3 Moves You Need to Make BEFORE the Holiday Rush

This post 3 Moves You Need to Make BEFORE the Holiday Rush appeared first on Daily Reckoning.

Dear Rich Lifer,

We’re entering the busiest time of the holiday season, and I’m sure you have a lot going on.

But the reality is that, with the end of the year rapidly approaching, now is also the time to consider some last-minute moves that can substantially change your finances as well.

So before time runs out, I want to give you three of the best ones …

Tax Loss Harvesting

Although plenty of stocks have made big gains in 2019, others haven’t fared as well.

So if you have some open losses in your portfolio, you might consider selling them before year’s end so you can deduct the losses on Tax Day, 2020.

It works like this:

First

If you also booked gains this year, you’ll be able to offset them on a dollar-for-dollar basis with no limit.

Second

If you recorded more losses than gains — or no gains at all — you can use your losses to offset some ordinary income. The maximum amount is $3,000 ($1,500 if married filing separately) … but you can carry additional losses forward for future tax years.

Doing this before year-end is a no brainer if you have losing positions that you don’t think will ever come back.

You will not only get a tax break, but you can then take the proceeds from the sale and reinvest them in better long-term choices.

Of course, even if you have underwater positions that you would like to continue holding for the long-term, you STILL might consider selling them at a loss for the tax advantage.

Why? Because as long as you wait more than 30 calendar days before buying back those same positions, the loss will count on your tax form.

The IRS applies what is known as a “wash rule.”

What Qualifies as a Wash?

Basically, they will not recognize a loss if you’ve bought replacement stock within 30 calendar days before or after you sell your losing position.

However, if you wait 31 days, you’re fine and the loss counts.

Aren’t tax laws great?

The real risk is that the stock could rebound over those 30 days and you’d miss out. But I would consider taking the chance, it all depending on the position.

You might also consider another tactic during this season of giving …

Charitable Donations

If you happened to spot some unused items while you were digging out your holiday decorations, now is a great time to take them to your local charity.

And the same thing is true if there’s a particular cause you’d like to fund.

Reason: As long as you itemize, your charitable donations will also be deductible come April 15th.

Here’s some of the fine print straight from the IRS:

“To be deductible, charitable contributions must be made to qualified organizations. Payments to individuals are never deductible.

“If your contribution entitles you to merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.

“For a contribution of cash, check, or other monetary gift (regardless of amount), you must maintain as a record of the contribution a bank record or a written communication from the qualified organization containing the name of the organization, the date of the contribution, and the amount of the contribution.

“In addition to deducting your cash contributions, you generally can deduct the fair market value of any other property you donate to qualified organizations.”

If you want even more details, go here. But suffice it to say that this is one of those rare tax items that helps you do well by doing good.

Last but not least, one last time…

Look at Your Retirement Accounts

Some accounts — such as IRAs — give you all the way until April 15th, 2020 to sock away money for 2019. But others must be established and/or funded by December 31st.

For example, if you have access to an employer’s 401(k) plan, your contributions have to be in before New Year’s Day.

So if you’ve been slacking, there should still be time for you to get something in there for this calendar year.

Doing so will provide you with more money for the future … the possibility of matched contributions from your employer … PLUS a nice tax break on your 2019 taxes.

Self-employed? Then DEFINITELY consider opening a Solo 401(k).

I’ve written about them before, but I never get tired of saying it: Opening one could allow you to sock away as much as $56,000 just in 2019 … or even $61,000 if you’re over 50!

But again, you have only until December 31st to establish a Solo 401(k) and elect to contribute any money that is to count as your “employee” part of the overall contribution (though the money itself can go in by April 15th).

One Last Thing

This is also the time to consider implementing any changes to existing accounts — for example, converting a traditional IRA to a Roth.

As with all the other moves I described today, personal circumstances will dictate a lot of what makes sense for you personally… and you may be best served by talking to a tax professional to get more information on all the ins and outs.

But my overall point is that — despite the holiday madness — this is also the best time of the year to make important decisions that will affect you well into 2020 and beyond.

To a richer life,

Nilus Mattive

Nilus Mattive

The post 3 Moves You Need to Make BEFORE the Holiday Rush appeared first on Daily Reckoning.

Let’s Steal My Neighbor’s Yacht

This post Let’s Steal My Neighbor’s Yacht appeared first on Daily Reckoning.

I still remember the day my college girlfriend told me her dad’s stock portfolio was worth $110,000.

