Financial Planner 43551

First Look Back, Then Ahead [Tax Changes]

In Income Planning, Investment Management, Steward Articles, Tax Planning, Weekly Articlesby Adam Cufr

This is it. The end of yet another year has arrived. Like every other year before it, 2017 appeared to pass by more quickly than the rest. I can only imagine how fast this ride becomes next year and the years to follow. In light of a new year, I thought we’d look at some new developments in the realm of taxes, setting the stage for our upcoming progress reviews. But first, I’d like to briefly look back from whence we came in order to add some helpful perspective.

Ten years ago, the Dow Jones Industrial Average, ‘The Dow’, peaked at 14,100 (October, 2007) before starting its mighty descent to a low of roughly 6,500 in March of 2009. That’s a 54% decline in case you’d forgotten. In percentage terms, that decline today would see the Dow plunging by 13,353 points! No, this is not a prediction, but simply a reflection. In a letter to clients in October of 2008, when the Dow had tumbled to 8,000 before seeing its 6,500 bottom, I shared this:

What to do next? Depending on where one rests in the belief that we have seen the worst in the stock market – just about everything is discounted about 40% from this time last year – then your favorites are on sale now. If you think we have more room to fall, then hold onto your wallets. As I see it, we are at a fork in the road: one path is the collapse of the financial system as we know it. For this, we cannot adequately plan beyond owning some gold, a paid for home, and a strong back. The other path is a slow, painful recovery that may take five or ten years. On this path, a long time horizon is required and you will find some incredible bargains to reinvest in or stay invested.   

Well, here we are, ten years from the market’s peak before its horrifying decline. Which path did you choose? We all know how easy it is to look back with the benefit of near-perfect hindsight and know the answers. But remembering what it was like at that time; the emotional and psychological pain of seeing life savings seemingly disappear right before our very eyes, with little security in our jobs and our government, can provide us with valuable perspective as we push forward into a new year. In the decade since 2007, the market has climbed more than 10,000 points, but certainly not linearly and without pain along the way.

And we must not forget that most of the people reading this were not retired in 2007, meaning the primary objective at that time was to simply remain employed, living to fight another day, hoping to retire someday  But as retirement looms closer or has become your new reality, the primary objectives must change. While job security isn’t the highest priority, income security is. And this means we must consider investing with that new objective in mind. To create income security, we’re using tools like income annuities, dividend paying stocks, and interest bearing bonds, utilizing these within a formal plan that allows you to meet your objectives regardless of the winding path the markets may take. This is where hindsight becomes so valuable: we know what can happen, so let’s plan for it, both the downs and the ups.

With hindsight as our companion, what can we look forward to in the coming years? Well, for one, a new tax bill has been signed into law which inevitably has an impact on financial markets. And while we shouldn’t use the tax tail to wag the dog and make long-term financial decisions solely based on taxes, we should consider how these changes may shift our planning a bit going forward.

New Tax Bill

As you’re likely aware, a new tax plan has just become law. The bill’s name is, and this is no joke: To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.’ Yes, that’s the name of the new tax plan. There’s a lot to learn of the new plan other than just its name, but one thing can be made clear from an early look at the changes: many of you will see a reduction in your taxes, some will not. Experts suggest that the average taxpayer will see an 8% reduction in taxes next year, while most will see taxes increase again by year 2027. In other words, enjoy this while it lasts.

The actual tax rates have been lowered across most tax brackets, meaning the same income next year should result in slightly lower taxes due than this year. The standard deduction has been increased dramatically, which means much simpler tax filing for most taxpayers. Here’s what that means: because the standard deduction is much higher, most taxpayers will no longer benefit from itemizing deductions. Two noteworthy effects of the higher standard deduction, and end to the need to itemize,  are the likely loss of the deductibility of mortgage interest paid on your home and the loss of deductibility for most charitable deductions. These deductions weren’t taken away per se, but the fact that the standard deduction rose so much means the direct benefits of these deductions become buried, even though you’re still benefitting indirectly from the higher standard deduction. It will be interesting to see how this alters behaviors; will people still be as charitable if they no longer see a direct benefit on their taxes? Will we still be willing to pay as much for a home?

It’s also worthy of noting that the top corporate tax rate has been reduced from 35% to just 21%. This move is not without controversy, arguing that it favors the rich. For your purposes, whether you feel rich or not, it’s likely to have a positive benefit on your investment portfolio. At least in theory, less taxes owed by the companies you own means higher net profit margins earned by those companies, which could mean higher stock valuations. Like you, I hope this is the case by and large, but only time will tell.

We’ve invested in new software to become even more strategic with your tax planning, so we’ll speak more to this as the new rules go into effect and our software receives the appropriate updates.

So as we turn the corner toward 2018, the engine of capitalism keeps running. We know from hindsight that uninterrupted prosperity is as unlikely as harmony in politics. What we can do is plan to prosper in spite of the challenges by being clear of our objectives, hedging risks where possible, and choosing to think long-term. Before we know it, we’ll be toasting our glasses to another year having passed. Until then, let’s plan for tomorrow while living for today.

All the best,

Adam Cufr Signature

Adam Cufr, RICP®


Adam Cufr, RICP® (Retirement Income Certified Professional®) is a financial advisor and founding principal of Fourth Dimension Financial Group, LLC providing personal finance and retirement planning services. Adam is a Columnist for Retirement Advisor Magazine. He is also a sought-after media commentator and thought leader. Adam was named one of The 20 Most Creative People In Insurance in 2015 and is a columnist for Retirement Advisor Magazine and the author of Off the Record – Secrets to Building a Successful Retirement and a Lasting Legacy.

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