Quote of the Week

“Politics is a game of fear. Those who do not have the ability to frighten power elites do not succeed. The platitudes about justice, equality, and democracy are just that. Only when ruling elites become worried about survival do they react. Appealing to the better nature of the powerful is useless. They don’t have one.” Chris Hedges, author, America: The Farewell Tour

Technical Corner

I made a mistake in the Tech Corner last week while discussing the National Debt.  Steve Cox pointed out that I quoted the National Debt being over $20 billion. I should have said $20 trillion. Let’s put that in perspective. One billion is a thousand million. One trillion is a thousand billion. $20 trillion is a lot of cash. To put that in perspective on how much each of us in the United States owes, it is $61,500.00 per person as of November of last year. With the deficit growing at one trillion per year that would add around $3,000 per year for each citizen. Just be glad you are not a Japanese citizen, you would owe $90,300.00 per person.

As expected, the House went to the Democrats, and the Senate went to the Republicans. I don’t think the Democrats have any appetite for another tax cut, but hopefully, the two can get together on lowering health care costs and possibly an infrastructure bill. Over the next two years, Washington certainly will not be boring. Be sure to have your seat belt fastened for the coming roller coaster ride. Hang on!

Last week the markets were up overall, but they sold off strongly on Friday and have sold off even stronger today (Monday). Last week the Dow was up 2.8%, the S&P 500 was up 2.1%, the Nasdaq was up 0.7%, and the MSCI EAFE was up 1.1%. Year to date the is up 5.1%, the S&P 500 is up 4.0%, the Nasdaq is up 7.3%, and the MSCI EAFE is down 9.5%.

Here is an interesting fact. As of October 25, 2018, more than two-thirds of the S&P 500 individual stocks are now in either a “correction” or in a “bear market.”  A “correction” includes stocks that are down 10% from their highs, and a “bear market includes stocks that are down more than 20% from their highs.

More than 350 companies out of the 500 tracked by the S&P 500 index have lost more than 10% of their value since hitting their 52-week highs, according to a recent analysis from Reuters. Within that group around 180 stocks are now in “bear market” territory with their shares having lost more than 20% of their value since hitting their 52-week highs.

This goes to highlight the difference between the high-flying stocks that have driven the S&P 500 to be overall up 4% this year vs. the rest of the S&P 500. This indicates a lack of correlation between the stars and the dogs.

Stephanie’s Thoughts

Education Tax Credits and Deductions

For parents and students trying to manage college bills and student loan payments, the federal government offers education-related tax benefits. The requirements for each are different, so here’s what you need to know.

American Opportunity credit

The American Opportunity credit (formerly the Hope credit) is a tax credit available for the first four years of a student’s undergraduate education, provided the student is attending school at least half-time in a program leading to a degree or certificate. The credit is worth up to $2,500 in 2018 (it’s calculated as 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000 of expenses). The credit must be taken for the tax year that the expenses are paid, and parents must claim their child as a dependent on their tax return to take the credit.

To be eligible for the credit, your income must fall below certain limits. In 2018, a full credit is available to single filers with a modified adjusted gross income (MAGI) below $80,000 and joint filers with a MAGI below $160,000. A partial credit is available to single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000.

One benefit of the American Opportunity credit is that it’s calculated per student, not per tax return. So parents with two (or more) qualifying children in a given year can claim a separate credit for each child (assuming income limits are met).

The mechanics of claiming the credit are relatively easy. If you paid tuition and related expenses to an eligible educational institution during the year, the college generally must send you a Form 1098-T by February 1 of the following year. You then file Form 8863 with your federal tax return to claim the credit.

Lifetime Learning credit

The Lifetime Learning credit is another education tax credit, but it has a broader reach than the American Opportunity credit. As the name implies, the Lifetime Learning credit is available for college or graduate courses taken throughout your lifetime (the student can be you, your spouse, or your dependents), even if those courses are taken on a less than half-time basis and don’t lead to a formal degree. However, this credit can’t be taken in the same year as the American Opportunity credit on behalf of the same student.

