their clients. Such advisors can be incentivized to recommend investment products that are in their own best interests – for example, those with higher fees or commissions – rather than their clients’.

We urge investors to ask prospective financial professionals whether or not they are fiduciaries; by law, they are required to disclose fiduciary status.

You can read more about this topic on our Resources page in the White Paper, “ Understanding your Financial Advisor’s Professional Designations…”

About The Author

Ayaz Mahmud

The Bond Market Corner – Fall 2020

Tue, 20 Oct 2020 16:39:07 GMT

In the third quarter, other than a modest steepening in the yield curve, the bond market essentially marked time. The 10-year US treasury note ended the third quarter at .69% versus .65% at the end of June. The two-year treasury declined from .15% at the end of June to .13% at the end of the third quarter. In September the equity market corrected with the Nasdaq declining as much as 10% during in the month.

Typically, the bond market is a haven of stock market stress. However, more recently, bond yields have not declined when equities have been under pressure. This signifies that interest rates may have limited downside reflecting the already low level of rates and the fact that the Fed has stated that it will not follow a negative interest rate policy in the US. The unattractiveness of interest rates becomes clearer when comparing the 1.6% dividend yield on the S&P 500 to the .69 % yield on the 10-year treasury. Record low interest rates not only make bonds unattractive they also helped fuel the stock market rally by making its relative return even more attractive.

Implications of an extended period of low rates

At its most recent meeting, the Fed stated it would keep rates low for an extended period and tolerate higher inflation to offset periods of lower inflation. Essentially this means we can expect short term interest rates to remain close to 0% for a long period perhaps until 2023 or 2024. This does not mean intermediate and longer-term rates can’t rise periodically when inflation rises, and investors begin to anticipate an inflationary environment. However, investors should not expect to earn more than low single digit yields in the bond market for the foreseeable future. The danger for investors is to avoid taking undue risks in their quest for higher yields.

Not everyone will benefit equally from low rates. Borrowers will clearly benefit. Low mortgage rates have already fueled a housing market rebound and a refinancing boom. Savers will see earnings reduced and those retired or approaching retirement will see their well laid plans derailed. Since retirees rely on a steady stream of income, often from fixed income investments, they will see that income reduced. Many will need to delay retirement in order to build their nest eggs further.

The Pandemic’s effects on Municipal bonds

The initial fiscal stimulus provided by Congress did not include much in the way of funds for State and Local governments. The Covid-19 pandemic has wreaked havoc on the finances of states and cities as well as other sectors of the municipal bond market. A reduction in income taxes, falling public transit ridership, stalled convention business and reduced hospital revenues have impacted many issuers. While not impossible, for legal reasons, it is difficult for states and cities to file for bankruptcy. Therefore, unless more aid is coming, the stalled economy will soon lead to a forced reduction in municipal work forces further straining economic activity. Not all municipal bonds will be equally impacted. Investors should focus their investments in essential service issuers such as water and sewer and public power bonds as well as general obligation bonds of municipalities with a strong tax base. These will hold up better than bonds that rely on a revenue stream such as issues backed by revenues from sports stadiums, airports or hospitals.

It is imperative for Congress to include aid for states and localities in the next stimulus bill to prevent further economic disruption. Hopefully Congress will see that helping municipalities is as or more important than aiding airlines and cruise companies which they have already done.

About The Author

James K. Ho

It’s Time to Get Started on Your 2020 Taxes

Tue, 13 Oct 2020 16:43:15 GMT

Even though your 2020 tax return will not be due until April 15, 2021, if you wait until after the new year to start thinking about your taxes, it may be too late to take some actions that could reduce your tax bill. This is the time of year to do some serious tax planning.

Tax planning begins with estimating your 2020 taxable income. Your tax advisor should be able to help you, or, if you’re so inclined, there are tax bracket charts and tax estimators available on the internet. The easiest way to start is to dig out your 2019 tax return and run through the figures to see how they have changed in 2020. Some suggestions:

For investment income and capital gains, you can look at the year-to-date figures on your latest statements (taxable accounts only) and adjust them upwards for the final month or two. If you own any stock mutual funds in your taxable accounts, check your December 2019 statement or your 2019 Form 1099 to see what they paid out in capital gains distributions in 2019 for an idea of what to they might be this year.
Refer to your latest IRA statement, which reports your total distributions to date, and adjust as needed for the full year.
If you used the standard deduction last year, you will probably do so again in 2020, unless, for example, you increased your charitable giving or had higher medical expenses.

Once you have estimated your taxable income, you can determine your marginal tax bracket and see how close you are to the top or the bottom of that bracket. If you are near the top, you may want to look for ways to keep from rising into the next bracket; if you are near the bottom, you may look for ways to push your income down into the lower bracket. Also, if you are on Medicare and close to the next premium surcharge bracket, you can look for ways to ways to avoid reaching into it.

If you are in the middle of one of the lower tax brackets, you may want to add some income by converting some Traditional IRA money to a Roth IRA. Remember that current tax rates are historically low and are scheduled to revert back to pre-2018 levels in 2026, so if you can withdraw from your Traditional IRA at a lower tax rate now, you may save future taxation. While some of us have perhaps been conditioned to wait until we have to make minimum required distributions at age 72 (previously, age 70½), that runs the risk of the withdrawals pushing our taxable income into higher tax brackets in the future. If you are already taking RMDs, even though the Cares Act lets you skip your RMD in 2020, it may be a good tax strategy to take money out anyway, and convert it to a Roth IRA, if you do not need the money.

Recent Retirees

People who have recently retired may find that they pay little or no taxes. Although that is an enviable status on the surface, it may not be optimal. If you have sizeable retirement account balances, that means that when you reach age 72, your required minimum distributions (RMDs) could generate a large tax liability, not only because your retirement account balances will be higher and the distributions could push you into a higher tax bracket, but also because tax rates will probably be higher than they are now. It may be better to spread your retirement plan distributions over time so that you stay in the lower tax brackets. Before the end of the year, you could withdraw just enough money from your (non-Roth) retirement accounts to reach the top of the 12% bracket, or even the 22% bracket, depending on your tax situation, and either use that money for living expenses or convert it to a Roth IRA.

Charitable Contributions

Starting in 2020, taxpayers can take a $300 (single)/$600 (joint) charitable deduction even if they use the standard deduction. Also, if you have reached age 70½, you can make a Qualified Charitable Distribution (QCD) of up to $100,000 from your Traditional IRA to a qualified charity. This reduces federal taxable income, like a tax deduction, even if you use the standard deduction. You must move the money directly to the charity from the IRA. If you are already taking RMDs, in place of your 2020 RMD, which you do not need to take, you can withdraw from your IRA anyway, and offset the increase in your taxable income by making a QCD.

Another tax-saving strategy is to bunch charitable deductions in alternate years if it causes your itemized deductions to exceed the standard deduction in those years. For example, if you regularly contribute $10,000 each year, and your total deductions, including your state and local taxes, medical expense deduction, and mortgage interest, fall just short of the standard deduction amount ($12,400 (single)/$24,800 (joint) for 2020; higher if you are over age 65), you can make your 2021 contributions now to bring your itemized deductions above the standard deduction. Then in 2021, you would take the standard deduction.

Retirement Plan Contributions

You have until April 15 to make most IRA and other retirement plan contributions, but if you are self-employed and use a Solo 401(k) or a SIMPLE IRA, any salary reduction contributions must be made no later than 30 days after the end of the salary period, which would fall in January 2021. The employer contribution portion can be delayed until April 15.

Capital Gains and Losses

It is often a good idea to reduce your capital gains for the year by selling securities with capital losses, which can offset the gains or even reduce ordinary income by up to $3,000 in any one year. If you still want to own that security, you can buy it back after 30 days to avoid the wash sale rule, which can disallow the tax loss. But if all of your taxable income falls in the 12% tax bracket and the loss would only offset gains and not ordinary income, your capital gains tax is 0%, so the loss won’t reduce your taxes. However, if your taxable income is in the 12% bracket, you can harvest some gains at a 0% tax, as long as the additional income keeps you in that bracket. And you don’t have to wait 30 days to buy back the security.

Medical Expenses

If you already have substantial medical expenses this year that will bring your itemized deductions close to or above the standard deduction, schedule appointments and procedures or purchase items that will increase your deduction for 2020. Deductible medical expenses are more inclusive than you may think, and include not only premiums, deductibles, co-pays, and prescriptions, but also dental, vision, and even transportation costs. In 2020, you are allowed to deduct total medical expenses in excess of 7.5% of your adjusted gross income.

529 College-Savings Plans

Many states, including Massachusetts, allow a deduction on state tax returns for at least a portion of 529 plans contributions that are made by the end of the calendar year.

Annual Gifts

If your assets are substantial enough to potentially be subject to federal or state estate taxes, consider annual gifting. You can give up to $15,000 per person each year without filing a gift tax return or using any of your lifetime estate tax exemption. Even though the estate tax exemption is over $11 million per person now, after 2025 the exemption will fall back to the $5 million level, unless Congress takes action. Also, some states impose estate taxes, including Massachusetts, where estate tax is applied to assets above $1 million.

