Quote of the Week
“Expectations are the root of all heartache.” – William Shakespeare
U.S. stocks finished slightly lower last week, with most of the attention shifting to corporate earnings announcements. Bank earnings kicked off the second quarter earnings season. The energy sector lagged, as oil prices declined for five straight days, finishing 7% lower on global demand concerns.
This week is the biggest week for earnings reports, with 33% of the companies in the S&P 500 reporting. We will get a good read on the manufacturing trends with a number of industrial companies reporting earnings.
An additional statistic just reported is that the global PMI statistics have come in with the reading at 49.4, which means the global economy is shrinking, and it looks like the trend is going down fast. A reading of above 50.0 means the global economy is growing, and a reading of below 50.0 means the global economy is shrinking.
We have taken off the short position for those who had that position because it looks like the Fed is poised to lower interest rates. Some areas of the markets tend to do well the three months following a Fed interest rate cut. I don’t think the cut will rescue the markets as lots of investors seem to believe. We just want to be safe at this time and wait to see what the markets bring us. We moved the money in the short position to long- term U.S. Treasuries.
There are too many downward trends established that will be too hard to turn around. With the tariff situation and the global economy declining, business leaders are frozen in place not knowing what to do, so they aren’t doing anything.
New IRS Guidance on State and Local Tax Refunds
The Tax Cuts and Jobs Act of 2017 included a $10,000 ($5,000 if married filing separately) cap on the amount of state and local taxes that can be claimed as an itemized deduction on Schedule A of Form 1040. If you itemize deductions that include a deduction for state and local taxes and then subsequently receive a state or local tax refund, you may have to include part or all of the refund as income in the year you receive it. There were some questions about how the new $10,000 cap would affect the amount of any such refund that would be included in income.
In general, if you receive a federal tax benefit from deducting state or local taxes in a prior taxable year and then subsequently recover (receive a refund for) some or all of the state or local taxes you had deducted, you have to do a two-part calculation. The first part of the calculation is to go back and determine what your total itemized deduction amount in the prior year would have been if you had paid the correct amount of state and local taxes and subtract that from the amount you originally claimed. The second part of the calculation is the difference between your itemized deductions taken in the prior year and the standard deduction amount (including adjustments for being blind or age 65 or older) for the prior year, provided that you could have claimed the standard deduction that year. The amount of the state or local refund that needs to be included in your income is the smaller of these two amounts.
For the 2019 IRS Form 1040 tax return, it is likely that the instructions for the line “Taxable refunds, credits, or offsets of state and local income taxes” will contain a simple worksheet for implementing this general rule. It will probably also include numerous exceptions that will require the use of a more complicated worksheet in IRS Publication 525. Exceptions might include (among others): you owed alternative minimum tax in 2018; you couldn’t use the full amount of credits you were entitled to in 2018; you could be claimed as a dependent by someone else in 2018; or you received a refund on a jointly filed state or local income tax return, but you aren’t filing a 2019 joint tax return with the same person.
Assume no exceptions to the general rule apply. You paid local real property taxes of $5,000 and state income taxes of $6,000 in 2018. Your state and local tax deduction was limited to $10,000, so you could not deduct $1,000 of the $11,000 state and local taxes paid. Including other allowable itemized deductions, you claimed a total of $15,000 in itemized deductions on the 2018 federal income tax return. In 2019, you received a $1,500 state income tax refund due to overpayment of state income taxes in 2018.
If you had paid only the proper amount of state income tax in 2018, the state and local tax deduction would have been reduced from $10,000 to $9,500 and, as a result, itemized deductions would have been reduced from $15,000 to $14,500, a difference of $500 (the first calculation).
You filed as a single taxpayer and were entitled to a standard deduction of $12,000 in 2018. The $15,000 of itemized deductions taken in the previous year exceeded the standard deduction by $3,000 (the second calculation).
The smaller of the two calculation amounts is $500. Therefore, you received a $500 tax benefit due to overpayment of state income tax in 2018. Thus, you are required to include $500 of the state income tax refund in gross income for 2019.
Copyright 2019 Broadridge Investor Communication Solutions, Inc
By the Numbers
RESULTING FROM OUR TRADE WAR– When comparing the first 5 months of 2019 to the first 5 months of 2018, Chinese exports to the United States have fallen 12% while American exports to China have fallen 19% (source: Commerce Department). Michael A. Higley, BTN 07-22-2019
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These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.
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