September Market Review

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Since the end of the financial crisis in June 2009, the current economic expansion has lived for nearly eight years. Counting from the last major market low in February 2009, the current bull market is now more than eight years old. The Fed has hiked its benchmark interest rate three times in the past few years, while a strengthening dollar over the same period further tightened financial conditions. Arguably, this economy is starting to show its age and anxieties are becoming more difficult to ignore. A review of the anxieties held by investors (you) and investment professionals (us) follows.


Equity Valuations – “The stock market is just too high” is something heard from clients more and more these days. True, after a near 20% rally in large cap domestic equities in a short period of time, it may seem that stocks are expensive, but considering the recovery in corporate profitability as shown in the chart on page 3 (“Earnings Recovery in S&P 500”) perhaps these stocks were just too cheap last year and are now back to where they should have been all along. We think a bottoming of earnings growth rates is illustrated in the right side of the chart. The trend of rising corporate earnings can be seen as well.

Often investors cite the price-to-earnings ratio (P/E) in relation to historical average as a measure of relative value. However, this comparison must be done carefully to consider the impact of changes in inflation rates. Since the early 1970s inflation has declined. During periods of lower inflation, P/E ratios can arguably be higher without being considered too expensive. A simple approximation of an inflation adjusted P/E ratio would be the sum of P/E and an inflation measure, like the Consumer Price Index (CPI). The chart on page 3 (“Inflation Adjusted P/E”) graphs P/E, CPI and the sum of P/E plus CPI. Observing that unadjusted P/E ranges between 10-25 while inflation adjusted P/E has a higher bottom range of 15, one might conclude that current valuation levels may not be as expensive as first thought.

Rising Interest Rates – A worry of fixed income investors is that rising interest rates can serve as a drag on the performance of their bond portfolios. Though our efforts to provide diversification through broad exposure to maturity ranges, industries and geographies are expected to reduce risk, investors who focus on quarter-to-quarter or year-to-year results have a right to be concerned. However, since the Federal Reserve’s first rate hike in December 2015, yields and prices for benchmark 10-year Treasury bonds are essentially unchanged. In November 2015, the U.S. 10-year had yields between 2.2% to 2.3%. As recent as March and April 2017, they yielded between 2.2% to 2.4%. Considering how Gross Domestic Product (GDP) growth rates continue to average less than the 2.5% aim of the Fed, it seems unlikely to us that the pace of rate hikes will dramatically accelerate. Therefore, longer rates should not make a sudden lurch higher, but rather match the Fed’s slow pace. Expectations of a gradual rise in rates showing up as paper losses until maturity while collecting coupon income along the way ought to be satisfactory for bond investors.

The Trump Administration – In discussions of the economy and markets, we refrain from partisan political commentary. However, when objectively viewing the results of what the Trump administration has accomplished in terms of legislation thus far, a fair observation could be that it has been less than what the campaign promised. The reality of governing could serve as a check on then-candidate Trump’s bold promises being enacted.


Earnings Recovery Stalls – A deeper analysis of the recovery in corporate earnings can give us concerns. At a broad level, there are two issues. First, the low base of previous years has made it easier for managers to achieve profit targets, especially after guiding these lower. Second, there is a casual perception that the earnings recovery may be concentrated in energy and financial sector stocks. Energy companies have benefited from oil rallying from the low $20s to $50 over this time. Banks have actually earned income on their excess reserves while prior to the hikes they did not. Our hope is that the rebound in earnings will not remain limited to only these two sectors, but will expand to the broad market.

Chair Yellen Raises Rates Too Quickly– With more inflationary pressures than a few years ago our worry is not that the Fed has begun to hike interest rates. Rather, our concern is that the Fed hikes too quickly and forces an unexpected deceleration of economic growth. A recession that starts prematurely invites deflationary pressures similar to those last seen in 2008-2009. Also, with little progress being made in per capita income since 2007, a recession beginning before average Americans experienced any wage gains could turn off another generation of investors from investing in stocks.

The Trump Administration
– If President Trump is unable to deliver on any of his headline campaign promises, or even only delivers but a pale shadow of them, he could be
a one-term president. It is worth noting here that America’s economic progress during recent one-term presidents (Carter, Bush 41) pales in comparison to those two-term presidents from both parties.


