Going, Going Gone!
Here we are at the start of yet another new year, 2018. It’s a bit hard to believe 2017 is now over, but as such, we like to take a look at how we got here as well as some of the top themes for 2018. For the equity markets, stocks seemed parallel to baseballs in a homerun derby contest, each one catapulting post the 2016 elections and seeming to fly right out of the park to new all-time highs. I can hear the announcer say, “there’s another one, it’s up, high and to the right, it’s going, going gone! In fact, in early January, the Dow Jones topped 25,000 for the firsttime ever.
For investors, the more risk taken in 2017 meant for even higher returns in one’s portfolio. Of course, not all stocks are created equal, but most hit new 52-weeks highs and in other cases all-time highs. The Dow ended the year up a staggering 25.1%, while the broader gauge of the US equity markets as measured by the S&P 500 was up 21.8%. The international markets faired just as well as the Dow, up 25.0%. So, as we asked ourselves last time, where do we go from here? It does seem clear that momentum is still behind equities, but for how long is anyone’s best guess. We remain cautiously optimistic and took the opportunity in the latter part of 2017 to rebalance portfolios to lock in profits.
Sweeping Tax Changes
In late 2017, Congress passed sweeping tax legislation to overhaul how Americans and corporations are taxed. This is the largest sweeping change since the overhaul from 1986. As all were getting ready for the holiday break, we found ourselves scrambling to get an understanding of the tax law changes to see if there was anything that could be done prior to year-end. Since the start of the year more resources have become available and we wanted to share some of the tax law changes that may affect you directly.
Here are some of the key changes to keep in mind:
- Maximum tax rate is reduced to 37%
- For households with income is less than $200,000 (single) and $400,000 (married), you’ll likely pay a little less in taxes at the margin as your top marginal rate is 32%, down from 33% and the marginal brackets are a bit more favorable than before
- Standard deduction increased ($12,000 for single, $24,000 married)
- Personal exemption has been repealed completely
- Mortgage deduction on new loans are capped at $750,000
- Child tax credit increases to $2,000/ qualified child, income phase-outs dramatically increased
- Interest on home equity lines (HELOC) no longer deductible
- The deduction for state and local taxes (SALT) including property taxes will be limitedto $10,000
This last bullet point in particular will be missed by most who live in a state like California. On average, in California for the 2015 tax year, most paid over $18,400 in state income taxes and paid thousands more in property tax. By limiting this deduction, it ensures most will likely pay thousands more in taxes. We anticipate many consequences to this, one in particular: Bay Area home prices. The limits on the deduction on mortgages and property taxes on homes will cause price appreciation to slow and potentially fall.
California has responded to this change in tax law by purposing that in lieu making a state income tax payment, tax payers could opt to make payments to the state fund to get a charitable deduction. This is still very much a work in progress and will likely come under scrutiny by the IRS should this proposal pass.
Also, keep in mind it’s projected that these changes will add another $1.5 Trillion to our deficit over the next ten years. Come January 2026 the tax changes are slated to revert back to the per-2018 laws. In fact, if some of the tax reductions add too much to the deficit some may be repealed prior to 2026. As we review returns this tax season, we will do what we can to proactively plan and navigate these changes and how they affect you.
Lastly, the limits for retirement plans have increased from $18,000 max deferral to $18,500. For those over 50 or turning 50 in 2018, the catch-up contribution remains at $6,000. Please be sure to adjust your deferral limits accordingly. For IRA accounts, the deferral limits remain the same as they were in 2017, so no to do on that front. As we meet with you throughout the course of the year, we will be sure to review the deferral limits with you as well.
Cryptocurrencies and Where to Find Them
The name cryptocurrency seemed like something of a myth just a year ago, but 2017 has been the best on record since the inception of this concept. I’m sure by now you have heard of the name Bitcoin and if you’ve dug into the space at all you’ve come across other currencies like Litecoin, Ether and Ripple just to name a few. Like all speculative investments, all are investments are equal, but some are more equal than others.
As most would argue, the value of these currencies has gotten a bit out of hand. In fact, it seemed we reached a level of pure mania back in mid-December. This kind of mania reminds us of the first bubble on record, the tulip bulb mania. We won’t go into the details of this mania, but you can follow this link for the background story:
www.archvest.com/tulip
So, what’s the value behind the digital currencies or is this just fool’s gold? Well, it does appear there is value behind the block chain technology which drives the security behind the digital currency itself. There are "miners" that confirm the transactions (the transfer of a digital currency) which then get added to a public ledger that keep all historical records of a particular digital currency’s transactions. The more miners tracking the currency the greater confidence one would have in that particular currency.
At the heart of it, it’s the technology that will ultimately be the driver in the cryptocurrency space. There are many parallels between this and the .com boom. The technology, the Internet, moved on but companies like Pets.com did not. Currently, there are hundreds of competing digital coins, and new ones are coming to market almost daily. The space is getting flooded with interest and arguably unjustified demand. We think the block chain technology behind these digital currencies might be used to challenge or augment our current banking systems but we are not fans of participating with purchasing the currency itself because it is just too speculative.
Housekeeping Items
Now that is January, 2018, it’s tax time again. The 1099 forms from the custodians and will be distributed to you by late January to mid-February. Please inform your tax preparer that the 1099 information might be subject to revisions. We will also have access to the respective tax forms and can send it directly to your tax preparer with your authorization. Please let us know if you would like us to do so. Like always, we would like to review your returns prior to you filing as an “Archvest double-check.”
An Archvest Update
Lastly, we are pleased to announce some exciting news on the home front. Back in mid-December we added another member to our team, Jill Shibuya. Jill’s values of putting the client first, attention to detail and compassion align with ours as well. She holds the CPA designation and is currently studying to attain the CFP® certification. Jill brings the level of care and expertise you’ve come know by working with us. We look forward to you meeting her in the coming months.
As always, we appreciate the confidence you have placed in us to work alongside you regarding your planning needs. Be sure to follow us on Facebook, LinkedIn and Twitter as well as our RSS feed to stay up to date on what we’re reading and thinking.
Eric Lai & John Wenzel | Archvest Wealth Advisors