About The Author

Anne Christopulos

The Bond Market Corner – Summer 2020

Fri, 31 Jul 2020 16:35:22 GMT

The year 2020 started off with continued strong economic growth fueling the equity market to new highs. Bond yields remained low as inflation continued to be muted. Then the Coronavirus Pandemic hit and threw everything out of kilter. Beginning in early March the economy shut down across the US and growth fell off a cliff with equity markets completely reversing direction. Stock prices declined sharply, as much as -35%, amid extreme volatility. Bond yields plumbed new lows as the Federal Reserve took the unprecedented step of pushing short term rates to 0%. The initial reaction of the credit markets was significantly wider credit spreads in both investment grade and high yield bonds reflecting investors’ risk aversion amid the uncertainty of the pandemic. However, Congress and the Federal Reserve took aggressive and unprecedented measures to counter the economic effects of the virus. Congress passed a $2.3 trillion spending relief bill and the Fed became a lender of last resort providing funding support to many parts of the credit markets including mortgage backed securities, corporate bonds and even high yield bonds. Short term rates were cut to 0%. Essentially the Fed pledged to do whatever it takes to provide the liquidity necessary to stabilize the economy.

The result was that beginning in late March, markets staged a dramatic rebound. Stocks recovered a significant portion of their losses and credit market spreads narrowed to almost pre-crises levels. Risk markets tend to look ahead and what we are seeing is investors’ belief that as the economy slowly reopens, the recovery will be swift. However, the bond market as measured by government bond yields is not showing agreement with this view. Ten-year treasury bond yields stand at .65 % down from 1.92% at year end. Even more stark the one-year treasury is at .18%. The risks the bond market is focusing on should not be overlooked. These risks include a potential second wave, the expiration of the first stimulus package which may not be followed by further action and the outcome of the Presidential election.

Capping Government bond yields

The enormity of the stimulus package will require the issuance of a large amount of government debt. If the economy does recover and inflation were to increase, this could result in an increase in yields leading to higher government borrowing costs. For the first time since the end of World War II the Fed is considering putting a cap on government bond yields. This would be accomplished by buying whatever amount of bonds necessary to keep borrowing costs from getting above a specific range or maximum yield. Such action also known as yield curve control would be a way to ensure that the Federal Reserve and the government’s stimulus efforts are not undermined by higher yields. Other central banks such as the Bank of Japan have utilized this strategy. The risk of yield curve control is that it is taking away the natural functioning of markets by artificially setting interest rates which may adversely impact other financial markets. Artificially low yields could potentially lead to asset bubbles. Capping rates would also hurt savers even as inflation rises.

Another tool used by other central banks to boost growth is bringing short term rates into negative territory. Negative rates punish savers and reward borrowers since borrowers are now paid to borrow and savers earn little or nothing. The Fed has stated that it will not pursue a negative rate strategy. Given the level of current yields and the Fed’s stated intention that it will not pursue a negative rate strategy, we do not expect yields to decline much further. However, any increase in yields will be limited and may not occur for some time especially given the Fed’s possible use of rate caps.

In the current environment where yields may remain low for an extended period, investors should search for products that offer potentially higher returns without taking undue risks. Intermediate investment grade corporate bonds remain a good alternative as they still offer attractive yields compared to government bonds and are of high quality. By focusing on intermediate maturities, the risk from rising interest rates is minimized. Floating rate notes within a mutual fund or exchange traded fund are also a good alternative. These notes are typically issued by non-investment grade companies, are higher in the capital structure and therefore safer than high yield bonds, and their coupons will adjust higher should the Fed rates rise. High quality dividend paying stocks should also be considered. However, riskier high yield bonds should be minimized since so much is uncertain about how these companies will fare as the economy recovers. In the end investors should accept the fact that returns will be subpar for an extended period and avoid undue risks.

About The Author

James K. Ho

Watch Out for “Tax Torpedoes”

Fri, 31 Jul 2020 16:30:34 GMT

Our tax laws include several tax triggers that are activated once certain income levels are reached. This tax concept is part of the progressivity in our tax structure, where ability to pay is an important consideration for lawmakers. Just as marginal tax rates increase the higher up the income scale you are, there are additional taxes lurking at certain income levels that result in even higher marginal tax rates.

Social Security Benefit Taxation

Perhaps the most common income-related tax involves Social Security benefits. If most or all of a taxpayer’s income is from Social Security benefits, it is likely that none of them will be taxed. However, as non-Social Security income increases, an increasing percentage of one’s Social Security income is taxed. This is sometimes referred to as the “tax torpedo”. There is a somewhat complicated formula for determining the amount of Social Security income, which few people actually see unless they are still doing their taxes on paper and must complete the worksheet in the instruction booklet. But to summarize, if provisional income (half of one’s Social Security benefits plus additional income, including tax-free income) exceeds $25,000 for single filers or $32,000 for joint filers then at least some portion will be taxable. That percentage will increase up to a maximum of 85% of the benefits being taxable when provisional income reaches $34,000 single or $44,000 joint. In time, more and more people will reach the 85% maximum, because the income levels in the formula are not adjusted for inflation, unlike the income levels for marginal tax rates.

Prior to 1984, Social Security benefits were not taxable at all. Initially, only 10% of recipients were subject to income taxes on their benefits, and the maximum percent that could be taxable was 50%. That was increased to 85% in 1993 when the Social Security Administration estimated that the total of worker payroll contributions, which had already been subject to income taxes, were about 15% of the total benefits received over their lifetimes. Currently about 60% of Social Security beneficiaries pay federal taxes on a portion of their benefits. Most states do not tax benefits.

Once you have reached the income level at which 85% of your benefits are taxable, any additional income will not raise your marginal rate any higher than your marginal tax bracket, all else being equal. But if you are below the 85% maximum, any additional income will be taxed at a rate higher than your marginal tax rate. This also means that if you can reduce your income in some way, such as by making an IRA contribution, realizing a tax loss, or taking less out of your retirement account in a particular year, the rate of tax savings will be greater than your marginal tax rate.

Social Security taxation should be taken into account in deciding when to start taking Social Security. It is tempting to start at full retirement age, even if still working, because you can earn as much as you want without having a portion of your benefits held back. But the combination of earnings from work and Social Security benefits could raise the portion of your benefits that will be taxed. Of course, if you have enough investment or other income so that 85% of your benefits will be taxed even without your working income, it may not matter from a tax standpoint, although waiting to begin benefits may be the optimal decision for you for other reasons.

Medicare Surcharge

Another tax trigger affects Medicare premiums. Sometimes a Medicare recipient is shocked to find that their monthly Part B and Part D premiums have increased substantially from one year to the next. It may just be temporary—for example, because of a large capital gain from a real estate sale, in which case the higher premiums will last just one year. Or if the recipient is still working and earning income, the premiums will fall after retirement. However, there is a lag, because Medicare premiums are generally based on modified adjusted gross income two years prior, which is what is available to the government when premiums are set for the year. For example, 2020 premiums are generally based on 2018 tax returns.

You have the right to appeal your higher premium if one of several qualifying reasons applies to you. The most common reason is that you’ve stopped working or are working fewer hours and your monthly income is much less. Other reasons for an appeal could be a change in marital status or a reduction or termination of a pension.

In 2020, the first income threshold is at $87,000 (single filers)/$174,000 (joint filers), at which Part B premiums rise from $144.60 per month to $202.41 per month and the amount added to Part D prescription premiums is $12.20 per month. The other income thresholds for single/joint filers are $109,00/$218,000, $136,000/$272,000, $163,000/$326,000, and $500,000/$750,000, at which Part B premiums rise to $289.20, $376.00, $462.70, and $491.60, and the Part D additional amounts are $31.50, $50.70, $70.00, and $76.40, respectively.

On the surface, the rationale for charging wealthier people more in premiums may seem to be related due to their greater ability to pay. However, a study from the National Bureau of Economic research found that while all Medicare enrollees receive more from Medicare in benefits than what they paid into the program in taxes, the windfall is greatest for the wealthy. Although wealthy enrollees pay more into Medicare than poorer people do in the form of general federal tax revenues and payroll taxes, they reap greater benefits over their lifetimes because on average they live longer and use more medical services.

Net Investment Income Tax

Another tax that affects higher-income taxpayers is the Net Investment Income Tax (NIIT), which was created by the Health Care and Education Reconciliation Act of 2010 and went into effect in 2013. A taxpayer is exposed to the tax only if modified adjusted gross income (MAGI) exceeds $200,000 for single filers or $250,000 for joint filers. (For most people, MAGI will be the same as adjusted gross income (AGI).) The tax of 3.8% is applied to the lesser of either (1) net investment income or (2) the amount by which MAGI exceeds those thresholds. Net investment income includes dividends, taxable interest, capital gains, taxable portion of annuity payments, rental income, passive business activities, and royalties, less investment expenses.

If you are subject to the tax because of the amount of your net investment income, taking capital losses or investing in tax-free rather than taxable bonds would be examples of how to lower the tax. If your MAGI is creating the exposure, making a retirement plan contribution would reduce your NIIT, as would taking a capital loss on an investment or investing in tax-free bonds.

Additional Medicare Tax

Also affecting higher-income taxpayers is the Additional Medicare Tax, created as part of the Patient Protection and Affordable Care Act (ACA). If your Medicare wages, on which you and your employer each pay 1.45% per year in payroll taxes, exceed $200,000 for a single filer or $250,000 for joint filers, you will pay an additional 0.9% on the amount your Medicare wages exceed those thresholds. (The employer does not also pay the additional tax.) This tax also applies if you are self-employed.

