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Ponderings For the Week of May 21 to 27, 2018

Lazy Days of Summer at Hand, Stock Market Slows Down

Stocks muddled through the week with small losses. Earnings season is past and trading volume has mercifully slowed. Large company stocks declined about ½%. Small caps, on the other hand, have been on a tear of late and advanced 1½% last week alone.

The primary item on Wall Street’s agenda in the near future is interest rates, since rising interest rates can divert investor ardor away from stocks into bonds. Last week the 10-year Treasury note yield surmounted 3%. The expectation is that the Federal Reserve Board will hike short-term rates another ¼%, not enough to spook the investment community. Hopes are that future Fed rate increases will be slow and easy.

Each year for the past several years, investment professionals have set low expectations for annual stock market performance, only to be proven wrong by strong returns (with the exception of small losses in 2015). Judging from market performance so far this year, however, 2018 may be shaping up to be a nothingburger for stocks.  


Time to Consider Changes in the 2018 Tax Rules

The Tax Cuts and Jobs Act was passed last December, but the rules don’t take effect until this year. It’s a lot better to consider the changes now rather than waiting until the end of the year or 2019 to figure out how they will affect your tax situation. These changes aren’t simple. Recalling Edward Gurney’s words that appeared in last months Ponderings: The United States is the only country where it takes more brains to figure your tax than to earn the money to pay it.

Here are some of the changes that you and your tax adviser should consider, if they apply to you:

Lower income tax rates. Most tax rates have declined modestly compared with last year’s rates and the income amounts subject to a given tax rates have been expanded. Most, but not all, taxpayers will benefit from lower rates.

Higher standard deduction. While several deductions have been limited under the new rules, the standard deduction amounts have been nearly doubled. That’s the good news. The bad news is that personal exemptions for the taxpayer, spouse, and dependents are generally no longer available. Singles and couples without dependents will generally be better off from the increase in standard deductions and elimination of itemized deductions, but families may find that these changes result in higher taxes.
Changes in itemized deductions. There’s also good news and bad news with respect to itemized deductions in 2018. The income threshold for deducting medical expenses is reduced, the income limitations on charitable deductions have been eased, and the overall limit on itemized deductions for high income taxpayers is no longer imposed. On the other hand, miscellaneous itemized deductions that had been allowed for deductions that totaled more than 2% of adjusted gross income, including tax-preparation expenses, are no longer permitted. Also, the deduction for personal casualty and theft losses is not allowed, except for casualty losses in a federal disaster area.

Limits on state and local tax deductions. Itemized deductions for state and local property taxes and state and local income taxes or sales taxes are limited to $10,000. This is nothing but bad news for many.

Limits on deductions for interest on mortgages and home equity loans. Less onerous, but still nasty for some taxpayers, is that interest on mortgages, home equity loans or credit lines taken out after December 2017. If not used to buy, build, or substantially improve a first or second home is not deductible. The maximum amount of loans taken out after December 2017 whose interest qualifies for deduction has been reduced to $750,000 from $1 million.  

Increase in child tax credit. Beginning this year, the child tax credit is doubled to $2,000 per child and the credit will now be available to many who didn’t heretofore qualify based on income.

Alternative minimum tax loosened. The new regulations increase the AMT exemption and phase out amounts. This means that many taxpayers will find that the much hated AMT takes less of an exaction out of their taxes.


Smart Money Tips

  • Avoid the rearview mirror when managing your money. Too many people are basing their investment decisions upon what has recently happened in the stock market. By staring in the rearview mirror you’re expecting whatever has happened in the immediate past to continue in the future. But the recent past is a very unreliable indicator of the future. At some point, the near future won’t be a reflection of the past. Those who rely too heavily on the rearview mirror will be disappointed. Consider the road ahead for signs that may help you identify investment opportunities or pitfalls. You won’t be disappointed.
  • Get rich slowly. Getting rich quickly is a one-in-a-million long shot. Judging from the plethora of seminars and infomercials that promise quick riches, a lot of people prefer immediate results which, we all know, are rarely achieved. On the other hand, if you work hard, do what's needed to advance in your career, save regularly, invest those savings wisely, and periodically address other important personal financial matters, getting rich slowly is a sure bet. If you can be happy with what you’ve got now, you’ll enjoy more abundance later in life.


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