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Tax Tips for Those in the Military

The Internal Revenue Service has certain special tax breaks and programs for members of the U.S. Armed Forces. Here are just a few.

Earned Income Tax Credit
If you get nontaxable combat pay, you may choose to include it in your taxable income. Including it may boost your earned income tax credit, meaning you may owe less tax and could get a larger refund. In 2015, the maximum credit for taxpayers was $6,242. The average amount of EITC claimed was more than $2,400. You may want to consider running both calculations to see what choice best benefits you.

Signing Joint Returns
As a rule, both spouses normally must sign a joint income tax return. If your spouse is absent due to military duty, you may be able to sign for your spouse. Keep in mind, however, that you may need a power of attorney to file a joint return.

Job Search
If you leave the military and look for work, you may be able to deduct some job search expenses. You may be able to include the costs of travel, preparing a resume and job placement agency fees.
* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.
Tip adapted from IRS[9]

[9] IRS.gov, January 8, 2021

Markets Start 2021 on a High – WEEKLY UPDATE – JANUARY 11, 2021

The Week on Wall Street
Shrugging off COVID-19 infections and the disruption at the Capitol on January 6, stocks powered higher to kick off a new year of trading.
The Dow Jones Industrial Average gained 1.61%, while the Standard & Poor’s 500 increased by 1.83%. The Nasdaq Composite index, which led throughout 2020, picked up 2.43%. The MSCI EAFE index, which tracks developed overseas stock markets, rose 1.45%.[1][2][3]

Fireworks to Start the New Year
Stocks got off to an inauspicious start amid the stuttering pace of vaccine distribution and concern that the economic recovery might take longer than anticipated. Uncertainty over the looming Senate runoff election in Georgia added to the broad retreat that marked the first day of 2021 trading.
From there markets turned higher, aided by firming oil prices with subsequent support provided by the Georgia Senate election results, which lifted hopes of additional fiscal stimulus. Stocks managed through political unrest mid-week, with banks, economically sensitive stocks, and technology shares leading the way.
The yield on the 10-year Treasury rose above 1% for the first time since March as investors fled bonds in anticipation of new federal borrowing.[4]
Stocks touched all-time highs on the final trading day, capping a strong week of performance.[5]

Employment Picture
The U.S. economy lost 140,000 jobs in December, confirming fears of economic slowdown brought on by a resurgence of COVID-19 infections.
Not surprisingly, it was restaurants and bars that saw the greatest job losses, with the larger hospitality sector accounting for nearly all the job losses last month. Meanwhile, November job creation was revised upward, from 245,000 to 336,000.[6]
To help put the pandemic in perspective, December’s job report capped the worst year for job losses since the tracking began in 1939. The unemployment rate remained unchanged at 6.7%.[7]

[1] The Wall Street Journal, January 8, 2021
[2] The Wall Street Journal, January 8, 2021
[3] The Wall Street Journal, January 8, 2021
[4] The Wall Street Journal, January 6, 2021
[5] CNBC, January 8, 2021
[6] The Wall Street Journal, January 8, 2021
[7] The Wall Street Journal, January 8, 2021

Tax Tips – Tax Benefit and Credits: FAQs for Retirees

Lots of questions can come up about income taxes after one has retired. Listed are answers to just a few common questions from retired taxpayers.

What types of income are taxable?
Some common types of taxable income include military retirement pay, all or part of pensions and annuities, all or part of individual retirement accounts (IRA), unemployment compensation, gambling income, bonuses and awards for outstanding work, and alimony or prizes.

What types of income are non-taxable?
A few examples of non-taxable income are veteran’s benefits, disability pay for certain military or government-related incidents, worker’s compensation, and cash rebates from a dealer or manufacturer of an item you purchased.

Why is my pension taxed?
It depends on how the money was put into the pension plan. For example, if all the money were contributed by the employer or the money was not taxed before going into the plan, it would be taxable. When your contribution is from already-taxed dollars, that portion of the pension is not taxed, but must be recovered over your life expectancy.

* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

Tip adapted from IRS[21]

 

[21] IRS.gov, January 1, 2021

The Year in Review – WEEKLY UPDATE – JANUARY 4, 2021

The Week on Wall Street

Stocks moved higher during a holiday-shortened week of trading, capping off a turbulent, but otherwise strong year for equity investors.