I was floored. Between that, a good job, and a nice house on Long Island— the guy was rich!

Twenty years later, it would take a little bit more to get my attention.

I tell you, as modestly as possible, that my current home is worth eleven times as much as that $110,000 stock portfolio. My investments, cash accounts, and other assets are worth many times that amount as well.

So yeah, life has been pretty good to this kid who grew up in a Pennsylvania coal mining town.

Yet I’m also aware that even my current wealth is merely a drop in the bucket to loads of other people.

Heck, I’ve hung out with men and women worth tens of millions … some worth hundreds of millions … maybe even a billionaire or two. Everyone from third-generation trust funders to self-made Internet entrepreneurs.

I’m relaying all this to explain why I’m troubled by Bernie Sanders’ recent proposal to tax billionaires, a group of people he says “shouldn’t exist.”

Bye Bye Billionaires

In a nutshell, Sanders says we should implement a “wealth tax” – as high as 8% — on the richest people in America.

About 180,000 households would pay some form of the tax.

It would start applying to individuals with a net worth of $16 million or married couples with $32 million. They’d pay 1% a year.

The top group – married couples worth at least $10 billion – would pay 8% a year.

Now, I’ll admit. There’s a small part of me that wants to agree with this idea of taking a couple percent from our country’s billionaires.

Do they seriously need that extra several million?

Of course not.

Would it be awesome to just take some of that money and create a universal income plan … raise Social Security benefits for millions of Baby Boomers … or give everyone free healthcare?

Absolutely.

There’s just one problem …

It would also be theft.

Consider the following.

Here I am in my million-dollar shack – and it really is just a simple home – albeit with a great view, staring out at the Pacific.

Meanwhile, right on the bluff above the ocean, are a row of houses worth many times as much as mine.

I know a few of the people who live in those houses, including a guy who has a lobster yacht docked down at the marina. His boat is also worth more than my house.

He doesn’t really need that boat. I’m pretty sure he could just go out and buy another one if it disappeared. Heck, he might not even miss it all that much on a day-to-day basis!

Does that mean I can go down there and take it out to the Channel Islands whenever I feel like it?

Or that someone getting evicted from their apartment can go down and live on it for a while?

Or that he should be forced to sell it and donate the money to charity?

Well, Bernie’s plan is basically this very thing writ large.

Bernie’s Burglary

It’s an asset seizure based on people’s relative wealth … just like me going down to the harbor and taking my friend’s lobster yacht simply because he has a lot more money.

Moreover, Bernie’s plan uses definitions of “too much wealth” that are arbitrary – and subject to change – just as my own have been over time.

And it feeds upon our own greed, self-righteousness, and jealousy to justify taking someone else’s stuff.

It isn’t taking some of what they’re earning, like our current income tax.

Nor is it taking some of their stuff once they die, like our current estate tax.

It’s a third layer of taxation that takes existing stuff from people every living year as long as they continue to have “too much wealth.”

Again, it’s easy to look the other way and dismiss the actual proposal because it only applies to the Zuckerbergs of the world.

Indeed, you’ll hear a lot of people say they don’t understand why more low-income Americans – particularly poor, rural Republican voters – can’t support this kind of policy.

Well, it isn’t because they’re all stupid.

Nor is just because they’re aspirational.

It’s because they know that no matter how much anyone else has, it’s simply wrong to steal from them.

And just so you don’t think I’m only picking on Bernie, other presidential candidates have proposed similar plans that are just as morally flawed.

So as appealing as it may seem to drain a little bit of wealth from the people who “won’t notice it” at the top of the ladder, at the end of the day, you have to face the facts. No matter what you want to call it, it’s theft, and stealing from people is not a great way of writing government policy, no matter who you are.

To a richer life,

Nilus Mattive

Nilus Mattive

The post Let’s Steal My Neighbor’s Yacht appeared first on Daily Reckoning.

The Big 4 Retirement Worries and How to Beat Them

This post The Big 4 Retirement Worries and How to Beat Them appeared first on Daily Reckoning.

The #1 concern most Americans have when it comes to retirement is paying for health care.

According to a recent survey from Merrill Lynch and Age Wave, those age 65 and over ranked health as their greatest source of worry.

With rising health care costs and longer life expectancies, it’s no wonder covering medical expenses tops most retirees list of retirement worries.

Add to that an unpredictable future for our Social Security system, market corrections, and uncertain taxes, it’s reasonable to feel a bit on edge these days.