About The Author

Anne Christopulos

Tax Laws May Provide a Silver Lining during Market Downturns

Mon, 04 May 2020 16:26:02 GMT

With the deadline for filing 2019 federal tax returns postponed until July 15, and our main focus on staying healthy and safe, taxes are probably not top-of-mind these days. However, whenever the stock market falls, it can present tax-saving opportunities. Here are a few ideas that may provide a silver lining. As always, consult with your tax advisor to determine if any of these suggestions would benefit you.

Tax Loss Harvesting

When we sell securities at a loss in taxable, non-retirement accounts, the losses can be used to reduce taxable capital gains from other sales and may even reduce taxes on higher-taxed ordinary income up to $3,000 per year, with any excess carried over to future years. Although we may be harvesting losses on an ongoing basis, when the drop in prices is as widespread as it is, there are many more opportunities. If the loss is in a position that we still want to hold, we can buy it back after 30 days under the 30-day wash-sale rule. If we buy it back too soon, the loss will be disallowed. If we are concerned that we will miss a price recovery in the meantime, we can immediately buy a different security that generally moves in a similar direction. Exchange-traded funds that invest in the same industry as the stock that was sold can be used for this purpose.

If your income is in the 12% bracket, your long-term capital gains rate is 0%, so applying losses to your gains is not beneficial. Instead, you could harvest some gains and immediately buy back the stock, because the 30-day wash-sale rule does not apply to gains.

Reduction of Outsized Positions

There is a natural disinclination to pare back outsized positions with large gains because of aversion to paying capital gains taxes, even at a time when tax rates on long term capital gains are historically low. But when the value of that position is down, the cost in taxes of selling a portion is lower. Also, if your overall taxable income is in the 12% marginal tax bracket, you may not have any federal long-term capital gains tax liability at all. (Remember that this is not relevant in a retirement account in which securities can be bought and sold without tax consequences.)

Replacement of Tax-inefficient Mutual Funds

This again pertains to taxable, non-retirement accounts. Because mutual funds must distribute their dividends and capital gains each year, they’re not a tax-efficient position in taxable accounts, unless they are index funds, which generally have very low turnover in their holdings and generate few capital gains. Even though the distributions increase the tax basis, over time the unrealized gains may have built up and made us reluctant to sell the fund and pay the tax. When there is a drop in market value, the unrealized gain is lower and may even be negative, providing an ideal opportunity to unload the fund. You can then replace it with a diversified selection of individual stocks, which give you more control over the timing of capital gains, or exchange-traded funds, which usually have low distributions.

Gifting Securities

Although for most of us, the federal estate tax threshold is far higher than the value of our estates, the current levels will expire in 2026 and revert to the previous level, which will affect more estates. Also, many states have their own estate taxes. For that reason, if your potential estate is large enough, it may make sense to gift the maximum allowed each year to your heirs, which is now $15,000 per person. With stock prices lower than they were, and presumably lower than they will be in the future, it is possible to gift more shares of a particular security than you could have when the stock price was higher given the same amount of money. Be aware that when you gift securities, the tax basis is transferred as well, unless it is negative. So if you currently have a loss, better to sell the shares yourself and take the tax loss.

Roth IRA Conversions

Roth IRAs are the ultimate tax advantaged vehicle. The investments can grow tax-free, not just tax-deferred, and distributions are not taxed as they are with a Traditional IRA or 401(k). Furthermore, there are no minimum required distributions and a Roth IRA can be inherited without a tax liability when money is eventually withdrawn.

But the catch is that only after-tax money can be put into a Roth, and there are two ways to do that. The first is to contribute after-tax money in the first place, which means there is no tax deduction as with a Traditional IRA (for those who qualify). The other is to convert a Traditional IRA to a Roth IRA, which entails paying income taxes on the amount that is converted because it increases taxable income. It’s that tax bill, which should be paid from non-IRA money to make the conversion worthwhile, that discourages many of us from doing Roth conversions.

When the value of the securities in our Traditional IRA is down, it is less costly to convert them to a Roth IRA. Then when the price recovers, the increase will be sheltered in the tax-free Roth IRA. Remember that you can choose the individual securities that you want to convert, so you can convert only those you feel have the best “bounce back” potential. But be careful that you do not convert too much and push some of your income up into the next tax bracket or trigger a higher Medicare premium.

If you would have been required to take a minimum IRA distribution this year, you might consider converting that same amount to a Roth IRA instead, paying the tax you would have paid in normal times.

Special IRA Provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act

Suspension of Minimum Required Distributions

The CARES Act allows minimum required IRA distributions to be skipped in 2020. For most people who do not need the money to cover living expenses, that probably makes sense. But there may be situations where someone might not want to skip the distribution, such as if the individual will be in a particularly low tax bracket this year. However, a Roth conversion would probably be a better option than just taking the money if it is not needed now.
Liberalized Withdrawals and Rollovers from Retirement Plans
To qualify for the relaxation of certain rules pertaining to retirement plan withdrawals and rollovers, the CARES Act lists several specific reasons, including a coronavirus diagnosis in your family, lost work hours, or having to close your business, but there is also a catch-all category for “other factors” that may apply.

If you are under 59 ½, you can withdraw up to $100,000 from your IRA without paying the 10% penalty, although income taxes would still apply.
Regardless of age, you can withdraw up to $100,000 and pay it back over three years without paying income taxes. It’s like a 60-day IRA rollover, but you have three years instead of 60 days. If you do not pay it back, you can spread the income taxes over three years.
If you are still working, you can take a loan against your 401(k) balance and delay payments for up to one year.

Details are yet to be released by the IRS and financial institutions as to specifically how these rules will be implemented and reported, as well as on whether the states will follow suit.

About The Author

Anne Christopulos

The SECURE Act Passed…Now What?

Wed, 22 Jan 2020 17:16:40 GMT

Just before the start of the new decade, Congress passed the SECURE Act, which makes important changes to certain rules governing retirement accounts. The formal name for the legislation is the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. There are two questions that retirement account owners need to ask: (1) How will it affect me? and (2) What changes should I make, if any, in response to the new rules?

Contribution eligibility has been expanded

The age limitation for contributing to Traditional IRAs, which is now age 70 ½, has been eliminated. That means that if you work past age 70, you can still make a Traditional IRA contribution and receive a tax deduction, as long as your gross income falls within certain limits.

Recipients of certain academic stipends and non-tuition fellowship income for the pursuit of graduate or post-doctoral study or research may now consider that to be earned income when determining their eligibility to contribute to an IRA.

Many part-time employees are now eligible to participate in their company’s 401(k) plan. The requirement is that they have worked at least 1000 hours for one full year or 500 hours per year for at least three consecutive years and that the employee is at least age 21 at the end of the three-year period.

Annuities Allowed in 401(k) plans

Employers may now offer annuities in 401(k) plans. The intent is to offer an option that provides a guaranteed income stream over a retiree’s lifetime, although participants have always had the option of rolling over 401(k) balances to IRAs for the purpose of buying an annuity.

Given the complexities and fees that characterize many annuities it bears watching to see which types of annuities employer plans will offer. One troubling detail is that the fiduciary responsibility to ensure that the products are appropriate for employees will now fall on insurance companies, which sell annuities, rather than employers. Variable annuities, which usually invest in stock mutual funds, have long been considered inappropriate within retirement plans, which are already tax-deferred. So this new option may be suitable only if a participant wishes to buy either an immediate annuity or a deferred annuity, both of which can guarantee a stream of income for life or for a certain number of years. But at today’s low interest rates, these types of products are currently more expensive than they would be in a higher rate environment.

Required Minimum Distributions now start at 72

For anyone who reaches age 70 ½ after 2019, the age at which minimum distributions from Traditional IRAs and 401(k)s must start has been raised to 72. The amount that must be distributed each year will continue to be based on life expectancy tables published by the IRS. While this is welcome news for some account owners, not everyone should assume that delaying distributions until legally required is the best long-term tax strategy. For some people, starting distributions even before age 70 ½ may be optimal. An individual’s retirement account withdrawal plan should be designed in consultation with one’s tax adviser and investment professional. (Although the age for required minimum distributions has been increased, IRA owners who have reached age 70 ½ can still make a Qualified Charitable Distribution (QCD) to a qualified charity. See below.)

The “Stretch IRA” has been eliminated

Under prior law, non-spouse beneficiaries of an IRA had the option of “stretching out” distributions over their own life expectancies. With a few, very narrow exceptions, including minor children, the SECURE Act requires non-spouse beneficiaries to withdraw the entire inherited IRA within 10 years. A spouse who inherits an IRA will continue to be able to roll over the IRA money to his or her own IRA and treat it as such.

Traditional IRA and 401(k) owners with high balances who plan to leave their retirement accounts to their children need to re-evaluate their plans. One question to ask: Might my children be in a higher income tax bracket, including the addition of the IRA income, when they inherit the account than I am in currently? (Keep in mind that the current low tax rates are scheduled to expire in 2026.) If so, you may want to withdraw more from your retirement accounts rather than your nonretirement accounts while you are living. This would, of course, increase your own tax liability (unless you are age 70 ½ and make a Qualified Charitable Distribution) but the tax savings for your children might be greater. In a sense, you would be “prepaying” taxes for your children and increasing the value of their inheritance.