Our sympathies are with those who feel anxiety over the stock and bond markets. Rather than lament the dearth of opportunities, or wax nostalgically for the higher returns of bygone eras, truly successful long-term investors will focus on using the stock and bond markets to earn the highest rate of return in relation to their risk tolerance. Part of the reason nominal bond yields and equity valuations may seem unappealing today is that investors forget the punishing inflation of bygone eras. In an era where global central bankers have demonstrated they can thwart inflation, the sustained purchasing power of today’s dollars is an often overlooked component of portfolio return. Investors whose assets are properly allocated among stocks, bonds and lower correlated alternatives should have nearly the same opportunity for rewards as they always have.


  • First quarter U.S. GDP came in at 0.7% below expectations of 1%. The reading is significantly below the 2.1% growth from the preceding quarter. The main detractor was weaker consumer spending, while business investment was healthy.
  • Real personal consumption grew by only 0.3% in the first quarter, down from an increase of 3.5% in the fourth quarter of 2016. This is the smallest increase in consumption since the fourth quarter of 2009. The lack of consumption was fueled by reduced spending on motor vehicles and utilities.
  • Core CPI, which removes food and energy costs, fell 0.1% from the prior month, the first decline since January 2010. The YoY core CPI measure is at 2% after the dip in March.
  • U.S. nonfarm payrolls rose in the month of April, adding 211,000 new jobs, and coming in above consensus estimates. March payrolls were revised downward to 79,000, somewhat dampening the sentiment of positive data from April.
  • Driven by strength in the labor market, the unemployment rate fell 10 basis points to 4.4%, the lowest reading since May 2001. Despite the strong gains in employment, the labor participation rate dropped to 62.9% from the previous month’s reading of 63%.
  • Average hourly earnings were somewhat soft, coming in below estimates at a 2.5% YoY pace for the month of April. Month-over-month gains in earnings were in line with the consensus at 0.3%.
  • The LEI index, published by the Conference Board, is comprised of 10 economic components and is considered a helpful gauge for estimating economic activity for the subsequent three to six months. The LEI index rose again in March by 0.4%, climbing to a value of 126.7.
  • Gains in the LEI index were broad based, led by interest rate spreads and new orders in the manufacturing segment. Six of the components added to the top line figure, while two
    subtracted from it.
  • According to Ataman Ozyildirim, Director of Business Cycles and Growth Research at the Conference Board, “the March increase and upward trend in the U.S. LEI point to continued economic growth in 2017, with perhaps an acceleration later in the year if consumer spending and investment pick up.”
  • Foreign developed equities rallied 3.1% in the final week of April following the first round of France’s presidential election. Investors were relieved after far-right candidate Marine Le Pen’s loss to centrist candidate Emmanuel Macron. Le Pen had made. Le Pen has made investors nervous because she supports leaving the EU. The MSCI EAFE index gained 2.2% in April and is up 10.2% this year.
  • Domestic equities faltered in the first half of the month amid weaker economic data that was not consistent with the post-election jump in optimism. Encouraging earnings reports lifted U.S. equities in the second half of the month. The rally brought the technology-heavy Nasdaq and small-cap Russell 2000 indexes to record highs. The Nasdaq closed above the 6,000 level for the first time.
  • Earnings momentum continued in the first quarter after S&P 500 earnings grew 8.6%% YoY in Q4 2016. Through the end of April, 66% of S&P 500 companies have reported Q1 2017 earnings. S&P 500 earnings are on pace for between 14% and 17% growth YoY. If this growth rate is maintained, it will be the strongest growth since Q3 2011.
  • Half of the S&P 500 companies to release Q1 results have reported revenue that was better than analysts’ estimates. This revenue “beat” rate is very strong compared to the historical average of 34%.
  • The industrial sector has been the biggest surprise this quarter with earnings growth on pace for 2.1% growth versus analysts’ estimates for a 5.1% decline.
  • Technology and consumer discretionary were the top performing sectors for a second straight month in April and are the best performing sectors year to date.
  • A reversal in the financial sector’s post-election rally has led to the sector being among the worst performing sectors for the past two months. The lack of policy progress from the new administration has reduced investors’ confidence in Trump’s ability to deliver policy changes, including bank regulation.
  • Energy and telecom were the worst performing sectors in April as reported Q1 earnings and revenue were weaker than analysts’ estimates. Analysts had very high hopes for the
    energy sector with revenue estimated to grow 48% YoY due to the recovery in oil prices, but reported growth is on pace to only be 29%.
  • In April, the trend toward a flatter yield curve revived itself. While a climbing 2-year Treasury yield combined with a falling 10-year yield to cause February’s flattening, a decreasing 10-year yield accounted for nearly all of the leveling of the curve in April.
  • This flattening occurred as inflation numbers and inflation expectations fell during the month. As much of the inflation data are not seasonally adjusted, underestimating the potential for inflation at this point in the year would be unwise.
  • With unemployment below most, if not all, published estimates of the natural rate, inflation pressures could begin to mount over the rest of the year.
  • High yield and Emerging Market bonds continue to maintain their strength over the rest of the market, with EMs closing the gap on high yield for the highest performing fixed income asset classes over the last 12 months. Every asset class had positive returns in April.
  • Since the election in November sparked sell-offs in emerging market and high yield bonds, risk appetites have driven yields to below historical average levels, as investors seek income and are willing to pay more to clip higher coupons.
  • In the more traditional sectors, taxable muni performance has outpaced investment grade corporate bonds.
  • All asset class spreads remain at tighter-than-average levels to U.S. Treasuries, with agency bonds appearing to be the closest to the historical average. Investment grade corporate bond spreads remain tightest relative to the historical average.
  • Tight spreads, particularly in riskier asset classes, tend to signal turning points in the credit cycle. While spreads did widen slightly this month, defaults remain below their historical norms, meaning this cycle may still have legs.
  • The value of high yield corporate bonds has improved over the last six months, having reverted to within a half of a percent of their historical mean.