However, Americans do retire successfully. Studies tend to show current retirees being less concerned about these issues than those approaching retirement. They have the benefit of experience, I guess.

Although I can’t predict your future, a bit of insight and planning can still go a long way to help ease some of your retirement worries.

So today, I’m going to debunk four of the biggest worries nearly all retirees have on their mind.

Retirement Worry #1: Health Care

You see healthcare top many retirement lists and studies as a major concern because many health issues are age related.

While you can’t control your genetic makeup, you can make good choices when it comes to eating healthy and exercising regularly. In addition, I find simply giving people their options when it comes to healthcare coverage can ease a lot of the uncertainty.

Here are the basics…

Most people become eligible for Medicare when they turn 65. Medicare is made up of several parts.

Medicare Part A is hospital coverage. It’s generally free, with some exceptions.

Medicare Part B is medical insurance, and you pay a premium for coverage.

Medicare Part C, aka Medicare Advantage, is an optional replacement for traditional Medicare. You might pay more for an optional Part C plan.

Medicare Part D is your prescription drug coverage. Pard D costs will vary.

So unless your prior employer has your health insurance covered for life, you’ll most likely go onto Medicare.

Choosing the right plan depends on your health status, family history, and budget. It’s also not a bad idea to consider a Medicare Supplement plan, or a Medigap policy.

A major reason to consider a Medigap policy is if you plan on traveling.

Traditional Medicare doesn’t cover you when you travel outside the U.S. But, most Medigap policies do.

The last thing you should consider is long-term care insurance. The data isn’t pretty. Coverage is expensive and your alternative of no coverage can be worse.

The main things to consider here are whether or not your assets are needed for someone else to maintain a certain standard of living. And, whether or not you’re looking to leave a legacy.

Those are two major questions you need to ask before you consider long-term care insurance.

Retirement Worry #2: Outliving Your Money

The second biggest worry is fear of running out of money. With longer life expectancies and rising costs, the amount of money it takes to maintain a comfortable standard of living in retirement is significant.

Step one is to figure out how much you’ll need saved to retire comfortably. You can do this a number of ways but my suggestion would be to find a few different retirement calculators and run the numbers.

Once you have a few different sets of numbers, choose the worst case scenario and build your savings plan around that number.

The sooner you know how much you should have saved the better. Sometimes it can seem like a pension, Social Security and some modest savings will be enough. But that isn’t always the case.

Inflation and other uncontrollable factors can quickly eat away at your savings. It’s important to keep your spending to a minimum early in retirement, this way you give your money time to grow and you’ll have extra saved should you run into trouble later on.

Retirement Worry #3: Not Enough Cash Flow

This worry might seem similar to the second, but it comes from a different place. A lot retirees worry that their income won’t be enough to cover basic living expenses.

The fate of Social Security is up in the air. It likely won’t disappear but it could be significantly reduced, leaving a lot of retirees struggling to pay their bills.

The fix here is putting in place a solid drawdown strategy. The most common strategy is the 4% rule, where you withdraw 4% of your savings in the first year of retirement, and each year after that you take out the same dollar amount, plus an inflation adjustment.

For example, if you have $1,000,000 in retirement savings, the first year you would withdraw $40,000. Then, over the course of that year, inflation runs 3%. The next year, you’d withdraw $41,200.

There are a number of different drawdown strategies, the point being that having a sufficient cash flow is critical in retirement.

Retirement Worry #4: Debt

The last big worry is paying down debt. This worry probably wouldn’t have topped the list 20 years ago. But today retirees carry a lot more debt.

Bigger mortgages, multiple credit cards — it’s a major issue that retirees face. It’s not that you can’t ever have debt in retirement, but you need to be able to manage it.

If you can, pay off your credit cards before you retire. You don’t want your retirement savings getting eaten up by high-interest payments.

In some cases, you’ll want to go into debt. Maybe you need to replace your vehicle and the interest payments are low enough that it makes sense to take out a car loan.

You might also downsize or buy a second vacation property with a mortgage. So long as you’re not relying on debt to fund your retirement and you have a plan in place to manage the debt you owe, you can overcome this worry.

The bottom line is that it’s natural to feel some anxiety about retirement. With the right plan is place and a grasp on what’s to come, you can mitigate most of your fears fairly easily.

To a richer life,

Nilus Mattive

Nilus Mattive

The post The Big 4 Retirement Worries and How to Beat Them appeared first on Daily Reckoning.