Leaving nonretirement accounts to your heirs takes advantage of a significant benefit our tax laws offer to inheritors of nonretirement accounts—step-up in basis. When appreciated assets in nonretirement accounts are inherited, the tax basis generally can be “stepped up” to the market value at the time of death. That essentially eliminates capital gains taxes on assets, including stocks and real estate, that have increased in value over time. Perhaps in the past, the value of the “stretch IRA” may have exceeded the value of the step-up in basis, but with the passage of the SECURE Act, this may no longer be true.
IRA owners who have reached age 70 ½ can make a Qualified Charitable Distribution (QCD) of up to $100,000 annually to a qualified charity. The benefit of this, which requires moving the money directly to the charity from the IRA, is that it reduces federal taxable income, like a tax deduction, at a time when most people, especially people who are retired, now take the standard deduction, which is usually higher than the total of their itemized deductions. However, under the SECURE Act, the amount of your QCD is reduced by the total of any Traditional IRA contributions you made and deducted after age 70 ½, which, under the SECURE Act, is now allowed if you have earned income.
Another alternative is to convert Traditional IRA money to a Roth IRA. This would also increase your own tax liability in order to save potentially higher taxes for your heirs, but it can be done gradually over a period of years to avoid reaching into much higher tax brackets. Like the Traditional IRA, an inherited Roth IRA can be held for 10 years, but during that time the tax-free (not just tax-deferred as with the Traditional IRA) accumulation of earnings is preserved, and then the money can be withdrawn by the beneficiary with no tax liability. This benefit is in addition to the fact that the Roth IRA is not subject to required minimum distributions for the original owner, who can leave the money in the Roth to accumulate tax-free for the rest of his or her life for the benefit of his or her heirs.
If you have large Traditional IRA or 401(k) balances that you want to leave to your children, you may want to talk to your estate planning attorney about naming a Charitable Remainder Trust as your retirement account beneficiary and naming your children as income beneficiaries of the trust. The trust could pay a regular income stream to your children over their lifetime, with a predetermined charity receiving any assets remaining in the trust after the death of the beneficiaries.
Although most IRA owners already name their spouse rather than their children as their primary beneficiary, the elimination of the “Stretch IRA” makes that more advantageous. The spouse can treat the inherited IRA as his or her own before leaving it to the children, which extends the life of the IRA. Also, an IRA owner with multiple beneficiaries may want to consider the likely tax brackets of each beneficiary in determining which types of assets, retirement or nonretirement, should be left to each.

At the very least, estate planning documents and beneficiary designations need to be reviewed after the elimination of the stretch IRA, especially if the primary beneficiary of your IRA is your revocable trust. In an example of unintended consequences, some IRA owners may have previously set up a “conduit” trust to leave an IRA to their beneficiaries that requires that only the minimum distribution be paid out each year. Under the new rules, that would be $0 in years 1-9 and 100% in year 10, which could result in a large tax bill in year 10.

Other changes

The SECURE Act contains many other provisions, including:

A tax credit of up to $5,000, which had been only $500, for employers who set up new plans. If there is an automatic enrollment feature, small businesses could receive another $500 credit. Also, multiple employer plans are now allowed.
Tax-free distributions from 529 plans for qualified Apprenticeship Programs and (up to $10,000) to repay student loans.
Penalty-free distributions of up to $5,000 for “qualified births and adoptions” from IRAs and retirement plans.
Unearned income of children (“kiddie tax”) will again be taxed at the parents’ tax rate rather than the trust rate, which had been part of the 2017 tax act.

As always, if you have any questions about the SECURE Act or other retirement topics, please give us a call at (413) 256-1225 or info@westbranchcapital.com . We are here to help.

About The Author

Anne Christopulos

The Bond Market Corner – Winter 2020

Wed, 15 Jan 2020 17:19:50 GMT

An uptick in economic activity caused bond yields to tick up modestly during the fourth quarter. In contrast to some foreign economies, US consumer and business spending rebounded. The Federal Reserve lowered interest rates for the third time; the Fed Funds rate is now at 1.5-1.75%. Despite strong labor markets, inflation remains under control and within the Fed’s 2% target range.

As would be expected, equity markets did well in the quarter with indices continually setting new highs, again in response to the improved economy. This was in spite of slower growth elsewhere in the world and continued trade tensions with China. The yield curve or the difference between long term and short term rates widened to positive spreads from inverted or negative levels earlier in the year. For example, earlier in the year the 10-year treasury actually yielded 15 basis points less than the two-year.

At year end this spread was plus 34 basis points, quite a dramatic reversal. As we have previously discussed, inverted curves are often a precursor to recessions: if a slowdown is expected then rates can be expected to decline and investors will want to lock in the yield on long term rates. The return to a positive slope makes the risk of recession lower. Currently the economic expansion is entering its second decade, unemployment is at a 50-year low and stocks are near record highs.

This trend has been sustained by central bank largess. For equity markets to continue moving higher, it will require central banks to continue providing stimulus when needed. However, options are now more limited for the world’s central banks as interest rates are already low or negative in many countries. In fact, the Fed signaled at its latest meeting in December that it is unlikely to lower rates next year. In essence, the risk of recession has been postponed not eliminated. At the end of the year, the 10-year US treasury yield stood at 1.92% compared to 1.67% at the end of the 3rd quarter.

During the quarter, companies and countries took advantage of low rates to issue record amounts of bonds which helped to satisfy investors’ appetite for yield. The rebound in treasury yields has mirrored a pullback from other haven assets such as gold, utilities and other dividend paying stocks. With a partial China trade deal, three Fed interest rate cuts which are working their way through the system and strong employment there remains room for equity markets to continue improving. Corporate bonds proved especially strong in 2019. Investment grade bonds returned well over 10% in most categories and high yield debt gained even more. This was the result of the narrowing in yield spreads between corporate bonds and treasury securities reflecting investors’ willingness to take more risk.

Looking forward, it is not likely interest rates will decline in 2020. However, given the age of the business cycle and less potential central bank support it is likely the economy could hit a speed bump. Therefore, we do not expect rates to increase significantly either.

A closer look at negative interest rates

Interest rates in many countries including the US have hit historic lows in this business cycle. Many countries have rates that are in negative territory. This recent experience with negative interest rates has had both positive and negative effects. Sweden’s central bank, the Riksbank, recently moved its key deposit rate to 0% from -.25%. This is the first central bank to move rates into positive territory from negative. The Riksbank was also one of the first banks to charge banks to hold their deposits by instituting negative rates in 2015. While rates are still negative in countries such as Germany and France, they are inching slowly toward positive territory. With the potential for the era of negative rates to end, it is instructive to see how they have impacted world economies.

On the positive side, subzero rates have stimulated economies by forcing commercial banks to lend at low rates rather than keep their money in central banks earning nothing or even paying to keep their money there. Negative rates have also helped boost a country’s exports by weakening its currency thereby making its exports more affordable. On the other hand, negative rates can crimp bank profits by making it less attractive to make loans. In fact, any financial company such as insurers or pension funds with long term liabilities will be adversely impacted because they are not able to earn the assumed returns necessary to meet their liabilities. Individuals saving for retirement are also hurt with sub-zero interest rates.

These short term impacts are clear. Longer term, negative rates can be counterproductive by helping extend the life of unproductive companies. And with lower borrowing costs, there is the potential buildup of excessive debt which increases risks across the economy.

The full impact of negative rate policies may not be known for many years. What is clear is that in the short term, economies have been helped by negative rates while financial companies and individuals have been hurt. The longer term impact is still to be determined.

About The Author

James K. Ho

2020 Contribution Limit Changes & the Secure Act

Mon, 06 Jan 2020 14:51:40 GMT

Understanding the changes for 2020 so you can maximize your retirement

There are some significant changes to your retirement plans starting January 1, 2020. Between the Internal Revenue Service announcing cost-of-living adjustments for tax year 2020 and the new Secure Act, there is a lot to digest.

Here are the highlights:

IRS Cost-of-Living Adjustments

Detailed in Notice 2019-59 and posted on IRS.gov, the IRS is increasing the contribution limits to your 401(k) and other retirement plans starting January 1, 2020, including:

Maximum employee contribution rises to $19,500
Combined employer and employee contribution rises $57,000
Employee catch-up contribution for participants ages 50+ rises to $6,500
Combined employer and employee contribution for ages 50+ rises to $63,500
Annual compensation limit for calculating contributions increases to $285,000
Highly Compensated Employee limit increases to $130,000
The compensation amount regarding simplified employee pensions remains unchanged
The limitation regarding SIMPLE retirement accounts rises to $13,500

The Secure Act

The Setting Every Community Up for Retirement Enhancement Act of 2019 – the SECURE Act – passed through the House of Representatives and the Senate and was signed by President Trump shortly before Christmas.

Incorporated into a broader 2020 fiscal year appropriations bill, the SECURE Act is aimed at helping Americans more easily participate in tax-advantaged retirement accounts as well as helping ensure that older retirees do not outlive their assets.

While the SECURE Act contains 29 provisions aimed at helping Americans better save for retirement, here are a few highlights:

It offers tax incentives to small businesses to set up automatic enrollment in retirement plans
It allows employers to join with other companies and offer joint-retirement plans, which should help keep costs down
It allows many part-time workers to participate in employer-sponsored retirement plans
It creates a new early withdrawal penalty tax exemption of up to $5,000 from an IRA to use for childcare costs
It pushes back the Required Minimum Distribution Age from 70 ½ to 72
It allows for the inclusion of more lifetime-income options, including annuities

Start Planning Your 2020 Changes Now

The changes from the IRS and the new SECURE Act both alter the rules surrounding retirement plans. And while many of them are simple, others are very complex. As such, investors should study the details and potential implications before blindly adopting.

