Most taxpayers have an instinct to delay paying taxes to the last possible minute. We want to hold on to our money and let it “work” for us. However, there is one exception to that notion. Most of us pay our property taxes as early as possible. Why? Because there is a discount for paying those taxes early. Well, the same may now be true for income taxes.
With the recent tax law changes, taxes are now historically low. However, they are scheduled to go up when the current tax law sunsets in 2025. Moreover, there is always uncertainty about what changes Congress will make to tax rates in the future. Given the country’s enormous debt and the current demographics of the baby boomers reaching retirement who are now becoming eligible for Social Security and Medicare, the government will likely need to either increase revenue or cut spending. Voting to slash benefits is typically hazardous to a Congress.
Therefore, we are recommending to our clients, they attempt to position significant assets into strategies that produce tax-free income such as Roth IRAs and overfunded cash value life insurance. As far as Roth conversions, we are typically recommending gradual partial conversions while attempting to keep clients out of the top tax bracket. For couples filing jointly the tax bracket is only 24 percent for income up to $168,400 and 32 percent up to $321,450. When tax rates go up in the future or when your kids — who may be subject to additional state income taxes — inherit your IRA, these rates will seem like a bargain.
For non-qualified assets, according to Bloomberg, several prominent wealth management firms have been repositioning billions of dollars into specially designed life insurance contracts for their high net worth families to allow for tax-free growth and future tax-free income. There are many factors to consider when doing long-term tax planning, so it’s prudent to consult with your adviser before implementing any long-term tax reduction strategies.
Once we reach age 65, most of us are eligible for subsidized health insurance through a government program called Medicare. Part A, which covers hospital care, is free. Part B, which is available for purchase for an extra fee (depending on your income), covers doctor visits, outpatient therapy, medical equipment and preventative services. Many people acquire Medicare Advantage or Part C, which includes prescription drugs as well. These plans are guaranteed issue. Open enrollment is between Oct. 15 and Dec. 7 each year.
Medicare Advantage plans are typically relatively inexpensive, but they come with high co-pays and other out-of-pocket expenses. Moreover, majority of care must be obtained in network like an HMO. Therefore, these plans are not ideal for those who like to travel and choose their own care providers regardless of the network.
For more flexibility, many people acquire Medicare supplements called Medigap. Medigap policies are sold by private insurance companies and help pay some of the health care costs basic Medicare doesn’t cover, such as co-payments, co-insurance and deductibles. In order to acquire a Medigap policy, you pay an extra premium in addition to the standard Medicare premiums. This is in contrast to the Medicare Advantage Plan premiums, which include the total cost of Medicare benefits. Medigap policies are guaranteed renewable even if you have health problems. This means the insurance company can’t cancel your Medigap policy as long as you pay the premium. Medigap policies generally do not cover prescription drugs and you will need to get a drug plan (Part D) to cover those expenses. Neither Medicare nor Medigap covers long-term care expenses.
It’s wise to review your plan each year with an expert to make sure it’s consistent with your needs. Based on the drugs you are taking, the doctors you are seeing and where you will be spending most of your time, you may be able to modify your plan selection to reduce your costs and maximize your benefits.
Stocks have not reacted too well to the recent snag in trade talks with China. Reportedly, China and the United States had been close to an agreement. However, that tentative agreement fell apart after China allegedly backtracked on some important concessions it had previously agreed to. The U.S. responded with 25 percent tariffs up from 10 percent on $200 billion of imports, with more to come soon if no deal is reached.
Stock markets don’t like trade wars because they have a very bad effect on the global economy. The U.S. seemingly has less to lose as it exported only $120 billion worth of goods to China in 2018, compared with the $540 billion it imported. Although China has a lot less American exports to tax, they can still cause a lot of damage. Many companies, such as Starbucks and General Motors, receive a lot of profits from China and could be hurt by Chinese retaliation. Although the U.S. would like to narrow the trade gap, they really want to stop China from continuing its widespread practice of stealing intellectual property from U.S. companies.
A new CNBC poll finds that 20 percent of U.S. corporations say China has stolen their intellectual property within the last year. IP theft — use of patents, trade secrets, trademarks, and copyrights without permission — is extremely costly. IP theft may not seem as egregious as taking physical property, but it represents either a loss of opportunity or loss of competitive advantage that reduces the revenue a company could have received.
According to CNN, the U.S. Trade Representative estimates the annual cost of this theft to be between $225 billion and $600 billion. Yet until recently, America declined to fight back: “After 20 years of having their way with the U.S., China still appears to be miscalculating,” noted a private-sector Reuters source apprised on the talks. Either way, the stock market will continue to react to new developments in the ongoing trade talks.
Every year educated “professional” money managers attempt to beat the benchmark of the S&P 500 index. Active stock managers, as a whole, have failed to beat the S&P 500 each of the last nine years — trailing by an average of 1.7 percent per year.* Individual investors have fared even worse according to research done by Dalbar. The average mutual fund investor significantly under performs the market due to fees and poor market timing decisions.
The S&P 500 has been a fantastic investment over the past 10 years, averaging about 16 percent per year for the decade that ended March 31. Unfortunately, most investors did not receive anywhere near the full benefit. Even fee-conscious, diversified, and disciplined investors have not kept pace with the S&P 500 because most diversified portfolios had exposure to other asset classes such as bonds and international equities that have not performed nearly as well as the large American stocks that comprise the S&P 500.
So, what can we learn from this? It may seem like investors should just invest in the S&P 500 index and call it a day. This strategy has a couple flaws; first, many investors can’t tolerate the risk of investing all of their assets in stocks. After a decade of averaging 16 percent per year and relatively high valuations, the next decade may not be so rewarding. Secondly, both international equities currently trading for about 12.4 times the earnings and emerging market stocks trading at 10.5 times the earnings appear to be much cheaper than U.S. stocks at 15.3 times the earnings.**
While an argument can certainly be made that the relative stability of the U.S. affords its stocks a justified premium, at some point any asset class can become overvalued and, if history is any indicator, whenever asset classes enjoy prolonged periods of outperformance, they are often followed by long periods of underperformance — which is why most professional advisers typically recommend sticking with a diversified portfolio.
**Capital Group data as of 11/30/2018
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