The Big 4 Retirement Worries and How to Beat Them

This post The Big 4 Retirement Worries and How to Beat Them appeared first on Daily Reckoning.

The #1 concern most Americans have when it comes to retirement is paying for health care.

According to a recent survey from Merrill Lynch and Age Wave, those age 65 and over ranked health as their greatest source of worry.

With rising health care costs and longer life expectancies, it’s no wonder covering medical expenses tops most retirees list of retirement worries.

Add to that an unpredictable future for our Social Security system, market corrections, and uncertain taxes, it’s reasonable to feel a bit on edge these days.

However, Americans do retire successfully. Studies tend to show current retirees being less concerned about these issues than those approaching retirement. They have the benefit of experience, I guess.

Although I can’t predict your future, a bit of insight and planning can still go a long way to help ease some of your retirement worries.

So today, I’m going to debunk four of the biggest worries nearly all retirees have on their mind.

Retirement Worry #1: Health Care

You see healthcare top many retirement lists and studies as a major concern because many health issues are age related.

While you can’t control your genetic makeup, you can make good choices when it comes to eating healthy and exercising regularly. In addition, I find simply giving people their options when it comes to healthcare coverage can ease a lot of the uncertainty.

Here are the basics…

Most people become eligible for Medicare when they turn 65. Medicare is made up of several parts.

Medicare Part A is hospital coverage. It’s generally free, with some exceptions.

Medicare Part B is medical insurance, and you pay a premium for coverage.

Medicare Part C, aka Medicare Advantage, is an optional replacement for traditional Medicare. You might pay more for an optional Part C plan.

Medicare Part D is your prescription drug coverage. Pard D costs will vary.

So unless your prior employer has your health insurance covered for life, you’ll most likely go onto Medicare.

Choosing the right plan depends on your health status, family history, and budget. It’s also not a bad idea to consider a Medicare Supplement plan, or a Medigap policy.

A major reason to consider a Medigap policy is if you plan on traveling.

Traditional Medicare doesn’t cover you when you travel outside the U.S. But, most Medigap policies do.

The last thing you should consider is long-term care insurance. The data isn’t pretty. Coverage is expensive and your alternative of no coverage can be worse.

The main things to consider here are whether or not your assets are needed for someone else to maintain a certain standard of living. And, whether or not you’re looking to leave a legacy.

Those are two major questions you need to ask before you consider long-term care insurance.

Retirement Worry #2: Outliving Your Money

The second biggest worry is fear of running out of money. With longer life expectancies and rising costs, the amount of money it takes to maintain a comfortable standard of living in retirement is significant.

Step one is to figure out how much you’ll need saved to retire comfortably. You can do this a number of ways but my suggestion would be to find a few different retirement calculators and run the numbers.

Once you have a few different sets of numbers, choose the worst case scenario and build your savings plan around that number.

The sooner you know how much you should have saved the better. Sometimes it can seem like a pension, Social Security and some modest savings will be enough. But that isn’t always the case.

Inflation and other uncontrollable factors can quickly eat away at your savings. It’s important to keep your spending to a minimum early in retirement, this way you give your money time to grow and you’ll have extra saved should you run into trouble later on.

Retirement Worry #3: Not Enough Cash Flow

This worry might seem similar to the second, but it comes from a different place. A lot retirees worry that their income won’t be enough to cover basic living expenses.

The fate of Social Security is up in the air. It likely won’t disappear but it could be significantly reduced, leaving a lot of retirees struggling to pay their bills.

The fix here is putting in place a solid drawdown strategy. The most common strategy is the 4% rule, where you withdraw 4% of your savings in the first year of retirement, and each year after that you take out the same dollar amount, plus an inflation adjustment.

For example, if you have $1,000,000 in retirement savings, the first year you would withdraw $40,000. Then, over the course of that year, inflation runs 3%. The next year, you’d withdraw $41,200.

There are a number of different drawdown strategies, the point being that having a sufficient cash flow is critical in retirement.

Retirement Worry #4: Debt

The last big worry is paying down debt. This worry probably wouldn’t have topped the list 20 years ago. But today retirees carry a lot more debt.

Bigger mortgages, multiple credit cards — it’s a major issue that retirees face. It’s not that you can’t ever have debt in retirement, but you need to be able to manage it.

If you can, pay off your credit cards before you retire. You don’t want your retirement savings getting eaten up by high-interest payments.