Talk to your financial advisor to make sure you understand the new rules and potential implications.

As always, if you have any questions about the new regulations, don’t hesitate to call our office at
413-256-1225 , or email info@westbranchcapital.com . We are here to help .

About The Author

Ayaz Mahmud

10 Ways the Secure Act Will Your Retirement Savings

Mon, 06 Jan 2020 14:39:42 GMT

With the decline of traditional pensions, most of us are now responsible for squirrelling away money for our own retirement. In today’s do-it-yourself retirement savings world, we rely largely on 401(k) plans and IRAs. However, there are obviously flaws with the system because about one-fourth of working Americans have no retirement savings at all–including 13% of workers age 60 and older.

But help is on the way. On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This new law does several things that will affect your ability to save money for retirement and influence how you use the funds over time. While some provisions are administrative in nature or intended to raise revenue, most of the changes are taxpayer-friendly measures designed to boost retirement savings. To get you up to speed, we’ve highlighted 10 of the most notable ways the SECURE Act affects your retirement savings. Learn them quickly, so you can start adjusting your retirement strategy right away. (Unless otherwise noted, all changes apply starting in 2020.)

RMDs Starting at Age 72

Required minimum distributions (RMDs) from 401(k) plans and traditional IRAs are a thorn in the side of many retirees. Every year, my father grumbles about having to take money out of his IRA when he really doesn’t want to. Right now, RMDs generally must begin in the year you turn 70½. (If you work past age 70½, RMDs from your current employer’s 401(k) aren’t required until after you leave your job, unless you own at least 5% of the company.)

The SECURE Act pushes the age that triggers RMDs from 70½ to 72, which means you can let your retirement funds grow an extra 1½ years before tapping into them. That can result in a significant boost to overall retirement savings for many seniors.

No Age Restrictions on IRA Contributions

Americans are working and living longer. So why not let them contribute to an IRA longer? That’s the thinking behind the SECURE Act’s repeal of the rule that prohibited contributions to a traditional IRA by taxpayers age 70½ and older. Now you can continue to put away money in a traditional IRA if you work into your 70s and beyond.

As before, there are no age-based restrictions on contributions to a Roth IRA.

401(k)s for Part-Time Employees

Part-time workers need to save for retirement, too. However, employees who haven’t worked at least 1,000 hours during the year typically aren’t allowed to participate in their employer’s 401(k) plan.

That’s about to change. Starting in 2021, the new retirement law guarantees 401(k) plan eligibility for employees who have worked at least 500 hours per year for at least three consecutive years. The part-timer must also be 21 years old by the end of the three-year period. The new rule doesn’t apply to collectively bargained employees, though.

Penalty-Free Withdrawals for Birth or Adoption of Child

Congratulations if you have a new baby on the way or are about to adopt a child! Right after you pass out the cigars, you’ll probably start worrying about how you’re going to pay for the birthing or adoption costs. If you have a 401(k), IRA or other retirement account, the new retirement law lets you take out up to $5,000 following the birth or adoption of a child without paying the usual 10% early-withdrawal penalty. (You’ll still owe income tax on the distribution, though, unless you repay the funds.) If you’re married, each spouse can withdraw $5,000 from his or her own account, penalty-free. Although using retirement funds for child birth or adoption expenses obviously reduces the amount of money available in retirement, lawmakers hope this new option will encourage younger workers to start funding 401(k)s and IRAs earlier.

You have one year from the date your child is born or the adoption is finalized to withdraw the funds from your retirement account without paying the 10% penalty. You can also put the money back into your retirement account at a later date. Recontributed amounts are treated as a rollover and not included in taxable income.

If you’re adopting, penalty-free withdrawals are generally allowed if the adoptee is younger than 18 years old or is physically or mentally incapable of self-support. However, the penalty will still apply if you’re adopting your spouse’s child.

Annuity Information and Options Expanded

Knowing how much you have in your 401(k) account is one thing. Knowing how long the money is going to last is another. Currently, 401(k) plan statements provide an account balance, but that really doesn’t tell you how much money you can expect to receive each month once you retire.

To help savers gain a better understanding of what their monthly income might look like when they stop working, the SECURE Act requires 401(k) plan administrators to provide annual “lifetime income disclosure statements” to plan participants. These statements will show how much money you could get each month if your total 401(k) account balance were used to purchase an annuity. (The estimated monthly payment amounts will be for illustrative purposes only.)

The new disclosure statements aren’t required until one year after the IRS issues interim final rules, creates a model disclosure statement or releases assumptions that plan administrators can use to convert account balances into annuity equivalents, whichever is latest.

Speaking of annuities … the new retirement law also makes it easier for 401(k) plan sponsors to offer annuities and other “lifetime income” options to plan participants by taking away some of the associated legal risks. These annuities are now portable, too. So, for example, if you leave your job you can roll over the 401(k) annuity you had with your former employer to another 401(k) or IRA and avoid surrender charges and fees.

Auto-Enrollment 401(k) Plans Enhanced

More companies are automatically enrolling eligible employees into their 401(k) plans. Workers can always opt out of the plan if they choose, but most don’t. Automatic enrollment boosts overall participation in employer-sponsored plans and encourages workers to start saving for retirement as soon as they are eligible.

The employer sets a default contribution rate for employees participating in an auto-enrollment 401(k) plan. The employee can, however, choose to contribute at a different rate. For a common type of plan known as a “qualified automatic contribution arrangement” (QACA), the employee’s default contribution rate starts at 3% of his or her annual pay and gradually increases to 6% with each year that the employee stays in the plan. However, under current law, an employer cannot set a QACA contribution rate exceeding 10% for any year.

The SECURE Act pushes the 10% cap on QACA automatic contributions up to 15%, except for a worker’s first year of participation. By delaying the increase until the second year of participation, lawmakers hope to avoid having large numbers of employees opt out of these 401(k) plans because their initial contribution rates are too high. Overall, the change allows companies offering QACAs to ultimately put more money into their workers’ retirement accounts while keeping the potential shock of higher initial contribution rates in check.

Help for Small Businesses Offering Retirement Plans

It’s simply harder to save for retirement if your employer doesn’t offer a retirement savings plan, because all the work falls to you. Although most large employers have retirement plans for their workers, the same can’t be said about small businesses. That’s why the SECURE Act has three provisions designed to help more small businesses offer retirement plans for their employees.

First, the new law increases the tax credit available for 50% of a small business’s retirement plan start-up costs. Before the SECURE Act, the credit was limited to $500 per year. However, the maximum credit amount is now up to $5,000.

Second, a brand new $500 tax credit is created for a small business’s start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is available for three years and is in addition to the existing credit described above. The credit is also available to small businesses that convert an existing retirement plan to an auto-enrollment plan.

Third, the SECURE Act makes it easier for small businesses to join together to provide retirement plans for their employees. Starting in 2021, the new law allows completely unrelated employers to participate in a multiple-employer plan and have a “pooled plan provider” administer it. This provision allows unrelated small businesses to leverage economies of scale not otherwise available to them, which typically results in lower administrative costs.

Grad Students and Care Providers Can Save More

Contributions to a retirement account generally can’t exceed the amount of your compensation. So if you receive no compensation, you generally can’t make retirement fund contributions. Under current law, graduate and post-doctoral students often receive stipends or similar payments that aren’t treated as compensation and, therefore, can’t provide the basis for a retirement plan contribution. Similar rules and results apply to “difficulty of care” payments that foster-care providers receive through state programs to care for disabled people in the caregiver’s home.

Under the SECURE Act, amounts paid to aid the pursuit of graduate or post-doctoral study or research (such as a fellowship, stipend or similar amount) are treated as compensation for purposes of making IRA contributions. This will allow affected students to begin saving for retirement sooner. Similarly, “difficulty of care” payments to foster-care providers are also considered compensation under the new retirement law when it comes to 401(k) and IRA contribution requirements.

“Stretch” IRAs Eliminated

Now for some bad news: The SECURE Act eliminates the current rules that allow non-spouse IRA beneficiaries to “stretch” required minimum distributions (RMDs) from an inherited account over their own lifetime (and potentially allow the funds to grow tax-free for decades). Instead, all funds from an inherited IRA generally must now be distributed to non-spouse beneficiaries within 10 years of the IRA owner’s death. (The rule applies to inherited funds in a 401(k) account or other defined contribution plan, too.)

There are some exceptions to the general rule, though. Distributions over the life or life expectancy of a non-spouse beneficiary are allowed if the beneficiary is a minor, disabled, chronically ill or not more than 10 years younger than the deceased IRA owner. For minors, the exception only applies until the child reaches the age of majority. At that point, the 10-year rule kicks in.

If the beneficiary is the IRA owner’s spouse, RMDs are still delayed until end of the year that the deceased IRA owner would have reached age 72 (age 70½ before the new retirement law).

Credit Card Access to 401(k) Loans Prohibited

There are plenty of potential drawbacks to borrowing from your retirement funds, but loans from 401(k) plans are nevertheless allowed. Generally, you can borrow as much as 50% of your 401(k) account balance, up to $50,000. Most loans must be repaid within five years, although more time is sometimes given if the borrowed money is used to buy a home.

Some 401(k) administrators allow employees to access plan loans by using credit or debit cards. However, the SECURE Act puts a stop to this. The new law flatly prohibits 401(k) loans provided through a credit card, debit card or similar arrangement. This change, which takes effect immediately, is designed to prevent easy access to retirement funds to pay for routine or small purchases. Over time, that could result in a total loan balance the account holder can’t repay.

