Quote of the Week
“A big part of friendship is showing up.” – Unknown
Equity markets finished lower last week resulting in the largest weekly loss for the S&P 500 since March. Worries about rising interest rates heightened China trade tensions, and other international risks weighed on stocks. Weakness was broad based, with the faster growing and more cyclical sectors declining the most. Unfortunately, the faster growing companies were exactly where we are invested. Our being in faster growing companies over the last two years has been the contributing factor to our portfolio doing so well.
Early in the week the International Monetary Fund (IMF) lowered its growth expectations for this year and also lowered its growth expectations for next year partly due to U.S./China trade tensions. Adding to the uncertainty were a small number of companies issuing profit warnings, making investors nervous about the upcoming earnings season.
Last week the Dow was down 4.2%, the S&P 500 was down 4.1%, the Nasdaq was down 3.7%, and the MSCI EAFE was down 3.1%. For the year the Dow is up 2.5%, the S&P 500 is up 3.5%, the Nasdaq is up 8.6%, and the MSCI EAFE is down 9.8%. It is the start of earnings season which should tell us a lot about the strength of the economy.
The one thing I have not discussed recently is the elephant in the room. Our National debt is rising, and it is rising fast. In as soon as a year, the annual debt accumulation will top $1 trillion and will never come back down unless Congress acts. This year’s deficit amounts to $6,200 per household and is more that we spend each year on Medicare or defense.
Interest on the debt rose by $62 billion over the previous year to $325 billion, which is about twice as much as we spend on the Departments of Transportation and Homeland Security combined. Under current projections, annual interest payments on the debt could top $1 trillion by 2030.
As expected, recent tax cuts and spending increases, which was put on the national credit card, are making a bad problem even worse.
It’s an unsustainable fiscal course that will lead us to debt overtaking the size of the entire economy in as soon as a decade. I can promise you that the recent tax cut will not pay for itself. No tax cut has ever paid for itself. It is unfortunate that 83% of the recent tax cut goes to the top 10%. My opinion is that the $1.5 trillion-dollar tax cut would have been better spent on our aging infrastructure. At least we would have something to show for the money.
Those elected to Congress this year will face stark and difficult choices to put the debt on a downward path and still protect our nation’s social programs such as Social Security and Medicare. With the aging of the Baby Boomers, the stress on the system will be even greater. Something has to give before we sail the ship off the edge of the earth.
Ten Year-End Tax Tips for 2018
Here are 10 things to consider as you weigh potential tax moves between now and the end of the year.
1. Set aside time to plan Effective planning requires that you have a good understanding of your current tax situation, as well as a reasonable estimate of how your circumstances might change next year. There’s a real opportunity for tax savings if you’ll be paying taxes at a lower rate in one year than in the other. However, the window for most tax-saving moves closes on December 31, so don’t procrastinate.
2. Defer income to next year Consider opportunities to defer income to 2019, particularly if you think you may be in a lower tax bracket then. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone payment of tax on the income until next year.
3. Accelerate deductions You might also look for opportunities to accelerate deductions into the current tax year. If you itemize deductions, making payments for deductible expenses such as medical expenses, qualifying interest, and state taxes before the end of the year, instead of paying them in early 2019, could make a difference on your 2018 return.
4. Factor in the AMT If you’re subject to the alternative minimum tax (AMT), traditional year-end maneuvers such as deferring income and accelerating deductions can have a negative effect. Essentially a separate federal income tax system with its own rates and rules, the AMT effectively disallows a number of itemized deductions. For example, if you’re subject to the AMT in 2018, prepaying 2019 state and local taxes probably won’t help your 2018 tax situation, but could hurt your 2019 bottom line. Taking the time to determine whether you may be subject to the AMT before you make any year-end moves could help save you from making a costly mistake.
5. Bump up withholding to cover a tax shortfall If it looks as though you’re going to owe federal income tax for the year, especially if you think you may be subject to an estimated tax penalty, consider asking your employer (via Form W-4) to increase your withholding for the remainder of the year to cover the shortfall. The biggest advantage in doing so is that withholding is considered as having been paid evenly through the year instead of when the dollars are actually taken from your paycheck. This strategy can also be used to make up for low or missing quarterly estimated tax payments. With all the recent tax changes, it may be especially important to review your withholding in 2018.
6. Maximize retirement savings Deductible contributions to a traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2018 taxable income. If you haven’t already contributed up to the maximum amount allowed, consider doing so by year-end.
7. Take any required distributions Once you reach age 70½, you generally must start taking required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (an exception may apply if you’re still working for the employer sponsoring the plan). Take any distributions by the date required — the end of the year for most individuals. The penalty for failing to do so is substantial: 50% of any amount that you failed to distribute as required.
8. Weigh year-end investment moves You shouldn’t let tax considerations drive your investment decisions. However, it’s worth considering the tax implications of any year-end investment moves that you make. For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all of those gains by selling losing positions. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or carried forward to reduce your taxes in future years.
9. Beware the net investment income tax Don’t forget to account for the 3.8% net investment income tax. This additional tax may apply to some or all of your net investment income if your modified adjusted gross income (AGI) exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately, $200,000 if head of household).
10. Get help if you need it There’s a lot to think about when it comes to tax planning. That’s why it often makes sense to talk to a tax professional who is able to evaluate your situation and help you determine if any year-end moves make sense for you.
Copyright 2018 Broadridge Investor Communication Solutions, Inc
By the Numbers
“LOTS AND LOTS OF PEOPLE – There are 102 cities in China with a population of at least 1 million, the largest Chinese city being Shanghai (22 million). There are10 cities in the USA with a population of at least 1 million, the largest American city being New York City (9 million) (source: Census Bureau, The Guardian).” – Michael A. Higley, BTN 10-15-2018
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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.