In some cases, you’ll want to go into debt. Maybe you need to replace your vehicle and the interest payments are low enough that it makes sense to take out a car loan.

You might also downsize or buy a second vacation property with a mortgage. So long as you’re not relying on debt to fund your retirement and you have a plan in place to manage the debt you owe, you can overcome this worry.

The bottom line is that it’s natural to feel some anxiety about retirement. With the right plan is place and a grasp on what’s to come, you can mitigate most of your fears fairly easily.

To a richer life,

Nilus Mattive

Nilus Mattive

The post The Big 4 Retirement Worries and How to Beat Them appeared first on Daily Reckoning.

Control Your Frivolous Spending in 6 Easy Steps

This post Control Your Frivolous Spending in 6 Easy Steps appeared first on Daily Reckoning.

One of the downsides to saving large sums of cash is it starts to burn a hole in your pocket.

When I was a kid, my grandparents would occasionally give me a $10 bill after I’d go visit for a week. I had zero tolerance for saving back then, so I would spend it on candy and comic books almost immediately.

Since then, I’ve built up a pretty good tolerance against spending cash. I’ve seen too many financial struggles and missed opportunities to not have a decent stockpile of cash in my bank account.

As of late though, my tolerance against spending is being tested. With a looming bear market, hoarding cash doesn’t feel like a bad investment.

The problem is this extra money starts tempting you. And, the last thing you want to do is waste your hard saved cash on something frivolous.

So, what should you do?

Here are 6 “easy” tips to help you control spending. I say easy because none of these require any extra discipline or extravagant measures. All you’ll need is a calculator, a pen and pad of paper.

The fastest way to boost your savings is by not spending what you have. If you want to accumulate more money, you need to learn some tricks to keep your spending urge at a minimum. Here are some tips I like:

Tip 1: Calculate How Much in Gross Income Is Needed to Buy

How much does it cost to buy a $90,000 Porsche 911 Carrera? It takes about $136,000 in gross income at a 30% effective tax rate. At a 25% effective tax rate, it requires $2,700 in gross income to purchase the newest $1,799 Macbook Pro.

Whatever you’re thinking about buying, multiply it by 1.5x to find out how much it really costs before tax. Suddenly, what you want to buy doesn’t seem as affordable.

Tip 2: Calculate How Many Hours of Work It Takes to Buy

If you work a salaried job, then you likely don’t pay much attention to your hourly rate.

However, understanding how much labor is required to afford something is sometimes the best strategy to give yourself some pause.

For example, to buy a $9,000 second-hand Rolex Submariner will take about 450 hours driving for Uber at $20/hour after operating costs. If you drive for 40 hours per week, that’s almost 11.5 weeks worth of work to purchase one watch.

Tip 3: Save 50% of Your After Tax Income Every Year

This might sound challenging, but I promise it’s not. As long as you’re maxing out your 401k and saving a certain percentage of your after tax income before you spend, you can afford to do whatever you want with your money after that.

But one idea I like is to max out your 401k and then save 100% of every other paycheck. Since most employers pay out twice a month, you can easily save at least 50% of your after tax income every year by following this plan.

It’ll be painful for the first 6 months, but after that you’ll adjust your living standards and it becomes easy.

Tip 4: Compare Yourself to Other People

If you make more than $35K a year, you’re in the top 1% of global income earners. Appreciate what you have compared to the billions of other people who weren’t lucky enough to be born in a developed country.

According to the UN world food program, some 795 million people in the world do not have enough food to lead a healthy active life. Simply comparing your circumstances to those less fortunate is sometimes enough to curb those impulse buys.

Alternatively, you can try motivating yourself by comparing your wealth and career success to other people your age who are doing better than you. Depending on your personality type, this can be really motivating and force you to keep boosting your savings in order to catch up.

Tip 5: Establish a Spending Goal

There’s a rule I like which states that whatever you want to buy, you should try to make at least 10x that amount first. For instance, if you want to buy a $30,000 car, try making $300,000 first. This is a tough rule to stick to but it forces you to achieve certain financial goals tied to big rewards.

What you’ll find is after spending all this time earning and saving enough to reach your big goal, you might lose the desire to actually buy what you originally thought you wanted.

Make your spending goals challenging so when you reach them it’s worth the pain to make the purchase.