  • Broad-based commodities prices seemed to roll over in early March driven by swift declines in both crude oil and industrial metals prices. U.S. crude oil and seaborne iron ore prices have fallen by more than 10% and 30%, respectively, since late February.
  • Global real estate and infrastructure indexes were the top performing areas of clients’ alternative investment strategy allocations in April. During April, the decline in the benchmark U.S. 10-year government bond yield, from 2.39% to 2.28%, most likely supported returns for these higher yielding asset classes.
  • The year-over-year jump in natural gas prices is largely due to last spring’s suppressed price levels and a warmer-than-expected summer of 2016. Expected supply increases from the U.S. Appalachia region may keep a lid on prices in 2017.
  • Global production growth in grains (wheat, corn, soybeans and rice) continues to outpace global consumption. This has led to year-over-year price declines in most agricultural commodities. Wheat output growth in Argentina, Russia and the European Union might lead to a fifth consecutive year of a global grain supply surplus.
  • Crude oil prices corrected approximately 10% in April, but key members of the November 2016 production cut agreement, including OPEC heavyweight Saudi Arabia, continue to signal an extension of the deal at their May 25 meeting.

Trust Company of North Carolina
Neither the information nor any opinions expressed in the review material constitutes an offer by bank to buy or sell any securities, financial instruments, provide any investment advice, service, or trading strategy. The securities and financial instruments described in document may not be suitable for you, and not all strategies are appropriate at all times. This review is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives. The portfolio risk management process and the process of building efficient portfolios includes an effort to monitor and manage risk, but should not be confused with and does not imply low or no risk.

Opinions expressed are only our current opinions or our opinions on the posting date. Any graphs, data, or informational in this review is considered reliably sourced, but no representation is made that it is accurate or complete, and should not be relied upon as such. This information is subject to change without notice at any time based on market and other conditions. The information expressed may include “forward-looking statements” which may or may not be accurate over the long term. There is no guarantee that the statements, opinions, or forecasts in this document will prove to be correct. Actual results could differ materially from those described.

Traditional and Efficient Portfolio Statistics include various indices that are unmanaged and are a common measure of performance of their respective asset classes. The indices are not available for direct investment. Past performance is not indicative of future results, which may vary. The value of investments and the income derived from investments can go down as well as up. Future returns are not guaranteed, and a loss of principal may occur. Investing for short periods may make losses more likely. Any investments purchased or sold are not deposit accounts and are not endorsed by or insured by the Federal Deposit Insurance Corporation (FDIC), are not obligations of the Bank, are not guaranteed by the Bank or any other entity and involve investment risk, including possible loss of principal. The price of equity securities may rise or fall because of changes in the broad market or changes in a company’s financial condition. The information is not intended to provide and should not be relied on for accounting, legal or tax advice. Diversification does not guarantee investment returns and does not eliminate the risk of loss.

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Long Term Care Insurance Purchase Options

by  /  Health Care, Long Term Care Insurance

Trust Fund Money Last time we investigated whether long term care insurance (LTCI) is a smart idea for consumers. Assuming you decide to acquire LTCI, what options offer the best value for your premium dollar?

When Should I Buy LTCI? 

  • Age is the single largest element in determining the LTCI premium.
  • The best time to buy LTCI is when you are healthy enough to qualify and you are in a place financially that you can comfortably afford the cost. Most buyers are in their late forties, fifties or early sixties.
  • The biggest mistake is waiting too long and then getting a medical diagnosis or condition that makes you uninsurable.
  • The good news is that once you are insured, your premiums cannot go up simply because you age, your health changes, or you file a claim.

