I am reading about the impact of Covid-19 as I push to
get all client tax returns completed and filed by the deadline, which may or
may not be extended.
Everyone is concerned and I wanted to respond.
These are scary times, both
for personal health for you and your family and for your finances. We worry about who will get sick, possibly
die, and who will be out of work and have major life changes.
Much of the ultimate outcome depends
on how quickly governments respond – “stop everything immediately” contains the
infections and thus allows the economy to bounce back sooner, while delayed
responses mean many more infections and deaths, with a prolonged, deeper hit to
On investing, to those who ask,
“should I cash out,” my answer is, “it’s already too late, the markets have
already gone down far, and even if you had sold a month ago, knowing when to
buy back in is so tricky that you would probably be worse off.” The truth is, when so many individual investors
ask if it is time to sell, that is often a signal to buy.
Here is an excerpt from a Merrill Lynch research post (credited to Jared Woodard, Derek Harris, Chris Flanagan, Justin Devery and Jordan Young) that I received last week, which crystalizes my experience from the downturns I lived through as well as the downturns I have studied:
Why stay invested?
Not staying invested means missing most of the long-term market upside…it’s simply too difficult to time the market. A strong impulse to hide out in cash is often a sign that a buying moment is near:
• We know that the best days often follow the worst and this has been the sharpest drop into a bear market in history (Chart 3);
• Since 1929, in the 24 months following a bear market, S&P 500 total returns have averaged 20%. Excluding the Great Depression, the average gain was 27% (Chart 4);
• Since 1931, an investor who missed the 10 best days of each decade made 91% in equities. Staying invested meant earning 14,962%;
• In the 2010s, missing the 10 best days meant gaining only 95% instead of 190%;
• Over any 10-year period, the odds of ending with equity losses are just 4%;
Let me know if this helps. And let me know if you want to talk.
Last year, we provided a three-part series explaining the impact of the new tax law. In our first part, we discussed the impact of the new law on personal taxes and in our second part, we discussed planning for small businesses. In this part, we update the third part posted last year, which is our guide for year-end moves to reduce total taxes between 2019 and 2020.
Can you act at
Each year we advise that you be practical, focusing on where
you can actually take action.
For many, the new $24,000 standard deduction for married
couples, $12,000 for single taxpayers, means you will not itemize (i.e., your
total for itemized deductions is less than the standard amount so you take the
higher, standard deduction). The
standard deduction goes up when you reach 65.
If you are not itemizing, you have fewer ways in which to
affect change in the taxes due in either year (but you can also stop collecting
receipts for those deductions!).
One technique for getting around the limit is to bunch
deductions from two or more years into one year. The one deduction that you can easily move is
for charitable donations. Your state,
local and real estate taxes are limited to a $10,000 maximum and you cannot
accelerate, or delay, significant amounts of mortgage interest.
If you do not want any one charity to receive the full
amount in a single year, you can still use this bunching strategy. Donate to a donor advised fund, from which
you may be able to designate donations to particular charities in future years.
IRA donations: If you are 70½ or older, you have the option of distributing up to $100,000 from your IRA or other qualified plan to an IRS-approved charity and having none of the distribution taxed.
Capital Gains: Review your portfolio. You may be able to “harvest losses” to offset capital gains realized on stock sales or mutual fund capital gains distributions. If you have substantial unrealized gains, consider donating to a charity. See below.
The tax planning
If you are able to itemize, determine what income and deductions you can move from 2019 to 2020 or vice versa. You want to minimize total taxes for both years. Make sure your planning includes the 3.8% Medicare tax on high income and review Roth conversions (Roth distributions are not taxed, so converting a traditional or roll-over IRA to a Roth could be beneficial, as long as the tax cost now is not too great). And business owners will want to review our post on planning under 199A for QBID.
Next, review the impact of moving income and expense to see what happens if you shift any of these amounts from one year to the other year.
But, watch for the Alternative Minimum Tax (“AMT”):
The exemption for the AMT and the threshold
above which that exemption gets phased out are now higher than before 2018, so fewer
taxpayers will owe the AMT.