The Lifetime Learning credit is worth up to $2,000 in 2018 (it’s calculated as 20% of the first $10,000 of qualified expenses). The Lifetime Learning credit must be taken for the same year that expenses are paid, and you must file Form 8863 with your federal tax return to claim the credit. In 2018, a full credit is available to single filers with a MAGI below $57,000 and joint filers with a MAGI below $114,000. A partial credit is available to single filers with a MAGI between $57,000 and $67,000 and joint filers with a MAGI between $114,000 and $134,000.

Unlike the American Opportunity credit, the Lifetime Learning credit is limited to $2,000 per tax return per year, even if more than one person in your household qualifies independently in a given year.

If you have more than one family member attending college or taking courses at the same time, you’ll need to decide which credit to take.

Joe and Ann have a college freshman and sophomore, Mary and Ben, who are attending school full-time. In addition, Joe is enrolled at a local community college taking two graduate courses related to his job. Mary and Ben each qualify for the American Opportunity credit. Plus, Mary, Ben, and Joe each qualify for the Lifetime Learning credit. Because the American Opportunity credit isn’t limited to one per tax return, Joe and Ann should claim this credit for both Mary and Ben, and then claim a Lifetime Learning credit for Joe. Joe and Ann can claim both the American Opportunity credit and the Lifetime Learning credit in the same year because each credit is taken on behalf of a different qualified student.

Student loan interest deduction

The student loan interest deduction allows borrowers to deduct up to $2,500 worth of interest paid on qualified student loans. Generally, federal student loans, private bank loans, college loans, and state loans are eligible. However, the debt must have been incurred while the student was attending school on at least a half-time basis in a program leading to a degree, certificate, or other recognized educational credential. So loans obtained to take courses that do not lead to a degree or other educational credential are not eligible for this deduction.

Your ability to take the student loan interest deduction depends on your income. For 2018, to take the full $2,500 deduction (assuming that much interest is paid during the year) single filers must have a MAGI of $65,000 or less and joint filers $135,000 or less. A partial deduction is available for single filers with a MAGI between $65,000 and $80,000 and joint filers with a MAGI between $135,000 and $165,000.

Also, to be eligible for the deduction, an individual must have the primary obligation to pay the loan and must pay the interest during the tax year. The deduction may not be claimed by someone who can be claimed as a dependent on another taxpayer’s return. Borrowers can take the student loan interest deduction in the same year as the American Opportunity credit or Lifetime Learning credit, provided they qualify for each independently.

Deduction for qualified higher education expenses

The deduction for qualified higher education expenses is not available in 2018 but was for tax year 2017. In 2017, it was worth up to $4,000 for out-of-pocket qualified higher education expenses paid during the year; single filers with a modified gross income (MAGI) of $65,000 or less and joint filers with a MAGI of $130,000 or less could take the full $4,000 deduction. A $2,000 deduction was available for single filers with a MAGI between $65,000 and $80,000 and joint filers with a MAGI between $130,000 and $160,000.

Comparison of Credits/Deductions

MAGI limits for 2018 Qualified expenses include
American Opportunity credit

$2,500

Single filer: $80,000 or less for full credit; partial credit if MAGI $80,000 to $90,000

Joint filer: $160,000 or less for full credit; partial credit if MAGI $160,000 to $180,000

Tuition and fees, plus course materials
Lifetime Learning credit

$2,000

Single filer: $57,000 or less for full credit; partial credit if MAGI $57,000 to $67,000

Joint filer: $114,000 or less for full credit; partial credit if MAGI $114,000 to $134,000

Tuition and fees only
Student loan interest deduction

$2,500

Single filer: $65,000 or less for full deduction, partial deduction if MAGI $65,000 to $80,000

Joint filer: $135,000 or less for full deduction; partial deduction if MAGI $135,000 to $165,000

Tuition and fees, room and board, books, equipment, and other necessary expenses
Deduction qualified higher education expenses

$4,000 (full); $2,000 (partial)

Not available in 2018 Tuition and fees only

For more information, see IRS Publication 970.

Copyright 2018 Broadridge Investor Communication Solutions, Inc

By the Numbers

“THAT WOULD HURT – Individual income taxes paid by American taxpayers would have to increase by +46% in order to eliminate our $779 billion deficit from fiscal year 2018 (source: Treasury Department). – Michael A. Higley, BTN 11-12-2018

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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.

Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.

 

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