The Dow Jones Industrial Average gained 1.35%, while the Standard & Poor’s 500 increased by 1.43%. The Nasdaq Composite index, which led all year, added 0.65%. The MSCI EAFE index, which tracks developed overseas stock markets, rose 2.02%.[1][2][3]

The Year in Brief

The global pandemic disrupted economies, financial markets, and daily life in 2020. Households and businesses were put to the test during the toughest and grimmest years in decades. The winter brought a resolution to the U.S.-China tariff dispute, the Brexit referendum, and the first U.S. appearance of the novel coronavirus. As spring started, abrupt stay-at-home orders in response to COVID-19 curtailed business activity, which dampened consumer spending. The federal government responded, arranging stimulus payments for millions of Americans.

Wall Street bounced back from its March downturn, but the economy limped along. The pandemic entered its worst phase in fall, but two highly promising vaccines were announced in November, and as winter started, they began to roll out to the public. On the cusp of 2021, Congress approved a second national economic stimulus, and the European Union and United Kingdom signed off on a post-Brexit trade deal.

There are many unanswered questions as we enter 2021. Will mass vaccination happen as quickly as we anticipate? Will a successful vaccination program lead to more hiring, more travel, more in-store shopping, and more confidence? The financial markets will be watching progress on this effort.

The U.S. Economy
The pandemic sent the U.S. economy into an abnormal phase, and so our fundamental economic indicators displayed atypical readings.

The Department of Labor’s main jobless rate, 3.5% in February, hit 14.7% by April. Headline unemployment declined for the next seven months, to 6.7% by November. The U-6 unemployment rate, measuring unemployment and underemployment, peaked at 22.8% in April.[4][5]

As people stayed home, consumer spending trended lower, falling 6.9% in March and 12.6% in April.[6]

The federal government moved to boost economic activity. As March ended, a $2 trillion economic stimulus bill became law, featuring cash payments to households, temporary increases in federal unemployment benefits, and a Small Business Administration program pledging to offer distressed companies funds equivalent to 8 weeks of payroll costs. The aid began rolling out in April, and in May, the White House unveiled Operation Warp Speed, a public-private partnership intended to produce COVID-19 vaccines in record time. Two vaccines were approved by the Food and Drug Administration by fall.[7][8]

The Federal Reserve took the benchmark federal funds interest rate down to a target range of 0-0.25%, and revived emergency loan programs first introduced in 2008. It collaborated with the Department of the Treasury on efforts to buy corporate bonds and encourage business loans. In a monetary policy shift, the central bank said in August that it would accept average inflation of 2% for the near term, and was willing to tolerate a little more inflation in the economy while pursuing the goal of full employment.[9][10]

As stay-at-home orders lifted, the economy rebounded. Gross domestic product, which the Bureau of Economic Analysis said had contracted 31.4% in the second quarter, grew 33.4% in Q3. The BEA also recorded a 41.0% Q3 climb for consumer spending. Stay-at-home orders returned in Q4, however, prompting another federal economic stimulus in December.[11]

The housing market stayed strong. By November, existing home sales were up 25.8% year-over-year, according to the National Association of Realtors; Census Bureau data showed a 20.8% annualized improvement for new home buying.[12][13]

The U.S.-China tariff dispute eased throughout the year. In the January 2020 trade talks, the U.S. promised to lessen import taxes on Chinese goods, and China agreed to buy more American exports.[14]

The Global Economy

The International Monetary Fund expects the world economy will contract 4.4% in 2020. If that estimate holds, 2020 will be the worst year for global growth since the 1930s.  The U.S. economy shrank 4.3% in 2020, according to the IMF’s forecast. That is better than the 8.3% setback estimated for the eurozone. The IMF projects that China’s economy grew 1.9% last year. As for 2021, it sees GDP advances of 8.2% for China, 5.2% for the eurozone, and 3.1% for the U.S.[15][16]

The European Union and United Kingdom agreed to a post-Brexit trade deal on December 24. This completed the Brexit process, which began with the 2016 leave vote and included the U.K.’s formal exit from the E.U. last January. Businesses and financial firms based in the U.K. now face new trade rules and costs, even with the new pact in place.[17]