Finally, if you have not maxed-out your 401(k) plan, IRA, Health Savings Account or flex plan account, consider doing so before the end of the year.
Your mutual funds may have large capital gains distributions. Christine Benz says, “Brace yourself: 2019 is apt to be another not-so-happy capital gains distribution season, with many growth-oriented mutual funds dishing out sizable payouts.”
your unrealized losses to see if you can “harvest” those losses to offset or “shelter”
realized gains, reducing your total taxable income. If you have more losses than gains, you can
take up to $3,000 of capital losses against other income.
If you sell an asset that you would prefer to retain, in order to shelter gains in 2019, make sure you do not run afoul of the wash-sale rule (any loss on an asset that you repurchase in 30 days will be disallowed, so you have to either wait 30 days or purchase a similar asset that fits your asset allocation while not counting against the wash sale rule).
If you have significant unrealized gains, consider using
appreciated stock for charitable donations – that way you avoid the tax on the
gain while still getting the full fair market value for your charitable
Some reminders on itemized
As you may recall, mortgage interest on new home purchases is deductible only for loans of up to $750,000 used to purchase or improve your primary or secondary residence. Interest on home equity loans will not be deductible, except when the home equity indebtedness is used to purchase or improve the residence.
Also, all miscellaneous deductions were eliminated. This includes investment and tax preparation
fees, safe deposit box charges and unreimbursed employee business expenses. And moving expenses are no longer allowed
(except for military personnel in certain cases).
Check taxes paid
Make sure your total paid in withholdings and estimates
meets the safe harbor rules. If not, you
could owe interest for under-withholding.
Estate plan review
While you review your taxes, consider reviewing your estate plan and your beneficiary designations. The federal exemption is just over $11 million in 2019, so fewer people will owe any federal estate tax. However, many states still impose estate taxes on smaller estates. If you have “excess wealth” and want to reduce your taxable estate by gifting assets to children or others, you can give $15,000 per person, per year. If your spouse joins you, that is $30,000 per person. This includes funding a 529 plan for education costs – expanded to provide for more than just college.
Note, however, that holding appreciated assets for the step up in basis at death may be better for your heirs than gifting.
Check on 2018
Check to see if you over-paid a penalty for
under-withholding. If you filed early,
the penalty calculation may have over-stated the total you owe, so you will
want to review your 2018 filing.
Carefully review any income and deductions that you can
still shift to see if moving will lessen the total taxes you pay for 2019 and 2020.
As Halloween passes, we know that the season of over-buying and over-eating is approaching, so it’s time to prepare. You want to enjoy being with friends and family without having the hangover of overspending, or worse, going into debt to finance all the fun.
Make the gift giving fit
with your cash management
Over-buying does not
make you happier and usually makes the recipient uncomfortable. Also, over-spending is likely to make
achieving your long-term goals more difficult, which can add to the depression
some feel at this time of year.
For gifts, “it’s the
thought that counts” rings true. Most
recipients appreciate being remembered for who they are and what they do. Think back to what you enjoyed most in past
holidays and let that guide you. This
can help you stick to your values as you think through the entire process and
devise your holiday shopping plan. The
time spent together may be far more important and rewarding than unnecessary
Have a plan
Technology and social
media can make shopping easier, but they also make it easier to overspend and
end up with credit card debt from funding your gift giving.
Budget – If you determine what you can reasonably spend and allocate that to people for whom you want to buy gifts, or give holiday tips, then you have a spending plan that should get you through. When devising your plan, go back to your financial goals to remind yourself why staying on track is so important. Include time for present wrapping to avoid time pressure that encourages splurge buying. Also, you may want to have small gifts on hand for unexpected guests. You can use budget apps, such as NerdWallet, to create a budget. When you do, stick to it!
If the people for whom
you are shopping have wish lists, follow them for ideas. And leave items in your shopping cart
overnight to take a second look and avoid regretting a splurge purchase. Ask “does the person really want or need
this?,” especially if you are shopping for yourself! (It may be wise to avoid, or at least
substantially limit, any buying for yourself.)
