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Donor-Advised Funds

By on September 1, 2018

Donor-Advised Funds, or DAFs, are merely a tax-efficient way to make charitable contributions.  They work pretty simply.  You make a contribution to a DAF and they distribute it to a qualified charity.  You can advise them on how much to give to each charity.  (Strictly speaking, DAFs do not have to heed your advice, but reputable ones do act on your instructions wherever legally possible.)  You get the tax deduction in the year that you make a contribution, but you can distribute to a particular charity at some point in the future (for up to five years).

The most immediate tax effect is to reduce your adjusted gross income, or AGI.  You might recall that your AGI is simply all of your income reduced by certain IRS-allowed expenses such as IRA contributions and college tuition.  Now your AGI can be further reduced by either the standard deduction or your itemized deductions.  In 2018, the itemized deduction for joint filers has increased to $24,000.  This means your AGI will be reduced by at least $24,000.  However, if your total itemized deductions exceed $24,000, then your AGI will be reduced even more.  And that can be very useful as taxes are calculated based on your “taxable income” (that is, on your AGI minus either the standard or itemized deductions).  Further, reducing your AGI might get you into a lower effective tax bracket.  There are a couple of rules that limit your total charitable deductions.  The deductions cannot exceed 60% of your AGI for cash contributions or 30% for appreciated asset contributions.

In addition to a reduction in your AGI, DAF contributions can lower capital gain and estate taxes as well as your alternative minimum tax (if applicable).  Any appreciation of your contributions within the DAF is also protected from any taxes.

For many of us, the new standard deduction will preclude the use of itemized deductions.  However, when evaluating the best tax strategy, don’t forget that itemized deductions include items other than charitable contributions such as medical and home interest (with a $750,000 mortgage limit) expenses.  What some taxpayers are doing is to accumulate their charitable contributions and contribute them less frequently (such as every two years).  This increases your standard deduction in the year that you make the contribution.

Naturally there are some important details which need to be considered such as the DAF administration and investment fees.  If you’d like help with these details or with a more comprehensive DAF discussion, we’d be happy to talk with you in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Yield Curves

By on August 1, 2018

Yield curves are simply graphs of the interest rates of bonds with different maturities versus time.  A commonly cited example is the yield curve for U.S. government securities.  The rate for 3-month, 2-year, 5-year, 10-year and 30-year treasury securities are plotted on the vertical axis and the maturity period is graphed on the horizontal axis.  Such a graph looks something like this:

This is what is called a normalized yield curve where longer borrowing periods receive higher interest rates.  The reason for the higher future interest rate is the uncertainty of the future – particularly with regard to inflation.  There are other forms of this curve such as a flat yield curve (short and long-term rates are similar) and an inverted yield curve (short-term rates are higher than long-term rates).  The shape of this curve tells us something about how investors feel about the future.  A positive outlook (economic expansion) leads to a normal curve.  A negative outlook (recession) leads to an inverted curve.  A belief that the economy is about to transition from a recession to an expansion (or vice versa) leads to a flat curve.

What’s particularly interesting about the yield curve is how accurately it forecasts a recession.  The Federal Reserve Bank in San Francisco points out that an inverted yield curve has preceded all of the last nine recessions since 1955.  (There was one false positive when the economy slowed down rather than going into an actual recession.)

Currently, government securities have a normal yield curve.  (However, the difference between the 2-year and the 10-year government securities narrowed to 34 basis points (0.34%) in late July.)  In addition, a JPMorgan global bond index recently inverted for the first time since 2007.  So, while not foolproof, it is probably wise to be ready for a potential recession.

If you’d like to see if your portfolio is ready for a recession or discuss any other financial questions you might have, we’d be happy to talk with you in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Another Reason to Eliminate Credit Card Debt

By on July 1, 2018

You might have heard that the Federal Reserve raised the federal funds interest rate another 0.25% recently.  That puts this rate at 2.0%.  (It is expected to rise to 2.5% by the end of the year and to 3.5% by 2020.)  As the Fed rate increases, so does the prime rate that banks use for lending.  And, credit card rates are tied to the prime rate.  So, an increase in Fed interest rates directly leads to an increase in credit card rates.

About half all households carry credit card debt and the average debt level per household is about $16,000.  So, each 0.25% of increase in interest costs a household $40 per year.  This means that the projected increase from the previous level (1.75%) to the forecast 2020 level (3.5%) will cost the average household with credit card debt about $280 per year.  While that’s not a ton of money, why throw it away?

Okay, so rates are going to rise which will increase the cost of credit card debt.  Even if we neglect that increase, credit card debt is probably the costliest kind of borrowing that you can do.  Assuming a credit card rate of 17% on a balance of $16,000, you’ll be paying $2,720 per year in interest.  Now for most of us, that’s serious money.