As always, if you have any questions about the new regulations, don’t hesitate to call our office at 413-256-1225, or email info@westbranchcapital.com . We are here to help .

About The Author

Ayaz Mahmud

The Bond Market Corner – Winter 2019

Fri, 08 Nov 2019 16:10:46 GMT

In the fourth quarter of 2018, equity and bond markets reversed direction from trends established through most of the previous nine months. Tough talk on tariffs and more signs of a slowing economy both in the US and globally weighed on equities, while at the same time helping treasury bond prices advance (leading to lower yields). There was much talk of the Fed pausing in its tightening cycle in response to the decline in equity markets worldwide as well as to clear signs of economic weakness. However, on December 19, the Fed raised the Federal Funds rate by .25% and signaled it would likely raise rates two more times in 2019. Although this was a slight downward adjustment from previously when it was thought they would raise rates three times in 2019, the risk markets were disappointed and continued their decline lower. This increase puts the Federal Funds target rate in the range of 2.25%-2.5%. The Fed did acknowledge that there are more risks to global growth reflected in its softened language regarding future increases in interest rates. Early in 2019 the Fed signaled it will likely slow its rate increases further, if not stop them altogether, in response to equity market volatility and its impact on the economy.

The 10-year treasury yield ended the year at 2.69% down from 3.05% at the end of the third quarter but up from 2.41% at year-end 2017. The 10-year yield rose to as high as 3.23% during the quarter before declining as investors sought safety in government bonds. Bond investors are concerned the Fed’s interest rate plans could lead to a slower pace of growth. Additionally, tariffs on US goods could hurt exports of domestic companies, adding to growth concerns. The closely watched spread between the two-year and 10-year yield ended at 21 basis points—this compares to 24 basis points at the end of September and 53 basis points at year end 2017. As a reminder, we are watching this closely as a flattening yield curve typically signals potential economic weakness; investors are more inclined to invest longer for less yield when they expect rates to decline further in response to a softening economy. While the 2/10 spread is still positive, other parts of the curve have turned negative. For example, investors can now invest in a one-year treasury bill and earn more than a two– or five-year note. The two-year treasury is now yielding about the same as the five-year. What this shows is investors are concerned the Fed may raise rates too much leading to an economic slowdown and lower rates. Therefore, they are inclined to accept a lower yield for a longer term to lock in that rate in the expectation that interest rates may decline. This is a phenomenon that bears watching.

In 2018 the expectation was that with a continued strong economy, inflation would increase and bond yields would rise significantly in response. Investors who believed this would have purchased inflation protected bonds. These bonds do well when inflation is rising since their principal value increases with inflation. However, higher inflation did not materialize. Price levels remain within the Fed’s 2% target range. As a result, the 10-year breakeven inflation rate stands at a low 1.7%. This number represents the difference between the nominal US treasury 10 bond yield and the inflation protected 10-year bond yield. Essentially, this is the level of inflation investors expect each year for the next ten years.

With price levels seemingly under control and volatile equity markets, the Fed’s next move may in fact be to do nothing and perhaps to even reduce rates.

The case for corporate bonds

In the fourth quarter, corporate bond spreads widened along with the decline in equity markets. However, for the year 2018, despite rising yields and widening spreads, owning corporate bonds turned out to be a relatively sound strategy. Corporate bonds which trade at a yield spread over treasuries did suffer as their spreads widened with the decline in the equity markets. However, even with treasury yields increasing and spreads widening during the year, the value of many of these bonds were not significantly impacted. Many of our clients have invested in a bond ladder made up of a series of maturities. With a bond ladder the bond holdings will roll down the yield curve. In other words, a five-year bond at the end of 2017 is now a four-year bond at the end of 2018. Since shorter term bonds trade at a smaller yield premium to treasuries and also decline less in price for a given change in yield, the rolldown helps preserve value.

An example will illustrate this point (see chart below).

The three-year bond at the beginning of 2017 is now a two-year bond at the end of 2018. As this illustrates, despite an increase in yields (the three-year yield was 2.01% at the end of 2017 now the two-year has increased at the end of 2018 to 2.67%) and a widening in yield spread on this corporate bond (+35 to +50), at the end of 2018 this bond which is now a two-year bond, is only marginally lower in price one year later due to the roll down effect. When you add in the one year of income it almost eliminates the negative performance. Of course, shorter term bonds will benefit more from the rolldown than longer term bonds in a rising rate environment, but the concept will generally hold true. Additionally, with a laddered bond portfolio, maturing bonds can be reinvested at today’s higher yields.

While there was no place to hide in 2018, investing in corporate bonds helped to minimized negative returns.

About The Author

James K. Ho

Opportunity Zones Offer Investors the Chance to Do Well and to Do Good

Fri, 08 Nov 2019 15:03:47 GMT

Although the 2017 Tax Cuts and Jobs Act did not receive bipartisan support, there is at least one provision in the legislation that has appeal to members of Congress and constituents on both sides. This provision offers what could potentially be a generous tax break to investors who reinvest their capital gains from other investments into economically distressed areas that have been designated as “Opportunity Zones”.

Throughout the country more than 8,700 census tracts have been designated as Opportunity Zones. The Zones were certified in every state, Washington, DC, and five US territories, including all of Puerto Rico, and are a mix of urban, rural, and, to a lesser extent, suburban areas. Local governments nominated the census tracts, and the US Treasury made the final determination.

The average poverty rate in the Opportunity Zones is about 30% and the median household income is just under 60% of the average in the wider geographic area. The unemployment rate is about 10 percentage points higher than the national average and more than one-third of prime age adults are not working. In addition to need, the Zones were selected for their potential for revitalization, as evidenced by some employment and business growth in recent years.

Investors with large unrealized capital gains can benefit in the following way:

The investor sells an existing asset that has appreciated in value.
The capital gain (all or a portion) is reinvested in an Opportunity Zone within 180 days.
The capital gains tax on that reinvested amount is deferred for at least five years, after which time 10% of the gain is excluded from taxation. If the investment is held for another two years, another five percent of the gain is also excluded. These deferred gains would be recognized on December 31, 2026, or on the date sold, whichever comes earlier.
If the investment in the Opportunity Zone is held for at least ten years, any gains on the Opportunity Zone investment itself are tax-free. This benefit has led to the coining of the term “Roth IRA for the rich”.

These investments are called Qualified Opportunity Funds (QOFs) by the IRS, which has gradually been releasing guidance. Although there has been some movement towards establishing such funds by several institutions, any actual investments are awaiting further information from the IRS in early 2019.

Theoretically, a QOF can be created by anyone, but the need to properly follow the regulations, conduct due diligence in the selection of appropriate projects for investment, cover the legal costs, and perform annual compliance and tax reporting suggest that the funds will be set up by experienced businesses and institutions and possibly by family offices (private wealth management firms that serve ultra-high-net-worth investors). Once QOFs are set up, individuals may be able to invest in them, with minimum investments probably starting at $25,000 or higher.

There is a wide range of projects in which QOFs can invest. The projects can include new real estate developments, substantial property upgrades that exceed a defined level and are made within 31 months of purchase, new business ventures, and other types of projects. Major players are expected to include real estate developers, private equity funds, venture capital companies, investment banks, and mutual funds. At least 90% of the fund must be invested in Opportunity Zones and the business investment itself must derive at least 50% of its gross income within the Zone. There are some types of businesses that do not qualify for the investments, including liquor stores, casinos, massage parlors, and golf courses. Also, financial services firms cannot simply locate in an Opportunity Zone and grow tax-free.

The provision is not without its critics. Results from past efforts that offered tax breaks to encourage private investment in low-income areas have not been as successful as hoped in achieving desired social ends. However, unlike past efforts, the tax benefits are not capped, fewer restrictions are placed on eligible businesses, and investors must stay in the investment for a longer period of time to reap the full tax benefit. Other critics feel that the benefits may not be worth the loss in tax revenue and that investments in the most attractive projects would have been made even without the tax break. And there is also concern that many of the projects will involve gentrification that will displace low-income residents.

The pool of money eligible for investment in Opportunity Zones is estimated to be around $6 trillion in unrealized capital gains, so there is tremendous potential, but it remains to be seen what portion of that money finds its way to Qualified Opportunity Funds, particularly at a time when tax rates are at historically low levels. Some investors may view investments in distressed areas as too risky for the potential tax savings. Even if the program attracts a lot of investment, the funds may not be distributed broadly or located where they are most needed, because participants may be motivated more by the tax benefits than by the benefits to society. In time, we will find out.

About The Author

Anne Christopulos

Ideas for Reducing the Cost of College

Fri, 30 Aug 2019 15:28:37 GMT

Encourage your student to think about their future financial self

Mid-August is the time of year that our kids pack the U-Haul and head to college. And while they’re excited about a brand-new semester, it can be frightening to see the cost – and rising college debt – that comes with the college experience. What can our college students do to ease the price tag?

Last school year, in-state tuition at a public university averaged $9,970 for residents and $34,740 at a private college, according to data from the College Board. Some private colleges come in at over $75,000 a year. (And yes, private college might not be worth that extra money.)

Before you freak out, check ideas for how your student can increase their income, boost their financial aid and cut expenses.

