November 2017 Newsletter to Clients
Submitted by Moneywatch Advisors on November 7th, 2017Enjoy this month’s newsletter that features a holiday open house invitation, security update for third party gifts, companies’ earnings and tax reform highlights…
Holiday Party is coming up! Mark your calendars for December 14 from 4-7:00 pm at our office located at 121 Walton Avenue.
Security Update: Protecting your personal information continues to be a TOP priority when serving our clients. We are continually updating our policies and procedures internally to keep personal information secure. We appreciate your patience as we can no longer use ‘standing instructions’ to make third party gifts; this means a ‘fresh’ signature will be required for each transaction.
It is important to never respond to an email asking one to confirm a user name or password. We recommend each client install antivirus software on their local computer and keep the subscription up to date. Emailing documents which contain personal information, including account numbers, is discouraged. If you need to send a document to our office please contact us first and we can provide a ‘safe’ portal.
Q3 2017 Earnings: To date (11/3/2017), 81% of the companies in the S&P 500 have reported actual results for Q3 2017. In terms of earnings, more companies (74%) are reporting actual EPS above estimates compared to the 5-year average. In aggregate, companies are reporting earnings that are 4.8% above the estimates, which is also above the 5-year average. In terms of sales, more companies (66%) are reporting actual sales above estimates compared to the 5-year average. In aggregate, companies are reporting sales that are 1.2% above estimates, which is also above the 5-year average. This data supports the strength we continue to see reflected in increasing stock prices.
Tax Reform: As we explained in the October Newsletter, it is our job at Moneywatch Advisors to analyze policy changes, assess the impact on our clients and help you change strategies, if warranted. So, we’ve been following the President’s and Congress’s efforts to reform the federal tax code and here is our initial assessment of the bill introduced in the House, followed by a simple example of the effect on a fictitious married couple with two children.
- After much discussion, the bill retains the tax treatment of contributions to retirement plans such as 401(k)’s, 403(b)’s and IRA’s and Roth IRA’s. That is extremely important as those are important tools to help people save and invest for their retirement.
- The bill compresses the tax brackets down to 4 – 12%, 25%, 35% and 39.6%.
- Each taxpayer has a choice of either itemizing deductions or using the federal standard deduction. The bill increases the standard deduction for single taxpayers from $6,350 to $12,000 and from $12,700 to $24,000 for married couples. As a result, many more people will use the standard deduction rather than itemize.
- Taxpayers can still deduct charitable contributions, mortgage interest for newly purchased homes worth up to $500,000 and property taxes up to $10,000.
- Deductions for state and local income taxes and for personal and dependent exemptions are eliminated.
- The bill repeals the Alternative Minimum Tax that affects high earners and those with certain preference items such as stock grants.
- Deductions for out-of-pocket medical expenses is eliminated. It is unclear yet whether this will impact contributions to Health Savings Accounts (HSA’s).
While it’s impossible to capture every person’s circumstances, let’s take a middle of the road example and apply the new proposal. So, as in September, let’s start with our fictitious couple and how much they pay under current tax law:
As an example, let’s imagine a married couple who earn a combined $125,000 in salary and each contribute 5% pre-tax to their employer’s retirement plan. For simplicity sake, we’ll ignore other deductions like their pre-tax cost of their employer’s health insurance plan, and call their Adjusted Gross Income (AGI) $118,750. (Gross income minus their retirement contributions) They have two children.
Current Law:
The couple has a choice between subtracting the standard deduction of $12,700 from their AGI, or itemizing deductions. As you can see below, their itemized deductions are more than their standard deduction, so they obviously deduct the larger amount:
- Mortgage interest deduction – $5,578 (Interest paid on their $200,000 house where they still owe $150,000 at 3.75% interest)
- State and Local Income tax deduction – $9,797
- Property tax on their home – $2,000
- Charitable contributions – $1,000
- Total: $18,375 (clearly more than the standard deduction of $12,700)
In addition to their itemized deductions, they are also allowed to deduct $4,050 each as personal exemptions plus dependent exemptions for each of the kids, for a total of $16,200.
Finally, their AGI of $118,750 minus their itemized deductions of $18,375 minus their personal exemptions of $16,200 equals Taxable Income of $84,175, resulting in Tax Liability of $12,521.
New Proposal:
Although mortgage interest and charitable contributions are still allowable as itemized deductions, state and local income tax deductions are not allowed. Property tax up to $10,000, however, can be included as an itemized deduction.
• Mortgage interest deduction – $5,578 (Interest paid on their $200,000 house where they still owe $150,000)
• Property tax on their home – $2,000
• Charitable contributions – $1,000
• Total: $8,578 (now less than the new standard deduction of $24,000)
The couple is no longer allowed to deduct $4,050 for their 4 personal and dependent exemptions because those have been rolled into the proposed standard deduction.
As a result, they find their itemized deductions are lower than the proposed new standard deduction – $8,578 is lower than $24,000 – so they use the higher number.
Finally, their AGI of $118,750 minus the standard deduction of $24,000 equals their taxable income of $94,750. Based on the new, compressed tax brackets it appears their tax liability would be $11,988 – a tax savings of $533.
As the bill must still be considered and voted on by both the House and the Senate and then any differences between the two versions ironed out before the bill heads to the President for his consideration, there will undoubtedly be changes. Most important, if and when the bill becomes law, we will determine if strategy changes are warranted for clients.
Thank you for your continuing confidence.
Past performance is no guarantee of future results. The opinions expressed are those of Moneywatch Advisors, Inc. and are no guarantee of the future performance of any particular fund. This information is for educational purposes only and is not intended as investment advice. Please consult your financial advisor for more detailed information or for advice regarding your individual situation.