Tip 6: Visualize the Opportunity Cost of Your Purchase

If the S&P 500 averages 7% a year for the next 10 years, you’ll have doubled any money you invest today in the index. Therefore, the $9,000 watch or $30,000 car you buy today might be worth $18,000 and $60,000 respectively in the future. Visualizing opportunity cost is one way to prevent spending, but it’s hard because it’s difficult seeing that far into the future. One easy way to see the future is by running your finances through a retirement calculator. You’ll quickly see whether you’re on track to retirement or not.

Boosting savings is not rocket science. Yes, it requires some discipline but if you follow these simple tips on how to curb your spending, you’ll build a high tolerance and see your bank account grow.

To a richer life,

Nilus Mattive

Nilus Mattive

The post Control Your Frivolous Spending in 6 Easy Steps appeared first on Daily Reckoning.

Zambia scraps sales tax plan in concession to miners

Zambia will not replace its value-added tax (VAT) with a non-refundable sales tax, Finance Minister Bwalya Ng'andu said on Friday, a major concession to mining companies that fiercely opposed the proposal. Zambia, Africa's second-largest copper producer, is grappling with high debt levels and the effects of a severe regional drought which has depressed economic growth.

Glencore loses bid to stop Australian tax office using ‘Paradise Papers’

Global commodity miner and trader Glencore on Wednesday lost its case to stop Australian tax authorities using business information that was leaked as part of the so-called Paradise Papers. Glencore had argued that information revealed by the Paradise Papers - a leaked dossier that included information on clients of the Appleby law firm in Bermuda - should not be available to tax authorities as the information had been stolen.

Endless Summer of Low Interest Rates

This post Endless Summer of Low Interest Rates appeared first on Daily Reckoning.

My summer is in full swing.

South swells are rolling through the ocean…

The California sun is shining in all its glory…

The water temps are balmy (at least for the Pacific)…

And there’s enough daylight to put in a full day of work and still surf for hours on end.

Of course, there are still plenty of things that can ruin my best-laid plans.

The wrong tide… onshore winds… simply too many people out in the water.

In today’s market, I think central bank policies are the biggest wild card of them all.

I will be the first to say that members of the Federal Reserve – and most global central bankers – are all very smart people.

At the same time, they are not immune to the same foibles that plague the rest of humankind.

They want to keep their jobs and their power. Some may be overconfident in their own abilities.

Others may actually be scared by the massive responsibility they have.

The list of emotional baggage goes on and on. But the point is that over the last two decades, U.S. central bankers have repeatedly turned toward easier and easier money at every rough patch in the road.

And now they’re discovering that it is nearly impossible to reverse course in any meaningful way.

Current Interest Rates

For a little while, it seemed like they were actually getting us back to some semblance of normal.

In my mind, “normal” is around 5%. I say this because the long-term average Fed Funds rate is 4.8%.

Right now, we’re at a targeted range of 2.25-2.5 and an effective rate of 2.41%.

You’d think half of normal is low, but it’s actually high based on the last two decades.

Take a look…

As you can see, ever since the original tech bubble popped, the Fed has only managed to get its interest rate target back above 2.5% for a relatively brief period before another bubble – this time in real estate – rose up and popped.

Now, after finally tip-toeing back up over the last several years, we’re already hearing talk of a new round of rate cuts.

Based on Fed-funds futures, market participants are essentially certain that we will see a rate cut at the end of this month… and they see a 16% chance it will be for half of a percentage point!

What a massive reversal!

Take a look at the Federal Reserve’s so-called “dot plots,” which show each individual voting members’ forecasts for interest rates going forward.

This first one is from June, 2017…

As you can see, most FOMC members were expecting rates above 2.5% by this year and holding somewhere between 2.75% and 3% beyond.

Now here’s the one from June, 2019…

Notice that seven members of the FOMC now expect rates to go back below 2% this year and to stay there in 2020…

Five see that continuing all the way through 2021…

And 14 of 16 FOMC members now believe rates will be at 3% or lower in 2022 and possibly beyond.

There’s always some new reason why rates need to stay low (or go lower still).

This time around, it’s a nebulous batch of uncertainties.

How Market Uncertainty Affects Rates

As Chairman Jerome Powell told the House Financial Services Committee during his two-day stint on Capitol Hill last week:

“It appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted.”

You might also translate that as, “President Trump wanted lower interest rates and has essentially forced our hand”… or as “we’re doing everything we can to avoid a Japan-style deflationary period… or both… but I digress.

The point is that it feels like the U.S. is in an endless summer of below-normal interest rates.

And things could go lower still.