Looking at stock benchmarks around the world, there were more ups than downs. South Korea’s Kospi Composite stood out with a 30.75% 2020 gain. Argentina’s MERVAL climbed 22.93%, Taiwan’s TWII 22.80%. Two other notable 2020 advances: Japan’s Nikkei 225 added 16.01%, and China’s Shanghai Composite rose 13.87%. There were also notable retreats: Indonesia’s IDX Composite lost 5.09%, France’s CAC 40 7.14%, Russia’s RTS 10.42%, and Spain’s IBEX 15.45%. The MSCI EAFE index, a broad benchmark tracking developed-economy stock market performance in Europe and Asia, rose 5.43%.[18][19]

Final Thoughts

We join all Americans in happily drawing the curtain on 2020. Though it was a challenging and tragic year for so many, there are good reasons to believe that 2021 will be a year of progress in returning to our pre-pandemic normal. We wish you and your family a healthy and happy new year!

 

[1] The Wall Street Journal, December 31, 2020

[2] The Wall Street Journal, December 31, 2020

[3] The Wall Street Journal, December 31, 2020

[4] Trading Economics, January 2, 2021

[5] CNN Business, May 8, 2020

[6] Investing.com, January 2, 2021

[7] Los Angeles Times, December 18, 2020

[8] Treasury.gov, January 2, 2021

[9] New York Times, December 23, 2020

[10] Reuters, August 27, 2020

[11] The Balance, December 27, 2020

[12] Reuters, December 22, 2020

[13] Census Bureau, December 23, 2020

[14] NPR, January 15, 2020

[15] Seattle Post-Intelligencer, December 31, 2020

[16] CNN Business, October 13, 2020

[17] The Week U.K., December 23, 2020

[18] Barchart.com, December 31, 2020

[19] Wall Street Journal, January 1, 2021

Vaccine Rollout Spurs Markets – WEEKLY UPDATE – DECEMBER 21, 2020

The Week on Wall Street

Stocks climbed higher amid the COVID-19 vaccine rollout and an improving outlook for a fiscal stimulus bill.

The Dow Jones Industrial Average, which has lagged all year, gained 0.44%. The Standard & Poor’s 500 picked up 1.25% while the Nasdaq Composite index surged 3.05%. The MSCI EAFE index, which tracks developed overseas stock markets, rose 2.44%.[1][2][3]

Stocks Climb Higher

In a week that celebrated the national rollout of a COVID-19 vaccine, market enthusiasm was tempered by worries of infection caseload and fresh economic lockdowns.

Investors turned their focus to the fiscal stimulus negotiations in Washington, D.C., with the hope that a relief bill may be the bridge that gets the economy over its near-term troubles until vaccine distribution grows more widespread.

These negotiations were not smooth sailing. When a compromise bill appeared to gather support, markets quickly moved higher, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all setting new record high closes on Thursday.[4]

Stocks slipped in the final day of trading as stimulus hopes wavered.

Fed Outlook on Economy Improves

The Federal Reserve on Wednesday concluded its last meeting of the Federal Open Market Committee for 2020. Fed officials provided more detail for its monthly bond purchase program and reiterated their commitment to a monthly purchase of $120 billion of Treasury and mortgage-back securities until its inflation and employment goals are met.[5]

The Federal Reserve also raised its outlook on the U.S. economy. It revised its September forecast of a 3.7% decline in GDP in 2020 to a 2.4% decline, and increased its 2021 GDP growth forecast from 4.0% to 4.2%. It also expects unemployment at 2020 year-end would fall to 6.7%, substantially lower than its earlier estimate of 7.6%.[6]

Final Thoughts

Our weekly market commentary will not be published next week. We would like to take this moment to wish you and your family a safe and joyous holiday season.

[1] The Wall Street Journal, December 18, 2020

[2] The Wall Street Journal, December 18, 2020

[3] The Wall Street Journal, December 18, 2020

[4] CNBC, December 17, 2020

[5] The Wall Street Journal, December 16, 2020

[6] CNBC.com, December 16, 2020

Tax Tips – Year-End Tax Tips

2020 is almost over, which means it’s time to start wrapping up those taxes for the year! There are lots of things to do to prepare for 2021. Here are some year-end tax tips to consider:

  • If you think you will be in the same or a lower tax bracket next year, it may be beneficial to defer income until 2021. This could include self-employment income or year-end bonuses.
  • You may be able to take some last-minute tax deductions, such as controlling when you contribute to charity.

The end of the year is the perfect time to talk with your tax professional on how to position yourself for 2021.

* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

Tip adapted from Turbo Tax[8]  

 

[8] Turbotax.intuit.com, December 11, 2020

Cases Rise, Stocks Retreat – WEEKLY UPDATE – DECEMBER 14, 2020

The Week on Wall Street

Stocks retreated last week on rising COVID-19 infections and slow progress on an economic relief bill.

The Dow Jones Industrial Average dipped 0.57%, while the Standard & Poor’s 500 dropped 0.96%. The Nasdaq Composite index fell 0.69% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, declined 0.05%.[1][2][3]

Stimulus Stalls, Stocks Stumble

The market grappled all week with worries over rising COVID-19 cases and the economic restrictions that followed. Nevertheless, there were moments of optimism- such as the starting of vaccinations in the U.K.- that drove markets to record highs.[4]

But gains could not be sustained as an agreement on a fiscal stimulus bill remained elusive and daily news regarding COVID-19 cases undermined investor sentiment.

Markets were also challenged by having to absorb a number of new and secondary stock offerings last week, including two high-profile technology IPOs. The Energy sector continued its strong run, while small and mid-cap stocks posted another week of positive performance.[5]

A “No-Deal” Brexit More Likely

The prospects of an agreement to manage Britain’s exit from the European Union by year end dimmed as the two parties failed to narrow their differences in a meeting held last week.[6]

Though primarily a European issue, a no-deal Brexit may hold consequences for U.S. businesses and investors. The failure to reach an agreement has the potential to disrupt an already fragile supply chain and cause issues in the financial markets. A supply chain disruption may weaken European economies (e.g., Germany) that are important to American companies. Another consequence may be a stronger U.S. dollar, which would make American exports more expensive and less competitive.

Little time remains in striking an agreement since the prevailing framework ends December 31, 2020.

[1] The Wall Street Journal, December 11, 2020

[2] The Wall Street Journal, December 11, 2020

[3] The Wall Street Journal, December 11, 2020

[4] USAToday.com, December 8, 2020

[5] CNBC.com, December 10, 2020

[6] CNBC.com, December 9, 2020

Tax Tips – Paying Employment Taxes? Make Sure You’re Using the Correct Form

If you’re a small business owner, you should understand the differences between two commonly used employment tax returns.

Form 944, Employer’s Annual Federal Tax Return, is designed for small business owners to pay employment taxes once a year instead of quarterly. Business owners may receive a notice from the IRS informing them that they can file Form 944. Business owners may have to file this form every year until the IRS notifies them differently.

Form 941, Employer’s Quarterly Federal Tax Return is a form designed for employers to report income taxes, Social Security, or Medicare tax withheld from employee’s paychecks. Again, the IRS may inform business owners of whether they should use Form 941.

If you have questions about which form you should use, please contact our office. We may be able to provide some guidance or help you find some information on the IRS website.

* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

Tip adapted from IRS[10]

 

[10] IRS.gov, December 17, 2019

Is Stimulus Near? WEEKLY UPDATE – DECEMBER 7, 2020

The Week on Wall Street
Stocks marched higher last week on an improving outlook for the passage of a fiscal stimulus package.

The Dow Jones Industrial Average rose 1.03%, while the Standard & Poor’s 500 tacked on 1.67%. The Nasdaq Composite index gained 2.12% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, gained 0.78%.[1][2][3]

A Record Week for Stocks
After opening the week with moderate losses amid rising COVID-19 infections, stocks turned higher as investor sentiment was buoyed by the resumption of fiscal stimulus negotiations. As lawmakers discussed various proposals, stocks managed to grind higher.

A better-than-expected jobless claims report on Thursday added fuel to the market rally, but the gains evaporated in late-day trading following news by a major pharmaceutical company that it would be slowing its rollout of the vaccine due to logistical challenges.[4]

A disappointing jobs report on Friday did not keep investors from bidding stocks higher as the week came to a close, sending the Dow Jones Industrials, S&P 500, and the NASDAQ Composite indices to record high closes.[5]

The Start of Holiday Shopping
The start of the holiday shopping season provides important insight into the state of the economy and overall consumer confidence. In response to the pandemic, consumers avoided in-store visits over the Thanksgiving weekend. This translated into a 22.4% decline in spending from last year’s levels.[6]

However, spending prior to the Thanksgiving-to-Sunday period surged 65.7% from a year earlier, thanks to large retailers introducing Black Friday-like deals as early as mid-October.[7]

