Quote of the Week
“Gratitude can transform common days into thanksgivings, turn routine jobs into joy, and change ordinary opportunities into blessings.” – William Arthur Ward
Last week was a mixed return for the indexes. The S&P 500 and the Nasdaq were up slightly while the Dow and MSCI-EAFE were down slightly. Last week was pretty much nothing burger. This week the markets are flat so far.
It is too early to tell, but we are starting to slightly trend towards Quad I. Quad I is when growth is increasing and inflation is declining. If that happens, we will move the portfolio more towards stocks and away from our inflation increasing investments. Back-testing, Quad I is when the stock market rips to higher levels, so potentially green lights going forward.
This week I would like to dive a little deeper on last week’s report that retail sales rose 1.7% in October. This indicates consumers are kicking off the Christmas shopping season early. Over the last three months retail sales have increased for an average of 1.2% per month. This is much higher than the average pre-pandemic monthly climb of around 0.2-0.3% per month. Online sales continue to lead the way. And increasing motor vehicle and parts sales was a good sign, after sales were hampered by a semiconductor chip shortage for most of this year.
Internet retailers and electronic and appliance store sales indicate consumers are willing to spend and are more concerned about goods arriving in time for Christmas than how much they might have to spend.
Stories about supply shortages are likely raising concerns among shoppers. Even though shoppers are worried, retailers have generally indicated their inventory situation remains positive. Retailers appear to have ordered goods earlier than normal, and some larger retailers have sought to use smaller ships docking in smaller ports to move goods. Improvements in the Los Angeles and Long Beach ports have slightly decreased the number of container ships waiting to dock, plus shipping prices have fallen in recent weeks.
The net effect is the Christmas season looks to be in solid shape.
Broadridge Investor has provided the following article which may be helpful in doing last minute tax planning. Good luck!
Year-End Tax Planning
As the end of the year approaches, it’s time to consider strategies that could help you reduce your tax bill. But most tax tips, suggestions, and strategies are of little practical help without a good understanding of your current tax situation. This is particularly true for year-end planning. You can’t know where to go next if you don’t know where you are now.
So take a break from the usual fall chores and pull out last year’s tax return, along with your current pay stubs and account statements. Doing a few quick projections will help you estimate your present tax situation and identify any glaring issues you’ll need to address while there’s still time.
When it comes to withholding, don’t shortchange yourself
If you project that you’ll owe a substantial amount when you file this year’s income tax return, ask your employer to increase your federal income tax withholding amounts. If you have both wage and consulting income and are making estimated tax payments, there’s an added benefit to doing this: Even though the additional withholding may need to come from your last few paychecks, it’s generally treated as having been withheld evenly throughout the year. This may help you avoid paying an estimated tax penalty due to under withholding.
Of course, if you’ve significantly overpaid your taxes and estimate you’ll be receiving a large refund, you can reduce your withholding accordingly, putting money back in your pocket this year instead of waiting for your refund check to come next year.
Will you suffer the alternative?
Originally intended to prevent the very rich from using “loopholes” to avoid paying taxes, the alternative minimum tax (AMT) now reaches further into the ranks of middle-income taxpayers. The AMT is governed by a separate set of rules that exist in parallel to those for the regular income tax system. These rules disallow certain deductions that you are allowed to include in computing your regular income tax liability, and treat specific items, such as incentive stock options, differently. As a result, AMT liability may be triggered by such items as:
- The standard deduction
- Large deductions for state, local, personal property, and real estate taxes
- Exercising incentive stock options
So when you sit down to project your taxes, calculate your regular income tax on Form 1040, and then consider your potential AMT liability using Form 6251. If it appears you’ll be subject to the AMT, you’ll need to take a very different planning approach during the last few months of the year. Even some of the most basic year-end tax planning strategies can have unintended consequences under AMT rules. For example, accelerating certain deductions into this year may prove counterproductive since AMT rules may require you to add them back into your income. If you think AMT is going to be a factor, consider talking to a tax professional about your specific tax situation.
Timing is everything
The last few months of the year may be the time to consider delaying or accelerating income and deductions, taking into consideration the impact on both this year’s taxes and next. If you expect to be in a different tax bracket next year, doing so may help you minimize your tax liability. For instance, if you expect to be in a lower tax bracket next year, you might want to postpone income from this year to next so that you will pay tax on it next year instead. At the same time, you may want to accelerate your deductions in order to pay less tax this year.
To delay income to the following year, you might be able to:
- Defer year-end bonuses
- Defer the sale of capital gain property (or take installment payments rather than a lump-sum payment)
- Postpone receipt of distributions (other than required minimum distributions) from retirement accounts
To accelerate deductions into this year:
- Consider paying medical expenses in December rather than January, if doing so will allow you to qualify for the medical expense deduction
- Prepay deductible interest
- Make alimony payments early
- Make next year’s charitable contributions this year
The gifts that give back
If you itemize your deductions, consider donating money or property to charity before the end of the current tax year in order to increase the amount you can deduct on your taxes. As an aside, now is also a good time to consider making noncharitable gifts. You may give up to $15,000 (in 2020 and 2021) (twice that amount for a married couple) to as many individuals as you want without incurring any federal gift tax consequences. If you gift an appreciated asset, you won’t have to pay tax on the gain; any tax is deferred until the recipient of your gift disposes of the property.
Postpone the inevitable
To reduce your taxable income this year, consider maximizing pretax contributions to an employer-sponsored retirement plan such as a 401(k). You won’t be taxed on the contributions you make now, and you may be in a lower tax bracket when you do eventually withdraw the funds and report the income. (Note that if you take withdrawals from the plan before age 59½, you’ll generally be subject to a 10 percent penalty tax in addition to any income tax due, unless an exception applies.)
If you qualify, you might also consider making either a tax-deductible contribution to a traditional IRA or an after-tax contribution to a Roth IRA. In the first instance, a current income tax deduction effectively defers income — and its taxation — to future years (as with a retirement plan, an additional 10 percent penalty tax will apply to withdrawals made prior to age 59½ in addition to any income tax due, unless an exception applies); in the second, while there’s no current tax deduction allowed, qualifying distributions you take later will be tax free. You’ll generally have until the due date of your federal income tax return to make these contributions.
Tax planning can be complicated. Consider seeking the assistance of a tax professional to determine what year-end tax planning moves, if any, are right for your individual circumstances.
Copyright 2021 Broadridge Investor Communication Solutions, Inc
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These are Larry Lof’s opinions 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.
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