Be Wary of Black Friday,
Cyber Monday and other retailer tricks
If you do your
homework, you can determine if waiting in line or buying on line will be best. As stated above, create a budget and stick to
Be on the lookout for
retailer other tricks like flash sales, loyalty cards, incentives to return for
more purchases, misleading refund policies.
Similarly, procrastinating can lead to splurge buying ruled by emotions
such as the need to please everyone and get the shopping done.
With the pressure of the holidays to address all the gift giving, parties and thank yous, stay vigilant for scams. These can come in the form of bogus IRS and social security calls, credit card offers, computer software deals and fake invoices. There are many phishing sites you can use to check out whether the offers are legit.
you’re unable to tip or give a gift, a thoughtful thank you note will
acknowledge those people who are important to you. You can even make a donation in their
Brace for over-eating
and possibly even depression
This blog is does not
profess to have any expertise in psychology.
Nonetheless, we have all heard how holidays can be disappointing if not
depressing from some. The Hallmark gatherings
promised on TV or social media rarely happen in real life.
If the holidays are depressing, consider volunteering somewhere, such as a soup kitchen, or getting out for some serious exercise. Both can lift your mood as well as either help others or improve your health. Allow time to rest and recover! And try a warm drink, tea not bourbon, or a warm bath.
Take care of yourself –
it’s hard to help anyone else if you are not in good shape yourself. But if you are really experiencing
holiday depression, speaking to people can help, be that family, friends or
We wish you all the best for financially sound, and fun, holidays! And let us know if we can help you plan.
Estate planning is not fun. You have to face what the world will be like
after you leave it. You want to leave a
legacy so your survivors are happy. However,
less than one in five of you have taken the steps needed.
If you completely ignore creating
a post-death plan, then you will leave a chaos and confusion for others to sort
out at a time when they will be grieving from your loss. They will have to find where you put
everything and sort out where you wanted everything to go.
If people depend on you
financially, not providing enough on which they can survive will mean major
lifestyle changes for them. Not
something you want.
You want survivors to focus on
cherished memories, not on probate courts.
Now, what do you do?
First, leave enough so survivors can survive
Make sure you have provided for
those who depend on you. Usually, that
means purchasing some form of life insurance.
You want to replace your earning power from now until the time that they
are independent, either when a spouse or partner retires or when your children
become gainfully employed.
If you have been saving for
retirement, those accounts may be enough so you don’t need to purchase life
insurance. Reviewing your potential
estate with an advisor is wise to make sure survivors have enough.
Second, sign the documents
Execute documents that ensure that your estate goes to the people who you want to benefit. This usually means signing beneficiary designations for retirement plan accounts and executing a will. You may even need a trust for young survivors. We wrote this post detailing the steps a few years back. If that’s too technical, ask me questions.
You may want to consult an advisor to get all the proper documents in place. Here is a good checklist to review.
Third, have the conversations
Talk to your spouse, to your
adult children and to the people you name in your documents. Make sure they understand your wishes. Do you want to be buried or do you want to be
cremated? Do you want donations made to
What if you have a catastrophe
the doesn’t kill you, but leaves you hooked up to machines forever? Have a conversation so your loved ones know
your wishes. And, make sure you sign a
health care proxy or medical directive, living will and even a “do not
resuscitate” or DNR order.
Fourth, leave a trail
Make sure the key people know how
to find everything. One way is to write
a memorandum listing your passwords, where to find the safe deposit box key,
and where you stored the life insurance policies. Give copes to key people, such as the
personal representative named in you will or the trustee of your trust.
Finally, leave a legacy
When you take care of all you
can, in advance, your survivors don’t have to suppress feelings while they
clean up a mess:
“WE WERE WORRIED ABOUT MY MOM after my dad died, but he had everything in order. It allowed us to focus on our grief instead of being bogged down in financial paperwork and family bickering.” That’s one of the candid responses Merrill Lynch and Age Wave received when they interviewed more than 3,000 Americans 55 and older for a comprehensive look at attitudes and practices surrounding legacy planning. From How do you want to be remembered…
You will need to review and
update your plan over time. But, just
knowing you took all these steps should improve matters for you and your family
now! Contact our office if you have
questions so you can “don’t worry, be happy!”