Since credit card rates are already high and are rising, it probably makes sense to pay down this debt as rapidly as possible.  Once you’ve done that, you’ll be in a position to reap additional dividends.  Take the monthly credit card payments you’ve been making and put half of it into a rainy-day fund.  Use the other half to pay off current balances on your credit cards so you can avoid any credit card interest.

If you’d like to see how you can retire your credit card debt or discuss any other financial questions you might have, we’d be happy to talk with you in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Reducing 2018 Taxes with Qualified Charitable Distributions

By on June 1, 2018

You are probably aware that the tax laws are changing in 2018.  However, many of us aren’t crystal clear on all of the details of these changes.  For example, deductions are changing.  The biggest deduction change is that the standard deduction has increased.  The increase applies to all taxpayers.  As an example, it’s $24,000 for joint filers (plus $1300 for each spouse over 65).  As a consequence, many people will use the standard deduction rather than itemized deductions starting in 2018.  (The changes in mortgage deductions, home-equity interest deductions, limits on state and local taxes and other deduction restrictions make it even more likely that people will opt for the standard deduction.)

So, in this new tax environment, people are thinking about how to minimize taxes if they switch from itemized to standard deductions.  One approach that’s being considered is the Qualified Charitable Distribution rule or QCD.  This allows you to contribute up to $100,000 per year per taxpayer to qualified charities and to reduce your adjusted gross income (AGI) by this amount.  Lowering your AGI offers benefits not available when using itemized deductions.  For example, a lower AGI might put you into a lower tax bracket or even help you reduce the amount of Social Security that is taxable.

Even if you made charitable contributions in the past, you may not have heard of QCDs before.  They simply permit you to transfer money directly from your traditional IRA to a qualified charity if you are 70 ½ or older.  This reduces your AGI and eliminates taxes on the donated portion of your required minimum distribution.  (The RMD is an amount that you must withdraw from your traditional IRA annually once you reach age 70 ½.)

There are a few details that need to be considered when using this tax strategy.  For example, you cannot use it until the tax year in which you turn 70 ½, spouses must withdraw their QCDs from separate IRAs, distributions to charities must be made by December 31st and non-deductible IRAs do not qualify.  If you’d like help with these details or with a more comprehensive QCD discussion, we’d be happy to talk with you in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Transitioning to Retirement

By on May 1, 2018

Retirement — kind of has a nice ring to it, doesn’t it?  For many of us, it means starting a new chapter in our life and doing some of the things we didn’t seem to have time for while we were working.  I’ve written before about some of the financial aspects of retirement.  The Retirement Checklist article is one recent example of this.  This month, I want to talk a bit about some of the non-financial aspects of retirement.  You might want to reread The Three Phases of Retirement article to kind of tee this up.

Let’s start by identifying the most central aspect of retirement — change.  Yep, your routine is going to dramatically altered.  For some of us, we’ll miss the self-worth that sometimes comes with a successful career.  We might also miss socializing with our colleagues at work.  On the other hand, the time pressure of work will ease up or even go away.  Maybe we’ve had a boss we didn’t like.  The point is, things will be different and how we feel about that varies from one person to another.

There are lots of articles and many books on retirement.  After reading some of these and visiting with my friends and clients who have retired, I’ve found that there are four concepts that can benefit most of us.

First of all, it’s probably good advice to let yourself settle into retirement a bit before doing anything major.  This doesn’t mean you shouldn’t take your dream vacation shortly after retirement.  But, you might want to hold off on moving to a new city, selling your home and other major decisions.

Second, it’s fairly well established that relationships are good for us – including both our physical and our psychological health.  Retirement can offer more time for socializing.  Spending more time with your spouse, visiting your kids and grandkids, having lunch more often with a best friend or group of friends are just a few of the ways we can strengthen our relationships.  If most of your relationships were professional, it might be that some of those people would still like to get together from time to time.  You can also meet new acquaintances by taking classes, going to the health club, joining a committee at church, doing volunteer work and so on.

Third, it’s up to you how to best use the time that retirement offers.  Maybe you want to play golf every day.  Maybe you want to learn a new language.  Maybe you want to learn to play an instrument.  Maybe you want to read more books or see more movies.  The options are endless.

Fourth, and finally, a lot of the time pressure and stress that you had to manage while you were working will be dramatically reduced or even eliminated.  You may be just as busy as you were while working, but you’ll be busy doing the things that you want to do and doing them at your own pace and that’s a huge difference.

If you’d like to discuss your retirement situation, we’d be happy to talk with you in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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IRS Tax Scams

By on April 1, 2018

April 15th is coming up soon and the tax scammers have been in high gear.  I even received a recorded call threatening me with arrest from some scammers this year!  The most important thing to know is that the IRS never makes an initial contact by phone or email.  If they do send you a letter, it will be easily verifiable.  If anyone calls saying they are the IRS, just hang up.  In fact, always be suspicious of any email or call asking for personal information.  I’ll cover two scams that are currently being used in this article.