 How Much Coverage Do I Need and For How Long? 

  • Coverage can range from $50 to $500 per day.
  • Estimate the amount you may need: 
    • Start with the average cost of care in the area where you will retire, both in-home and institutional skilled nursing care. The national median daily rate for a private room in a nursing home is $250 according to Genworth, the largest LTCI insurer.
    • Then calculate how much you will be able to afford from retirement or personal savings. The cost could be more for a married couple where one will be living in skilled nursing while the other remains in the home.
    • Buy LTCI coverage for the gap. If you plan to stay in the home and supplement family-provided nursing care, you need less benefit than if you are in the memory care wing of a nursing home.
  • Most LTCI policies are for three to five years, but they can extend for life. Time periods run from the start date of benefit payments.
  • The total lifetime benefit is the per day benefit multiplied by the duration of the policy. A three year policy at $250 per day would pay $275,000 (before inflation adjustments).

 How Long is the Elimination Period (Deductible)? 

  • LTCI policies start the clock as soon as you need help with two activities of daily living (such as bathing, dressing or feeding yourself) or are certified to have cognitive impairment.
  • Around 90% of LTCI policies have 90 day elimination periods, although you can pay a great deal more for zero days.
  • For budgeting purposes, if you had a 90-day elimination period and were paying $250/day, you would be responsible for the first $22,500 of nursing home expenses.

What is the Inflation Protection? 

  • Nursing care costs are rising at rates higher than inflation and LTCI policies often do not pay out for many years after they are purchased, so it is very important to have some inflation protection.
  • Older LTCI policies tended to boost benefits by 5% compounded each year, but 3% per year is now common, due to increased costs from the low market interest rates.
  • Compound interest rate protection is more expensive than simple interest, but probably worth it if you buy the LTCI policy when you are younger.

 Is the LTCI Benefit Shared Between Spouses or Are They Individual Policies? 

  • With shared coverage, benefits from both partners’ policies can be pooled and one or both partners may access the benefits until they are paid out in full.
  • This option costs more in premium, but makes it much more likely that the proceeds will be paid out for nursing expenses for at least one of the two insureds.

 What Are Options to Reduce the Cost of LTCI Premiums? 

  • Obviously, buying early, lower per day benefits, longer elimination periods, lower inflation protection and lower duration all lower premiums.
  • LTCI premiums may be deductible on your Form 1040, to the extent that your medical expenses exceed 10% of your adjusted gross income.
  • If you intend to stay in the home and have nursing care provided at home, consider taking out a reverse mortgage on the house to free equity up for expenses. Homeowners borrow against a home’s equity and continue to live in the house. The loan and accumulated interest is paid off when the home is sold, or the borrower moves or dies.
  • “Combo” or “hybrid” life insurance policies or annuities are becoming more popular. Both of these tax-advantaged saving vehicles can provide a lifetime stream of income. Typically the hybrid life insurance policy permits an advance payment of death benefits for LTC needs.
  • You can make a 1035 exchange of money tax-free from an annuity or cash-value life insurance policy to a LTCI policy.
  • Some states require insurers to offer policyholders who drop their policy an option to elect a benefit equal to the premiums actually paid to that point, rather than forfeit the policy entirely.

50 dollar bills paying for nursing careLike other financial decisions, whether to acquire LTCI or what options to purchase, are multi-variable equations. Please seek advice from your financial advisor before venturing forth.


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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Long Term Care Insurance

by  /  Health Care, Long Term Care Insurance

A recurring question raised by clients regards the advisability of acquiring long-term care insurance (“LTCI”). The ballooning cost of home health care, assisted living and nursing home care is general knowledge. In central North Carolina, Genworth Financial released monthly costs for 2016 and projected for 2026, including:

    2016   2026
Home Health Aide (8 Hours Daily)   $3,956   $5,317
Assisted Living Facility Private Room   $3,841   $5,162
Nursing Home Care Semi-Private Room   $6,920   $9,300
Nursing Home Care Private Room   $7,924   $10,649

As aging baby boomers approach their retirement years, projected medical expenses represent a large budgetary consideration, that can be alleviated with Medicare and Medigap insurance policies. The above-listed long-term care expenses, current and projected ten years from now, represent an even more significant drain on a retirement budget. Experts estimate that more than two-thirds of individuals age 65 or older will require long-term care for some period. The advisability of using LTCI to hedge against the significant financial risk represented by long- term care expenses has been the subject of considerable debate.