Heck, in Europe they’ve been employing negative interest rates – a perverse arrangement where it actually costs people to park their money – since 2014.

Just remember that the weather can change quickly – it can get hotter or cooler, and it’s entirely possible for a storm to blow in… one that can’t be stopped by any amount of monetary policy.

For me, all of this simply argues for a renewed focus on income-oriented investments… especially at the value end of the spectrum.

Specifically, I continue to believe that dividend stocks give the best combination of immediate income… continued capital appreciation potential… and the chance for growing yields even if interest rate targets stay low for years to come.

Many of my favorite names have been lagging just as other parts of the markets look fairly overheated.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post Endless Summer of Low Interest Rates appeared first on Daily Reckoning.

Until the Tax Man Do Us Part

This post Until the Tax Man Do Us Part appeared first on Daily Reckoning.

Are you planning a wedding for this year? Congratulations!

Whether it’s going to be one with hundreds of guests in a grand setting or something much more intimate… like a ceremony on the beach with a few close family members and friends… you have a lot going on now.

What to wear, whom to invite, what to serve, where to go on a honeymoon are surely on your checklist.

Furthest from your mind is what getting married will mean for your income taxes. But between now and next April, it will pop up. So the sooner you know what to expect, the more time you’ll have to plan, which could be especially important when it comes to…

The Marriage Penalty

If the two of you will pay more taxes as a married couple than you would if filing as two single persons, you are getting hit with the marriage penalty.

The Tax Cuts and Jobs Act that took effect last year eliminated the marriage penalty for many couples. Others might still feel the pain.

Let’s Start with the High Earners…

Two people without children each earning $500,000, taking the standard deduction, and filing as singles would be in the 35% bracket. If they marry, their combined income will be $1 million. That will push them into the 37% bracket and translate into $7,264 of additional income taxes.

Source: Tax Foundation

For our million-dollar couple and those with slightly more modest incomes, the 0.9% Medicare surtax could consume a piece of their paycheck. When single, the threshold amount was $200,000. For a married couple it’s $250,000.

So two singles each earning $150,000 don’t have to worry about this tax. Once they are married, though, their combined income will be $300,000 — exceeding the threshold by $50,000. 

Additional tax: $450

Then there’s the Net Investment Income Tax (NIIT).

The NIIT is a 3.8% tax on certain sources of income, including: interest, dividends, and capital gains.

As a single-filer, you’ll owe this tax if you have net investment income and your modified adjusted gross income (MAGI) is more than $200,000.

After you’re married and file jointly, the tax kicks in when the two of you have a combined MAGI of $250,000.

Now let’s look at…

Lower Income Folks…

Perhaps you’re not in the million-dollar club or even close to it. In fact, you’re way at the other end of the scale.

Then you might be familiar with the earned income tax credit. Keep in mind that a credit is different from a deduction in that a credit could result in a refund even when your tax bill is zero.

This credit is available to low earners and qualified working taxpayers with children.

The maximum amount of the credit is:

  • $529 with no children
  • $3,526 with one child
  • $5,828 with two children
  • $6,557 with three or more children

Say you and your future spouse each earn $40,000 annually and each have a child. In 2018, you were both eligible for a $3,526 tax credit since the threshold was $41,094 for a single filer. In other words, the two of you received a total of $7,052 in tax credits.

However, when you file for 2019, your combined income will be $80,000 — far exceeding the $52,493 married filing jointly limit.

So you can kiss that $7,052 goodbye.

Source: IRS

Tax Implications for Retirees…

Retirees tying the knot could see more of their Social Security benefits taxed.

If you file as an individual and your provisional income (total adjusted gross income, nontaxable interest, and half of your Social Security benefits) is less than $25,000 — you won’t owe tax on your benefits.

Provisional income between $25,000 and $34,000 will mean up to 50% of your benefits will be taxable. If your income is more than $34,000, up to 85% of your Social Security is subject to tax.

Logic would tell you that after you’re married these thresholds would double to $50,000 and $68,000 respectively.

Sorry, but logic plays no role here.

In fact, for married couples filing jointly the initial threshold is only $32,000. Between $32,000 and $44,000, you may have to pay tax on up to 50% of your benefits. And if it’s more than $44,000, up to 85% could be taxable.