In the first type of scam, victims are told that they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer.  If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license.  In many cases, the caller becomes hostile and insulting.

“This scam has hit taxpayers in nearly every state in the country.  We want to educate taxpayers so they can help protect themselves.  Rest assured, we do not and will not ask for credit card numbers over the phone, nor request a pre-paid debit card or wire transfer,” says IRS Acting Commissioner Danny Werfel. “If someone unexpectedly calls claiming to be from the IRS and threatens police arrest, deportation or license revocation if you don’t pay immediately, that is a sign that it really isn’t the IRS calling.”

Other characteristics of this scam include:

  • Scammers use fake names and IRS badge numbers.  They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security Number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

In the second type of scam, criminals actually deposit a “refund” in your bank account and then have a “collection agency” contact you to reclaim the funds.  Once again, just hang up.  The IRS recently published some warning signs that this scam may be occurring. They say you should be alert to possible tax-related identity theft if you are contacted by the IRS or your tax professional/provider about any of the following situations:

  • More than one tax return was filed using your SSN.
  • You owe additional tax, refund offset or have had collection actions taken against you for a year you did not file a tax return.
  • IRS records indicate you received wages or other income from an employer for whom you did not work.

Unfortunately, scammers seem to be a part of our lives in recent years.  If you need more information on these scams or just want to discuss some other aspect of your financial life, we’d be happy to talk with you in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Inflation

By on March 1, 2018

I’m pretty sure every reader has a pretty good understanding of inflation.  In general terms, things cost more as inflation rises so that a fixed amount of money buys fewer things.  And from an investment point of view, a portfolio worth a certain amount of money will buy less as inflation rises.

Inflation is measured in a variety of ways.  For most of us, the most familiar measurement is the Consumer Price Index.  The CPI increased from January 2017 to January 2018 by 2.07%.  This is pretty good as most industrialized governments attempt to keep inflation between 2% and 3%.

The overall CPI is an important measure of spending power.  However, it’s also important to look at the sub-groups that make up the CPI.  For example, over the last twelve months housing increased 2.79%, medical care increased 1.98% and education and communication decreased 1.73%.  So, if you’re retired and have paid off your house, the housing component wouldn’t be that important whereas heath care would be quite important.

What does inflation mean to our investments?  To understand that, we need to understand the difference between nominal and real interest rates.  Nominal interest rate is the growth of your investments.  Real interest rates represent your investment growth after inflation is taken into account.  As an example, suppose inflation is running at 3.5% and your portfolio is currently returning 6%.  Nominal is 6% and real is 2.5% (6% – 3.5%).  The important lesson here is to think about the real rate of return since that represents your purchasing power.

For many of us, our investments can be divided into stocks and bonds.  It’s generally accepted that over the long run, stocks are able to cope with inflation fairly well.  Bonds on the other hand usually suffer as inflation rises.  This hasn’t really been true during the last few years, but normally rising inflation leads to rising interest rates.  And as interest rates rise, fixed-income investments like bonds lose value since a new bond has a higher rate of return than an older existing bond.   Now there are some important nuances here.  One example is when you hold bonds that yield at least your targeted withdrawal rate in retirement.  Suppose your retirement plan is to withdraw 3.5% per year from your portfolio.  Now if your returns are higher than that, your earnings are less than the current yield, but still high enough to meet you goals.

You can see that inflation matters and that the best defense depends on whether you’re retired or not as well as other factors.  We’d be happy to talk about inflation and your particular situation or any other financial matters in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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The Bitcoin Bubble

By on February 1, 2018

If I say the 2000 dot-com bubble or the 2007 housing bubble, you immediately have a pretty good idea what a bubble is.  Basically it’s when the price of some asset strongly exceeds the asset’s intrinsic value.  The first recorded asset bubble occurred in the 1600s when the price of Dutch tulip bulbs went through the roof.  Experts have tried to predict bubbles, but have largely failed.  Bubbles are only agreed on retrospectively – once a sudden drop in prices has occurred.  Indeed, within mainstream economics, many believe that bubbles cannot be identified in advance; cannot be prevented from forming; that attempts to “prick” the bubble may cause financial crisis; and that instead authorities should wait for bubbles to burst of their own accord, dealing with the aftermath via monetary policy and fiscal policy.

Several causes have been identified for bubbles such as excessive monetary liquidity; extrapolating past extraordinary returns of certain assets into the future; herd behavior (investors tend to buy or sell in the direction of the market trend); and moral hazard issues (when the risk-reward relationship is interfered with, often via government policy).