LTCI pays for some or all of the costs of nursing homes, assisted-living facilities and home health care for people unable to care for themselves. According to Limra, a research firm funded by the insurance industry, about eight million people have some form of LTCI. In the early 2000s annual sales of LTCI policies peaked at 750,000, but have decreased to around 131,000 annually recently. Only about a dozen companies remain in the LTCI market, down from about ten years ago. In launching LTCI products, which originally offered unlimited lifetime benefits, many insurers underestimated factors such as number of claims, how long claimants would receive benefits, rising health care costs and lower return and yield on insurance company investments.

As the market has tightened, premiums have been rising. Next submission we will speak more specifically on pricing of various provisions in an LTCI policy. For now, know that premiums have been rising at rates as high as 40% per year. The older you are when you commence the policy, the longer and the larger the coverage and the inflation increases, the higher the premium.

In November 2015, Boston College’s Center for Retirement Research published a study on LTCI (the “Study”), indicating that previous research on LTCI understated the risk of going into nursing home care, but overstated the average length and cost of those days.

  • The Study found that Medicare had paid as much as 25% of nursing home costs in recent years.
  • Nearly half of men’s nursing home stays, and 36% of women’s, are less than three months, within Medicare’s 100-day maximum for stays following hospitalization.
  • The Study places the risk for men or women, age 65 or older, of needing nursing-home care at, 44% and 58%, respectively, up from previous research indicating 27% and 44%.
  • The Study further concluded that nursing-home stays are shorter than previously believed, 10 and 16 months for the typical single man or woman, respectively, versus the 16 and 24 months previously accepted.

The real question is whether it is a smart idea to acquire LTCI or use the premium dollars for other investment purposes?

  • People with low income and assets may need to rely on Medicaid.
  • Those with over $2.5 – $3 million in retirement assets can likely afford to pay their long-term care expenses individually.
  • The people in the middle are the potential LTCI clients.

 If staying at home is the goal, round-the-clock home-based professional care can be costlier than a high end nursing home. In 2012, according to the American Association for Long-Term Care Insurance, roughly half of newly opened claims were for home-based care, versus 31% for nursing homes and 19% for assisted care facilities. Reverse mortgages could assist with these costs of staying in your home. Homeowners borrow against a home’s equity and continue to live in the house. The loan and accumulated interest are paid off when the house is sold, or the borrowers move out or pass away.

We will discuss other alternatives and what to look for in a LTCI next time. Stay Tuned!


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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Create Your Own Pension

by  /  Retirement Planning

The vast majority of those reading this submission find themselves, either currently or prospectively, saving for retirement using a defined contribution plan (such as a 401(k) plan), rather than the defined benefit pension plans that our parents or grandparents enjoyed. This is because few employers, other than governments, can afford to fund traditional pensions. Instead, we live with defined contribution plans, where our ultimate benefits will depend on our level of funding, our employer’s optional matches, and the performance of the securities markets throughout our lifetimes. Gone are the days when we would work for a corporation for 35 years and they would tend to our needs throughout our remaining lifetimes.

The new prototypical retirement involves our leaving our employer and:

  • Rolling our 401(k) plan balance into an IRA that we manage ourselves or hire someone to manage for us.
  • Collecting social security, depending on our ages when we start (waiting to age 70 maximizes our draw) and our work and social security payment history.
  • Assembling our after-tax investments, such as securities accounts, investment properties, or our principal residence to determine what cash flow might be attainable.

We will discuss at another time the issue of proper investing of, and withdrawal rates from, retirement assets, assessing the likelihood of out-living our limited retirement assets, but let us discuss some sobering numbers:

  • The federal General Accounting Office says around 29% of households age 55 and older have no retirement savings or accounts.
  • The federal Census Bureau says the average net worth for an American age 55-64 (excluding home equity) is $45,447.
  • Social security, with an average monthly benefit for retired workers of $1,354.04 as of October 2016, was intended to be a safety net or insurance policy, not a sole source of retirement income.