 Filing status

Provisional income

Amount subject to income tax

 Single 

 Under $25,000

 0

 $25,000 – $34,000

 Up to 50%

 Over $34,000

 Up to 85%

 Married filing jointly 

 Under $32,000

 0

 $32,000 – $44,000

 Up to 50%

 Over $44,000

 Up to 85%

Regardless of your Income…

The amount you can deduct for state and local taxes (SALT) is capped at $10,000 for singles and married couples. This would only affect you if you itemize, which few do since the standard deduction is now $24,400 for married filing jointly.

Still, single taxpayers who do itemize and live in high tax states, like California and New Jersey, could see part of their deduction disappear after they tie the knot.

The Tax Policy Center has a handy tool that will calculate how much federal income tax two people might pay as individuals vs. as a married couple.

If you find that your taxes will increase after marriage, you could look into ways of reducing taxable income such as contributing to a traditional IRA or your employer’s qualified retirement plan, like a 401(k).

Also if there will be a big difference in the amount of tax you’ll owe, you should fill out a new Form W-4 so you don’t get any surprises come tax time.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post Until the Tax Man Do Us Part appeared first on Daily Reckoning.

The Cult of the Trump Tax Refund

This post The Cult of the Trump Tax Refund appeared first on Daily Reckoning.

Last week, I told you how I got a surprise correction from the IRS – one relating to Trump’s new tax laws and my Solo 401(k) retirement plan.

What I didn’t mention is the monetary impact of that note – essentially, I ended up owing a couple thousand more in taxes than I had previously figured.

Before you shed a tear, on balance, the new tax laws were a net positive for my specific situation last year.

Even though my Solo 401(k) contributions were slightly less valuable, the qualified business income deduction was a big win …

While the SALT cap is painful for someone like me living in California – with high state income taxes and high property taxes – at least my oversized mortgage is still fully deductible because I purchased my home before the new lower limits kicked in …

And with a young child in the home, the doubling of the child tax credit (plus higher phaseout thresholds), was an additional positive.

I could keep going.

The point is that many things changed and how the sum total affected you depends on the very specific details of your life.

How did Americans Fare Under Trump’s Tax Changes?

The IRS just released its first batch of official numbers, using tax returns filed by May 23rd.

Roughly 10% of filers are still using the benefit of extensions and haven’t turned in their returns yet. Moreover, that group of people tend to be higher-income filers – with more complicated returns – and they represent 20% of all the income reported to the IRS.

Still, we can get a good idea of where things stand.

Here are some general takeaways:

#1. Households making somewhere between $100,000 and $250,000 received fewer refunds and were more likely to owe money.

That comes from a Wall Street Journal analysis of the IRS’ data. But we’ll talk more about this idea in just a second. It isn’t really what it seems.

#2. Average refunds for households making $250,000 to $500,000 rose 11%.

I suspect this has a lot to do with the aforementioned QBI and other benefits for businesses and their owners.

If you’re starting to feel like only the wealthy made out …

#3. From a high-level view, about the same number of Americans got refunds this year (79% vs. 80%) and for roughly the same amount ($2,879 vs $2,908) as the 2017 tax year.

So if you’re now feeling like the ultra-wealthy made out and everyone else got shafted, you’re not alone.

Barron’s recently cited a Gallup poll conducted in April, which found only 14% of Americans thinking their taxes went down.

However, the reality is far different …

#4. The Tax Policy Center says roughly two-thirds of American households paid less in taxes overall year-over-year while 6% paid more.

How is this possible?

How can half of the population not realize their taxes actually went down under the new laws?

Beyond the fact that many people outsource their tax preparation and thus have no real connection to what’s happening in that part of their life, many Americans only look at their refunds.

If they get money back after they file, they’re happy.

If they get more than last year, they’re really happy.

Of course, none of that makes rational sense.

This year, for example, IRS withholding amounts were adjusted earlier in the year.

That means many workers had less money getting taken out of their regular paychecks. So what they ended up owing or getting back is not a good indication of how they fared overall.

So What’s with the Overreaction?

The entire “cult of the tax refund” is completely misguided and always has been.

Getting a large refund from Uncle Sam simply means you loaned him a good chunk of money at zero-percent interest over the course of the year.

That’s hardly something to celebrate!

Instead, your goal should be paying exactly what you owe and not a penny more.

Or, even better, paying less than you owe without incurring underpayment penalties and then writing a check for the difference come filing time.

And bonus points if you have the difference invested and earning some type of return during the interim … which is the polar opposite of what almost everyone else does.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post The Cult of the Trump Tax Refund appeared first on Daily Reckoning.