Okay, this is interesting, but how can it help you protect your assets from future bubbles?  Well, first of all you need to be aware that bubbles continue to exist and are impossible to accurately identify before the burst (or crash) begins.  Secondly, remember the definition in the beginning of this article:  watch for situations when some asset is strongly exceeding its intrinsic value.

There are a few things going on right now that deserve bubble scrutiny.  This includes stock market prices overall; housing in California (which often sets national trends); hot individual stocks such as Facebook, Tesla and Google; and cryptocurrencies.

Let’s drill down just a bit on the last one.  The most famous cryptocurrency is Bitcoin, but Ethereum and ripple are important players too.  Bitcoin’s value increased 343% in the past year and Ethereum is up 3,600%.  Ripple increased from 23 cents per coin to about $3.00 in about a month.

Now these kinds of increases are a bit thrilling and it’s tempting to want to join the party.  But cryptocurrencies walk like a bubble and talk like a bubble, so they just might be a bubble.  My belief is there are other investment alternatives where prices are more in line with asset values.  So, for my money, it just might be better to avoid the temporary thrill as well as the likely long-term pain of cryptocurrencies.

Want to talk more about financial bubbles or any other financial matters in a no-charge, no-obligation initial meeting?  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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2018 Financial Resolutions

By on January 1, 2018

Happy New Year!  As we welcome in 2018, we might want to set a couple of financial resolutions so that we have plenty of time to realize our goals.  Typically, people have similar resolutions in mind.  Common ones are increasing your 401(k), preparing a spending plan, reviewing the new tax rules, increasing your emergency fund, updating (or creating) estate documents and revisiting life insurance.  Some of these we’ll talk about in future blogs, but let’s hit one that I emphasize with clients.

In my mind, there’s one financial resolution that stands out for many of us.  It’s your 401(k) plan.  In 2018, we are permitted to contribute up to $18,500 to our 401(k).  And there’s an additional $6,000 contribution permitted for those of us who are 50 or older.  Why does your 401(k) deserve special attention?  First of all, maximizing your retirement savings is a great way to ensure a nice nest egg for your golden years.  For example, saving $10,000 annually starting at age 40 and assuming a 4.5% growth rate over the next 25 years would add about $465,000 to your retirement assets.  Second, these contributions lower your taxable income.  That’s right, the recently passed Tax Cuts & Jobs Act still permits funding 401(k) plans with pre-tax money.  So, if your income is $75,000 and you contribute $10,000, your taxes are calculated on $65,000.  At this income level, your tax rate would be 22%.  So, the $10,000 reduction in your income would save you $2,200!  And last, but not least, there are the matching contributions from your employer.  Many employers match your contributions (or at least some percentage of your contributions) up to some specified limit.  If your employer has a 100% match up to say $5,000, the match to your 401(k) contribution would be $5,000.  That’s a 50% growth rate!  So, why not sign up for or increase your contributions to capitalize on this great deal!

We’d be happy to go over any of your 2018 financial resolutions or talk about any other financial questions you may have in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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As 2017 Winds Down…

By on December 1, 2017

Can you believe it, we’re only a month away from the end of the year!  For many of us, we’re pretty busy with our normal activities (work, school, etc.) and then we have the holidays to prepare for too.  It seems like there’s no time for anything else and yet there may be some very important financial matters to take care of before December 31st.

You may be familiar with the many financial considerations that could stand a little time before year’s end.  For example, do you have an employer-sponsored Flexible Spending Account?  Such accounts   often have rules about using the balance or losing it.  Then there are discretionary medical expenditures.  If you’ve already reached your deductible limits, December might be the perfect time to take care of some medical needs.  Naturally, there’s an important budgeting exercise for December.  Plan and stick to a holiday spending budget.  Do your investments need rebalancing?  The market has done very well this year and naturally some things have done better than others.  Why not check your asset-allocation plan?  Speaking of the market, you may want to sell some of your investments that have lost money to help lower your tax bill.

Here’s one end-of-year action you may want to consider.  It’s got to do with your property taxes.  You may have heard that congress is in the process of trying to pass some tax-reform legislation.  One provision in the proposed law eliminates the deduction for property taxes.  So, here’s what I recommend that you do.  Keep your eye on this bill and see if it becomes law before the end of the year.  If it does, consider prepaying your 2018 property taxes in 2017.  Since deductions are applied to the year in which they are paid (rather than the year that they are due), you can still claim your 2018 property-tax payment even if the law goes into effect.  Since the 2018 property taxes are not yet posted online and since taxes will increase 15-25% in 2018, you should visit the Larimer County Treasurer’s Office (200 W. Oak St #2100) to request a firm estimate.  Be sure to take your checkbook!

We’d be happy to discuss any end-of-year financial questions (or any other questions) you may have in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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