What can we do today to protect against outliving our retirement resources? Let us focus on a slightly more favorable example:

  • Joe, age 70, has been making $150,000 per year but is retiring with an accumulated 401(k) balance of $1 million, that he is transferring to an IRA. Mary, Joe’s wife is also 70.
  • Joe’s social security benefit, when he claims at age 70, will approximate $3,600 per month. Mary did not earn social security.
  • Joe and Mary have non-retirement investments and savings of $500,000.
  • Assuming 80% of prior salary in retirement, Joe and Mary would need $10,000 per month in cash flow.
  • If they invested the IRA and withdrew 4% per annum, that $40,000, or $3,333.33 per month, would add to the $3,600 per month social security, leaving just over $3,000 per month shortfall to be paid out of after tax investment assets.
  • What would happen if the markets had a 50% drop in value as happened in 2000 or 2008? The resulting $500,000 IRA balance results in $1,670 per month from the IRA at a 4% withdrawal rate, furthering the cash shortfall.

This is where we depart the accepted, conventional world of fee-only financial planning and stride boldly into the world of the commissioned brokerage industry. One solution to this risk and this cash shortfall is the use of a single payment immediate income annuity (SPIA). Let’s revisit our last scenario using the SPIA solution:

  • Assume $500,000 of the IRA were used to purchase an annuity, payable for the joint life expectancy of Joe and Mary.
  • $2,859.66 would be payable monthly during Joe’s life, decreasing by one-third upon his death, through Mary’s life.
  • So long as Social security and the insurance company issuing the annuity survive, Joe and Mary will receive $3,600 + $2,859.66 = $6,459.66 per month until Joe passes and slightly less thereafter. Basically two-thirds of their cash flow nut has been covered by a pension that they created with social security and a SPIA.
  • The projected $1,670 from the IRA (based on 4% of the $500,000 balance) and whatever can be generated from after tax investments should be able to make up the other third of needed cash flow. The IRA could be invested more robustly, because the annuity is supporting their cash flow needs.

Please note that interest rates are still near historic lows and the rates payable on SPIAs lock in at the time of purchase and will increase if and when market interest rates increase, making these numbers even better. If your retirement strategy can allow time for rates to rise, patience is encouraged.

In the past, annuities have been used to generate fees to brokers, to the potential detriment of the client. Placing expensive variable tax-deferred annuities into tax-deferred IRAs (“layering your tax deferral”) is tough to justify under a fiduciary standard. Nevertheless, there exist times and places for low-cost SPIAs in the crafting of your “do-it yourself” pension plan.


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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More Ways to Lower Your Taxes

by  /  Tax Planning

Let us continue today with our discussion of more tax deductions, credits and reductions for our 2016 tax returns. In addition to the seven tactics we discussed last time, please consider the following:

Job Hunting Costs

  • If you are searching for a new job in the same field as your last job, whether or not you were successful in finding the new job in 2016, you can deduct job-hunting expenses as miscellaneous deductions if you itemize, subject to a floor of 2% of your adjusted gross income (“AGI”).
  • Deductible costs include:
    • Taxi fares, parking tolls, 54 cents per mile for self-driving, food and lodging for overnight trips
    • Employment agency fees
    • Costs of printing resumes, business cards and advertising
  • You can also deduct moving expenses to your first job location, even if you do not itemize, as long as it is at least 50 miles away from your old home.

Reinvested Mutual Fund Dividends

  • If you, like most investors, reinvest mutual fund dividends into additional shares, the mutual fund will send you a 1099 to remind you that the amount is taxable even though you received no cash. Remember that each new purchase increases your tax basis in that fund. Increased basis results in less capital gain when you sell the fund.
  • The reinvested dividend results in tax in the year of receipt, without the receipt of any cash to pay the tax [referred to as “dry income”], but at least the annual increases in basis from the dividends being reinvested reduces the ultimate capital gain upon a sale.

Amortizing Bond Premiums

  • If you acquired a bond with a higher than market interest rate and paid a premium to face value, you must either:
    • Amortize the premium over the remaining life of the bond, by subtracting each year’s share of the premium from the interest reported each year on your tax return, and reducing the cost basis by the amount of premium amortized; or
    • Ignore the premium until you sell or redeem the bond, when the basis added by the bond premium will reduce the taxable gain dollar for dollar.
  • Better to go through the hassle of amortizing annually, because it reduces ordinary income, rather than the lower-taxed capital gain.

Child or Dependent Care Credits

For a qualifying child (age 13 or younger) or dependent/spouse (who is physically or mentally incapable of caring for his/herself and shares the taxpayer’s principal abode for at least half of the year), two options are available:

  • An employer-sponsored child/dependent care reimbursement account allows deferral of up to $5,000, avoiding federal income taxes and 7.65% of social security tax; or
  • For two or more children or dependents, you can receive a tax credit for up to $6,000 of expenses for care that enable the taxpayer to work. The credit ranges from 20 to 35 percent of the qualifying expenses, depending on level of AGI.