Of course, the pandemic has led to an acceleration in shopping online. Cyber Monday sales jumped 15.1% over last year’s levels as consumers spent almost $11 billion, making it the largest U.S. online shopping day ever.[8]

[1] The Wall Street Journal, December 4, 2020

[2] The Wall Street Journal, December 4, 2020

[3] The Wall Street Journal, December 4, 2020

[4] The Wall Street Journal, December 3, 2020

[5] CNBC, December 4, 2020

[6] CNBC, November 30, 2020

[7] CNBC, November 30, 2020

[8] CNBC, December 1, 2020

Total Return on Investment

Manage Your Portfolios for Total Return on Investment

In our last post we briefly discussed seven principles of long-term investing. Beginning with this post, we will take a deeper look at each. Before we do, however, let’s remind ourselves of the seven principles: 

  1. Total Return on Investment 
  2. Don’t Chase the Crowd 
  3. Remain Flexible and Diversified 
  4. Buy Value 
  5. Manage Risk 
  6. Learn from Mistakes 
  7. Monitor your investments 

Total Return on Investment 

The word “total” is not to be taken lightly. In fact, it is the operative word in this principle, because there is more to the ROI (return on investment) than the daily gains and losses your investments experience. It’s human nature to focus on the daily activity, but there are other factors lurking that can eat away at your portfolio. You rarely, if ever see them, but the damage they can do is not insignificant 

The three most insidious are taxes, inflation and fees.  

If you are not accounting for these three, then you are not accounting for the total ROI of your portfolio and, in doing so, are missing a major piece of the picture that could lead to considerable financial pain when you retire.  

 Fees 

On the surface, fees may seem less onerous than taxes and inflation, and you can certainly look at them in that way, but they do add up. Even at 1% you are paying $1,000 for every $100,000 invested. That may not seem like much, but that fee comes right off the top regardless of how well your portfolio has performed.  

Fees structures vary depending on a few factors. If you have a professional managing your investments, you can count on paying a flat 1%-2% fee on the balance of your accounts.  

You can avoid that percentage by managing your own accounts, but beware that there you will likely be paying fee for every transaction you make.  

The bottom line with fees is to do your homework, ask the questions and make your decision based on what you are most comfortable doing.  

Taxes 

When it comes to paying taxes, we all want to keep as much of what we earn as possible. When it comes to investing, there are a few ways taxes can reduce the value of your portfolio each year with taxes on capital gains, dividends and income (from taking distributions). 

Whatever your investment strategy, you need consider the tax burden with the goal, of course, of keeping as much of what you earn as possible. Don’t take this to mean that taxes should drive your investment strategy. On the contrary, like all other variables, it is something to keep in mind. There are two things to consider here, tax efficiency and tax-deferred investments.  

By incorporating a tax efficiency plan into your investments, you will reduce the burden of capital gains, dividends and income taxes. If you use a tax deferral plan, your investments will grow tax free, paying taxes only on the money you withdraw.  

As always, study your options and create a plan that balances your goals with your risk tolerance.  

Inflation 

Of the three portfolio eaters, inflation is the worst. While fees and taxes also reduce the overall value of your investments, at least you can see them on your statements and tax forms. Inflation is different. It’s constantly at work, but you can’t see it. There is no box for it on your monthly or annual statements. So how do you account for something that can’t be seen. Let’s start by doing a little math.  

We’ll start with a portfolio of $100,000 and an annual inflation rate of 4 percent. In ten years, that same $100,000 will have the purchasing power of $67,500. If you want $100,000 in today’s money to be worth $100,000 in 10 years, the real value of the account will have to grow by 48% to $148,000. Oh, and we aren’t including fees and taxes in this total, so it will need to be much higher.   

Part of your strategy must include investment vehicles that will appreciate enough in value to overcome the rate of inflation, which has averaged 3.2% over the last century. Equities such as common stock have proven to be good performers over time. They do open you up to more of a tax risk, but putting too much in fixed-income securities, leaves you exposed to inflation because they don’t grow at the rate of equities.  

Conclusion 

Total return on investment is where your focus should be when calculating the value of your investments. Accounting for fees, taxes and inflation will give you a better picture of the health of your portfolio and better visibility into your future standard of living.  

As always, do your research and think about your decisions in terms of where you are in terms of timeline to retirement and your comfort level in terms of risk.