Reduce Student Loans

Borrowing $2,500 less in student loans each year equates to $10,000 over four years. If instead you take out an extra $10,000 in federal government-backed Stafford loans at, say, a fixed 6.8% interest, you pay $115 a month for the next 10 years. That $10,000 ends up costing you $13,812 – a big burden even with repayment plans.

Avoid taking out more student loans than you need, even if you’re eligible. Make sure you take out the subsidized loans before the unsubsidized loans. Avoid private student loans at all costs.

The class of 2018 graduated with the most student debt ever, an average of $38,390, according to the Wall Street Journal. If your child is in college now, you probably don’t want their graduating class to make similar headline in the future. What are the options?

Earn More

Yes, that means extra work between courses, research papers and case studies. The rewards, though, are well worth the effort.

Your child doesn’t need a full-time job along with a full course load. They can look into part-time jobs that offer flexible schedules so they rack up paid hours around classes. If working for someone else doesn’t appeal to them, they can create their own work with a side job.

Not only will your child earn cash to help with college expenses but they’ll also earn valuable experience to put them ahead of the pack when starting a career after graduation

Reapply for Scholarships and Grants

If you were denied before, try again. A lot can change in a semester.

If your child brought up their grades, for instance, they might now qualify for tuition help that they applied for before but missed. Check with your department chair for scholarships for upperclassman in your child’s major.

Did your child lose their scholarship? They should focus on studies to boost grade point average again.

Live Frugally

You only live once. Should your child buy a car? Get an expensive nice apartment a few miles from campus? Take a vacation between semesters?

Teach your child to live within their means and use student loans exclusively for college expenses. Frugal living means seeking inexpensive alternatives instead of automatically springing for the most expensive option. Instead of trying to live alone in a two-bedroom apartment off-campus, for example, encourage roommates (or even live at home).

Use School Facilities and Discounts

Most colleges have great amenities that students often ignore. Many services they need may be a 10-minute walk from their living space – and they already pay for these services with tuition.

If there’s a gym on campus, why pay for a membership elsewhere? If their laptop stops working, contact the campus information technology department for a possible cheap repair. Not feeling so great? Head to the school health-care center.

Don’t forget that a college ID can score discounts to events both on and off campus: plays, museums, movies and even train passes.

Accelerate

Four courses (12 credit hours) per semester won’t get your student walking across that stage, diploma in hand, in four years. And the more semesters they stick around, the more everyone pays: even if tuition is fixed, per-semester fees often go up steadily.

Don’t forget about opportunity costs, either: the longer your child stays in school, the longer before they start their career and secure a salary, delaying future earnings potential.

Gently push your child to do what they need to do to graduate in four years – that includes having them stop changing majors – and if possible take summer classes and use advanced placement credits from high school to finish in three years.

It takes a lot for any college student to hold a side job or get through school as fast as possible.

But if your student does the hard work now, their future financial self will thank you for the lack of debt.

About The Author

Ayaz Mahmud

Retirement Basics: Health Care

Fri, 30 Aug 2019 15:16:48 GMT

When planning for retirement, it is extremely important to understand and account for health care expenses. Typically, these expenses consist of Medicare or Medicare Advantage premiums, supplemental plan premiums, and out-of-pocket expenses (deductibles, copays, coinsurance, etc.).

Medicare

Most individuals age 65 or older in the U.S. will participate in a Medicare or Medicare Advantage plan. Medicare – often referred to as “Original Medicare” – includes coverage for hospital insurance (Part A) and medical insurance (Part B). While there is usually no cost associated with Part A, Part B currently costs individuals in the lowest income bracket $1,626 per year. For 2020, annual Part B premiums for individuals in the lowest income bracket will rise to $1,732. Individuals in higher income brackets pay higher premiums for Part B coverage, with the highest tier currently paying $5,526 per year. The deductible for Part B is currently $185 per year; once this is met, individuals typically pay 20% of the Medicare-approved costs associated with doctor services, outpatient therapy, and durable medical equipment.

Because Medicare Parts A and B do not provide coverage for most medications, many enrollees choose to add a prescription drug benefit (Part D) to their plans. Part D plans vary depending on such factors as deductibles, copayments, and coinsurance, with higher premiums plans associated with lower out-of-pocket expenses. The national average Part D premium is currently $398 per year. In addition, enrollees can purchase Medigap insurance to help pay for the out-of-pocket expenses not covered by Parts A, B or D.

Medicare Advantage

Medicare Advantage plans (Part C) are administered by private companies to provide the same types of coverage as Medicare Parts A, B, and typically D. These plans can include:

Health Maintenance Organizations (HMOs)
Preferred Provider Organizations (PPOs)
Private Fee-For-Service Plans
HMO Point-Of-Service Plans
Special Needs Plans

Premiums for Medicare Advantage plans vary depending on plan features. According to CMS, which administers Medicare, the average annual premium for Medicare Advantage plans is currently $336 .

Assessing Health Care Costs

Unfortunately, health care costs can far exceed Medicare/Medicare Advantage premiums. According to a comprehensive pricing model developed by Mercer Health and Benefits, a typical 65-year old woman was estimated to pay $5,200 in annual health care expenses in 2018. Not surprisingly, this figure increased with age: a typical 75-year old woman was estimated to pay $7,900 annually, and an 85-year old woman, $10,100 annually. These figures include Medicare/Medicare Advantage (or equivalent) premiums as well as out-of-pocket expenses, but do not include any long term care expenses.

Over the course of an entire retirement, the cumulative burden of health care expenses can prove quite significant. The Boston College Center for Retirement Research (BCCRR) estimates that a typical 65-year old couple will spend $197,000 on health care during retirement. Of course, there is a risk to planning for a “typical” retirement when it comes to health care. A more conservative analysis, conducted by the Employee Benefit Research Institute (EBRI), suggests that a 65-year old couple should expect to save $265,000 in order to have a 90% chance of covering total health care expenses in retirement.

It is also important to note that the price of health care – as distinct from utilization – has been rising at a higher rate than the cost of other goods and services in the United States. In the past twenty years, for example, the growth in the Consumer Price Index (CPI) for medical care has risen at approximately 3.5% per year, significantly exceeding the 2.2% annual growth in the broader CPI. Assuming this rate of medical inflation, and using the EBRI figure above, a current 55-year old couple should expect to save nearly $374,000 by the time they turn 65 in order to have a 90% likelihood of covering health care costs in retirement.

For anyone interested in a more precise estimate of his/her health care expenses in retirement, Medicare has developed a free online “Out of Pocket Cost Estimator” that factors in, for example, health status, geography, and supplemental insurance desired.

About The Author

Ayaz Mahmud

Changes to Retirement Accounts are on the Horizon

Thu, 08 Aug 2019 15:35:36 GMT

Change may be coming this year to certain rules for IRAs and other retirement accounts. The House of Representatives recently passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 by a 417-3 vote. The Senate has its own version called the Retirement Enhancement and Savings Act (RESA), which shares many provisions with the SECURE Act, but does differ in several respects. Recent efforts have been focused on passing the House bill in the Senate, either as is or with minimal modifications.

Distributions and Contributions

Both bills would raise the age at which minimum distributions from Traditional IRAs and 401(k)s must start. Currently that age is 70½, but the SECURE Act would raise that to 72 and the RESA would raise it to 75. The amount that must be distributed each year would continue to be based on life expectancy tables published by the IRS. However, delaying IRA distributions until the law requires them may not be the best strategy for everyone. While delaying taxes may be attractive, that may come at the expense of a higher tax rate. An individual’s IRA withdrawal plan should be designed in consultation with one’s tax adviser and investment professional.

The bills would also increase the number of people who are eligible to contribute to a Traditional IRA. First, the age limitation for contributing to Traditional IRAs, which is now age 70½, would be eliminated. For those who continue to work past age 70, the possible tax deduction from IRA contributions is welcome news. Second, recipients of certain academic stipends and non-tuition fellowship income may now, under the SECURE Act, consider that to be income when determining their eligibility to contribute to an IRA.

Elimination of the “Stretch IRA”

While the above changes are certainly favorable to IRA investors, there is one potential change that is decidedly negative—the end of the so-called “Stretch IRA”. Under current law, non-spouse inheritors of an IRA have the option of stretching out distributions over their own life expectancies. But the SECURE Act would require all non-spouse beneficiaries to withdraw the entire inherited IRA within 10 years, while the RESA would apply a five-year time limit only to non-spouse beneficiaries who inherit more than $400,000. The intention of this provision is to accelerate the taxation of the tax-deferred IRA money. (A spouse who inherits an IRA will continue to be able to roll over the IRA money to his or her own IRA and treat it as such. Also, minor children would be excluded from the new time limit.)

Estate Planning Implications

The ramifications of the elimination of the Stretch IRA could be substantial for beneficiaries if the larger annual withdrawal amounts push them into higher tax brackets. Even under current law, a Roth IRA or 401(k) is a much more attractive vehicle for beneficiaries. The new regulations would make it even more attractive. Under the SECURE Act, the Roth (like the Traditional IRA) can be held for 10 years after the death of both spouses, but during that time the tax-free (not just tax-deferred as with the Traditional IRA) accumulation of earnings is preserved, and then the money can be withdrawn with no tax liability. This benefit is in addition to the fact that the Roth IRA is not subject to required minimum distributions for the original owner, who can leave the money in there to accumulate tax-free for the rest of his or her life for the benefit of his or her heirs. Because of these features, it is anticipated that conversions from Traditional IRAs to Roth IRAs for estate planning purposes will become more numerous, despite the tax liability that conversions entail.