Business Equipment Depreciation

Accelerated depreciation can prove very useful for businesses (even those run from a home), encouraging the acquisition of needed equipment.

  • Bonus depreciation of 50% is allowed for equipment placed into service in 2016 or 2017.
  • Perhaps even more favorable is the section 179 expense election, allowing the business owner to write off the full cost of qualifying assets in the year placed into service, up to $500,000. This phases out after you put more than $2 million worth of assets placed in service in a year. Think about that new computer or printer this year, before rates are lowered and deductions become less valuable.

Divorce and Legal Fees

  • Legal fees and court costs of a divorce are generally not deductible, as personal expenses.
  • However, if you itemize, you can deduct the portion of the legal fees for acquiring alimony, because that is taxable income, and tax advice. Be sure to get a detailed invoice separating out the various services.
  • This is deemed to be a miscellaneous expense deductible over 2 percent of AGI.

There are other deductions/credits that are more widely known and applied. These and last submission’s lists are some of the lesser known, yet still useful, tools to lower your tax liability.


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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Lower Your Taxes

by  /  Tax Planning

Last time we discussed the likelihood of tax revision/reduction passing in the Republican-controlled Congress early in the new Trump administration. In anticipation of lower tax rates next year, we should focus on deferring income and accelerating deductions/credits/reductions this year. It is worthwhile to mention a few tactics that are often overlooked, but could reduce your tax bill.

Tax Credits and Deductions

  • A tax credit is a more valuable dollar-for-dollar reduction of your tax due (if it is a refundable credit, it can generate a check back to you even if you owe no taxes, if it is non-refundable it can only decrease actual taxes you owe).
  • A tax deduction is less valuable because it lowers the amount you pay tax on, rather than directly reducing the tax.
  • If you are in the 28% tax bracket, a $1.00 deduction lowers your taxes by 28 cents, but a $1.00 credit lowers your taxes one dollar.

Tax Loss Harvesting

  • Sell your losing investments before year end to generate realized losses to offset other gains from sales or distributions from your mutual funds.
  • This is not a deduction, but is a quantifiable reduction in taxes.
  • Remember the wash sale rule and do not buy the securities you sell at a loss within thirty days before or after the loss sale.

Student Loan Interest Paid by Parents

  • If you are not claimed as a dependent on your parents’ tax return, but they pay back your student loans, you can deduct up to $2,500 of student loan interest each year, even if you do not itemize.
  • Your parents’ repayment is deemed to be a gift to you, followed by your payment.
  • Your parents will not mind, because, in addition to the fact that they love you, they could not deduct the interest anyway, as it is your debt.
  • Do not forget to deduct student loan interest you pay yourself, also included in the $2,500 maximum.

State Tax Paid with Last Year’s Return

When you list your 2016 state tax withholdings or estimated tax payments,  remember to include the amount you submitted last spring with your state tax return for taxes you owed from 2015.

American Opportunity Credit

  • For all four years of college you can receive a credit for 100% of the first $2,000 spent on qualifying college expenses and 25% of the next $2,000.
  • The credit phases out at a couple’s Joint Adjusted Gross Income (“AGI”) of $160,000.
  • This is a refundable credit, so if it reduces your taxes below zero, you can receive a check from the IRS for the difference.

Credits for Energy Savings Home Improvements

  • Up to $500 of eligible energy saving improvements, such as insulation, efficient HVAC systems and new windows, based on 10% of the cost.
  • Qualified residential alternative energy equipment, such as solar hot water heaters or wind turbines, get a credit of 30% of the cost, including installation, without the $500 limit.
  • These credits expire this year, unless renewed.

Out-of-pocket or In-kind Charitable Deductions

  • Charitable contributions in cash or by check are easy to remember, but do not forget other gift vehicles.
  • Gifts of appreciated property (stocks) can deliver the same dollar amount while also avoiding capital gains tax on the sale of the stock and the gift of the proceeds.
  • Assets with a loss should first be sold and then the cash proceeds donated to the charity.
  • Gifts of personal assets, such as clothing or other personal items, are deductible at thrift shop value.
  • If you drove your car for a charity, deduct 14 cents per mile, plus parking and tolls. You cannot deduct the value of your time, however.
  • Keep the receipts to substantiate your deduction and individual contributions over $250 need an acknowledgement from the charity as to the support you provided.

Medicare Premiums for the Self-employed

  • If you continue to run a business after you are eligible for Medicare and if you are not eligible for coverage on another employer’s or your spouse’s employer’s health care plan, you can deduct the premiums for Medicare Part B and Part D, plus a Medigap supplemental policy.
  • You need not itemize to claim this deduction and it is not subject to the 7.5% of AGI threshold for those over age 65, that increases to 10% of AGI after 2016.