Company Plans and Other Changes

There are other provisions in the bills that are intended to expand the ability of small businesses to offer retirement plans. Small employers could set up multi-employer plans that would allow them to share plan costs. There is also a new tax credit to encourage automatic enrollment, which has shown to be effective in increasing employee participation, and the current tax credit for starting a retirement plan would be raised from $500 to $5,000.

Larger businesses may also be affected by the new legislation. Long term part-time employees would now be eligible to participate in a company’s 401(k) plan. Also, in response to concerns that some people may outlive their retirement money, plan sponsors could add annuities, that may pay income for life, as an option for employees. Some retirement experts have expressed concerns about the high fees often associated with annuities, but have advocated for offering deferred annuities in 401(k) plans. This type of annuity can be purchased relatively inexpensively with a small portion of the account balance at an earlier age, such as age 70, but doesn’t pay out until a later age.

Other provisions in the bills include a loosening of some rules for 529 college savings plans, some relief for the so-called “kiddie” tax, and additional reasons for penalty-free IRA withdrawals.

What Comes Next?

Although we have a good idea of the direction the final bill will take, the precise provisions and the timing of the bill have yet to be determined and are subject to the rules and politics of the House and Senate. Although there is widespread bipartisan support, already there have been delays due to interference from a few individual senators that has prevented the House bill from swiftly passing through the Senate, as some hoped. In the meantime, we can be thinking about what the changes will mean for us as individuals and be ready to make adjustments to our plans and strategies.

About The Author

Anne Christopulos

A New Tax Break: Qualified Business Income Deduction

Tue, 30 Apr 2019 15:39:49 GMT

Do you do any work as a freelancer or independent contractor and receive a 1099-MISC?

Do you own a real estate investment trust (REIT) or master limited partnership (MLP), either directly or through a mutual fund or exchange-traded fund?

If so, you may be a beneficiary of the 20% deduction on Qualified Business Income (QBI) for pass-through businesses that was included in the 2017 Tax Cuts and Jobs Act. This is a deduction that you can take even if you are not itemizing deductions.

A pass-through business is one that pays no taxes. Instead, the business’s taxes are paid through a person’s own personal tax return. The person may be a sole proprietor, or a partner in a partnership, or a shareholder in a S-corporation. This is in contrast to either traditional corporations or C-corporations, in which the company itself pays corporate taxes on income that it earns.

If you are not a business owner, or don’t think of yourself as a business owner, you may not have paid much attention to this provision. And even if you are a business owner, you may not have thought the deduction applied to your type of business. And you may not have even considered the possibility that you could receive the deduction as a result of investments you may own. Some people have been pleasantly surprised that they receive any benefit from this provision at all.

Qualified Business Income

There are two components of qualified business income. The first is qualified income from sole proprietorships, partnerships, S corporations, trusts or estates subject to various eligibility requirements. The second is qualified dividends from real estate investment trusts (REITs) and qualified income from certain publicly-traded partnerships (PTPs), such as master limited partnerships (MLPs). The operative word here is “qualified” due to the rules and restrictions involved.

If you are a sole proprietor, you calculate your QBI using the income reported on your Schedule C. If you are a shareholder or partner in an S corporation or partnership, QBI is reported to you on a Schedule K-1. If you are an investor, either directly or through a fund, in a REIT or MLP with income that qualified for the deduction, that income is reported to you as Section 199A Dividends on a 1099-DIV or on a Schedule K-1.

It is possible that you may receive a deduction as both a business owner and an investor, in which case the two are added together when you prepare your tax return.

QBI Deduction if Income below $157,500 (Single) or $315,000 (Joint)

Self-employed income from a pass-through business or trade earned by a taxpayer whose total taxable income from all sources does not exceed $157,500 (single) or $315,000 (joint) will probably qualify for the 20% deduction. You qualify for the deduction regardless of the type of trade or business in which you are engaged. However, there are some adjustments to be made before simply applying the 20% to the Schedule C bottom line. To determine your QBI, you must deduct certain adjustments that you made to your gross income, including the portion of your self-employment tax that you deducted from gross income, contributions you may have made to a qualified retirement plan, and the amount you may have deducted for self-employed health insurance. Once you have made those adjustments to calculate your QBI, you multiply it by 20%.

But you are not done yet. There is another calculation to be done. Separately, you must subtract your net long term capital gains and qualified investment dividends, which already receive favorable tax treatment, from your total taxable income and multiply that figure by 20%. Compare that figure to the previously calculated figure. Whichever is lower is your deduction. Although this deduction will reduce your taxable income, it will not reduce your self-employment taxes, which are calculated on your business income before the QBI deduction.

QBI Deduction if Income between $157,500-$207,500 (Single) or $315,000-$415,000 (Joint)

If your total taxable income falls between these ranges, you must determine whether your business or trade is “qualified”. According to the IRS, your business or trade is not qualified if it is a specified service trade or business (SSTB), defined as “involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees.”

If your business is not an SSTB, your deduction will be limited by the amount of W-2 wages paid by the business as well as the UBIA (unadjusted basis immediately after acquisition) of qualified property held by the business certain factors.

If your business is an SSTB, your QBI deduction is limited by the same W-2 and UBIA factors and will be phased out by the amount that your taxable income exceeds the lower end of the range.

QBI Deduction if Income above $207,500 (Single) or $415,000 (Joint)

If your business is not an SSTB, your deduction will be limited by W-2 wages and UBIA.

If your business is an SSTB, there is no QBI deduction, although you may still be entitled to a deduction for QBI earned from qualified REIT dividends or MLP income.

Conclusion

The new 20% deduction for Qualified Business Income affects more taxpayers than what many may have originally thought, but there are myriad qualifications and restrictions. If you utilized tax preparation software or the services of a tax professional to prepare your 2018 taxes, you probably realized any benefit that applies to you. But if you did your taxes the old-fashioned way with pen and paper and think you may have missed a tax break due to this new tax provision, it is a good idea to seek professional advice.

Along with many other provisions of the 2017 tax bill, this deduction will expire after 2025. But if you are considering doing some freelance work or investing in a REIT or MLP, or in a fund that invests in those securities, there may be a hidden tax benefit in store.

About The Author

Anne Christopulos

The Bond Market Corner – Summer 2018

Wed, 08 Aug 2018 16:11:00 GMT

The Federal Reserve again raised interest rates at its June meeting. The new range on the Fed Funds rate is now 1.75%-2%. We expect another two rate hikes this year which will bring this key short-term rate to as high as 2.5%. US growth remains strong and inflation has crept upward. The Fed will likely continue raising rates in response to the strong economy. It needs to ensure there is enough ammunition going forward, in terms of its ability to lower rates, if the economy does falter again. US Treasury yields increased during the quarter with the 10-year yield increasing to 2.84% from 2.74% at the end of March. Yields briefly moved above 3% before retreating on concerns about mounting trade tensions and slower global growth.

There are several factors that have at least kept bond yields somewhat in check. Providing support to yields is the Trump administration’s proposal for trade tariffs, which could hurt not only the US but the global economy. Proposed tariffs would affect imports from many countries by impeding the flow of goods and disrupting supply chains for a variety of industries. A stronger dollar likewise has helped keep yields low as it keeps a lid on import inflation and hurts emerging market countries, especially those with dollar denominated debt. We don’t know how serious the trade war will get or whether it is just posturing on both the China and US sides. But any disruption to free trade as we know it could lead to slower global growth. The interest rate markets have responded with declining yields whenever trade tensions escalate. On the other side, pressuring rates higher, is increased government borrowing and potentially higher inflation from the tax cuts and the recently enacted spending bill. These are only a few factors impacting the level of treasury rates.

As we stated previously, an increase in the short rates will negatively impact any borrower with a floating rate loan. Longer maturity US treasury notes are also a benchmark that helps set rates for fixed rate mortgages, business loans and consumer debt. As short and long term rates rise and borrowing costs increase, economic performance will be negatively impacted.

What signs can investors watch for?

There are a couple of indicators investors can watch to determine the direction of yields and the economy. First the break even inflation rate on TIPS, or treasury inflation protected securities. TIPS pay a fixed coupon but the principal is adjusted upward every six months for inflation. The difference in yield between TIPS and nominal treasury securities of the same maturity is an indication of the market’s expectation for inflation. For example, the difference between 10-year TIPS to 10-year nominal treasuries is an indication of what the market expects for annual inflation over the next ten years. The current level of the breakeven inflation rate for 10-year TIPS at 2.1% indicates that market risks have yet to translate into higher prices. Higher inflation will lead to higher yields since inflation erodes the value of a bond’s fixed coupon. A second indicator to watch is the slope of the treasury yield curve, specifically the spread between the two-year and 10-year yield.

History has shown that when the two-year yield exceeds the 10-year yield, a phenomenon known as an inverted yield curve, a recession, is at least somewhat likely. At quarter end, this spread was 33 basis points. This is the narrowest in more than a decade. At the end of the year it was 53 basis points and one year ago it was 93 basis points. The two-year yield is influenced by expectations for Fed policy and its impact on short term rates. Longer term rates are more sensitive to the outlook for inflation and growth, but are currently being weighed down by trade war fears. This may partially explain the flatter curve but investors should watch these two indicators closely for signs of where the economy, inflation and interest rates are headed next.

About The Author

James K. Ho