Notice that some of these deductions/credits apply whether you itemize or claim the standard deduction on your return. Proposals for 2017 include increasing the standard deduction to $30,000 for a couple filing jointly.

The first partner I worked for out of law school shared with me what, in retrospect, has proved to be valuable tax advice: “Be sure you disclose every penny of income on your return, but be equally certain you have taken every penny of justifiable deduction from that income.”


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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Trump Tax Plan

by  /  Tax Planning

Now that the election is final, let us review positions on tax planning that the President-elect Trump stated during the campaign, in hopes of preparing in advance of any legislation being passed. President-elect Trump’s Tax Plan is similar to that proposed in June by the House Speaker Paul Ryan and Republican leaders of Congress:

Individual Side

  • Reduce marginal income tax rates for all individuals and businesses.
    • 3 ordinary income tax brackets of 12, 25 and 33%.
    • Maintain current capital gains tax rates of 0, 15 and 20 percent.
  • Repeal personal exemptions and increase standard deduction amounts:
    • Increase from $6,300 to $15,000 for single filers and from $12,600 to $30,000 for married filing jointly.
  • Cap itemized deductions at $100,000 for single filers and $200,000 for married joint filers.
  • Repeal the individual and corporate alternative minimum taxes (“AMT”).
  • Repeal the 3.8 percent net investment income tax (“NIIT”).
  • Tax carried interest (from hedge funds) at ordinary income tax rates, rather than capital gains.
  • Repeal the estate, gift and generation-skipping transfer taxes, replacing them with carryover basis of appreciated assets (rather than the current step-up to date of death valuation), subjecting beneficiaries to capital gains tax on the built-in pre-death appreciation of inherited assets when they sell the inherited assets in the future. A capital gain exemption amount of $5 million for individuals and $10 million per couple filing jointly is proposed. Without this, taxpayers who were previously exempt from estate tax, would have to pay capital gains tax on imbedded pre-death gains.

Business Side

  • Reduce the corporate income tax rate from 35% to 15%, for businesses “that want to retain the profits within the business.” This sounds like C corporations, because S corporations and LLCs pass the taxes on to the shareholders.
  • Eliminate most corporate deductible tax expenditures except the research and development credit.
  • Impose a one-time 10% deemed repatriation tax on corporate profits held offshore, to entice corporations such as Apple to repatriate their profits and bring the cash back home.

Under the Trump Tax Plan 

  • Over the next ten years, federal tax revenue is reduced by $6.2 trillion, increasing the federal debt by approximately $7.2 trillion (with interest) on top of the current $20 trillion, if not offset by spending cuts.
  • Nearly all Americans would see a reduction in taxes in 2017:
    • $4,310 if you make between $143,100 and $292,100, and
    • $1.07 million if you are in the top 0.1 percent and make over $3.8 million.

Under the House GOP Plan 

  • Tax revenues would decrease and the national debt would increase, by about one-half of the Trump numbers.
  • Those with incomes under $292,100 would see a slight drop of $340, but the top 0.01 percent would see an average $1.2 million tax decrease in 2017.

Given the Republican-controlled White House and Congress, it is likely that some form of tax reform legislation will pass in 2017. The issue will be what terms will garner bi-partisan support for passage? The disproportionate benefits between the high and low-ends of the proposed income brackets may cause heartburn with the current proposals.

Something will pass, however, so what should we do today to prepare for a tax decrease in 2017?

  • The old adage is to defer income into 2017 and accelerate deductions into 2016.
  • Sell losing stocks in 2016 to maximize tax loss harvesting; delay selling winning stocks into January 2017, to enjoy any tax breaks. However, never allow tax planning to prevent you from making the correct investment decisions. It is always better to sell a day early than it is to sell a day late.
  • Bunch your deductions into 2016, as they will be worth less after a tax cut. If the standard deduction for a married couple increases to $30,000, many taxpayers will not need to itemize their deductions on Schedule B of Form 1040.
    • Accelerate elective medical expenses
    • Pay state income and property taxes early
    • Double–up your 2016 charitable contributions and possibly skip 2017.
    • Max-out your deferrals into your employer-based qualified retirement plan.
  • Defer bonuses and consultant invoices into 2017, if possible.

We are confronted with “A Good Problem.” Preparing for tax cuts is always more fun than preparing for tax increases.

In the words of Bobbie McFerrin, “Don’t Worry… Be Happy.”


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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