Tax Bill Provisions to Consider Before You Jingle All the Way

And the award for the busiest profession during the 2017 year-end holiday season goes to… preparers and planners…..the crowd goes wild and applauds loudly. “I’d like to take this opportunity to thank our President, our senate and our House of Representatives for this “gift”. Without their last minute help and effort, no one could have made this Christmas to New Year’s period any busier for us.”

Laughing all the way…

The new tax law hasn’t been fully ratified by the U.S. House and Senate yet, but all indications are that the Tax Cuts and Jobs Act of 2017 will be sent to the President’s desk in the next two days. As you probably know, the House and Senate versions were somewhat different. What does the new bill look like?

Tax simplification? “Fuggetaboutit!” (think Italian mobster)

Despite the promise of tax “reform” or “simplification,” the bill actually adds hundreds of pages to our tax laws. And the initial idea of reducing the number of tax brackets was apparently tossed aside in the final version; the new bill maintains seven different tax rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Most people will see their bracket go down by one to four percentage points, with the higher reductions going to people with higher income. And the tax brackets, going forward, will be indexed to inflation, meaning that the “real” income brackets will remain approximately the same from year to year.

The new brackets break down like this:

Individual Taxpayers

Income $0-$9,525 – 10% of taxable income
$9,526-$38,700 – $952.50 + 12% of the amount over $9,526
$38,701-$82,500 – $4,453 + 22% of the amount over $38,700
$82,501-$157,500 – $14,089.50 + 24% of the amount over $82,500
$157, 501-$200,000 – $32,089.50 + 32% of the amount over $157,500
$200,001-$500,000 – 45,689.50 + 35% of the amount over $200,000
$500,001+ – $150,689.50 + 37% of the amount over $500,000

Joint Return Taxpayers

Income $0-$19,050 – 10% of taxable income
$19,051-$77,400 – $1,905 + 12% of the amount over $19,050
$77,401-$165,000 – $8,907 + 22% of the amount over $77,400
$165,001-$315,000 – $28,179 + 24% of the amount over $165,000
$315,001-$400,000 – $64,179 + 32% of the amount over $315,000
$400,001-$600,000 – $91,379 + 35% of the amount over $400,000
$600,000+ – $161,379 + 37% of the amount over $600,000

Taxes for trusts and estates were also changed to:

$0-$2,550 – 10% of taxable income
$2,551-$9,150 – $255 + 24% of the amount over $2,550
$9,151-$12,500 – $1,839 + 35% of the amount over $9,150
$12,501+ – $3,011.50 + 37% of the amount over $12,500

Tax geeks like me note that the current 10% tax bracket is little changed, and the 15% bracket is now 12%, while the 25% and 28% tax bracket are replaced with 22% and 24% and a new 32% rate. Notice that in the lower brackets, the joint return (mostly for married couples) are double the individual bracket thresholds, eliminating the so-called “marriage penalty.” However in the higher brackets, the 35% rate extends to individuals up to $500,000, but married couples with $600,000 in income fall into that bracket. In the top bracket, the marriage penalty is more significant; individuals fall into it at $500,000, while couples are paying a 37% rate at $600,000 of adjusted gross income. That means more two-income couples will be calculating their taxes filed jointly and separately to arrive at the lowest resulting tax.

Making spirits bright…

Other provisions: the standard deduction is basically doubled, to $12,000 (single) or $24,000 (joint), $18,000 (head of household), and persons who are over 65, blind or disabled can add $1,300 to their standard deduction (currently $1,250).

The bill calls for no personal exemptions for 2018 and beyond (currently $4,050). For married couples with more than two children, this means that the new standard deduction ($24,000 in 2018) will be less than their current total standard deduction plus personal exemptions ($24,850 with three children in 2017). And the Pease limitation, a gradual phaseout of itemized deductions as taxpayers reached higher income brackets, has been eliminated. The Pease limitation added up to 3% to a high income taxpayer’s rates.

Despite the hopes of many taxpayers, the dreaded alternative minimum tax (AMT), remains in the bill. The individual exemption amount is $70,300; for joint filers it’s $109,400. But for the first time, the AMT exemption amounts will be indexed to inflation, so fewer taxpayers will be ensnared by the AMT. Even without this change, fewer taxpayers would be subject to the AMT because, as described below, the maximum deduction for (state and local income, sales, property) taxes is reduced beginning in 2018, and for most taxpayers, it was the deduction of those taxes that made them subject to the AMT.

Interestingly, the new tax bill retains the old capital gains and qualified dividend tax brackets—based on the prior brackets. The 0% capital gains rate will be in place for individuals with $38,600 or less in income ($77,200 for joint filers), and the 15% rate will apply to individuals earning between $38,600 and $452,400 (between $77,400 and $479,000 for joint filers). Above those amounts, capital gains and qualified dividends will be taxed at a 20% rate.

Misfortune seemed his lot…

In addition, the rules governing Roth conversion recharacterizations will be repealed. Under the old law, if a person converted from a traditional IRA to a Roth IRA, and the account lost value over the next year and a half, they could simply undo (recharacterize) the transaction, no harm no foul. Under the new rules, recharactization would no longer be allowed. This makes more accurate tax projections essential going forward, along with a good working crystal ball.

Before the tax act, fewer than 30% of taxpayers itemized their deductions. With the higher standard deductions, many more people will no longer file Schedule A, Itemized Deductions. Their deductions will simply not be enough to exceed the standard deduction, especially given the other changes in the tax bill. This makes year-end planning and projecting even more essential.

For many taxpayers who can itemize deductions, their taxable income number will likely be higher under the new tax plan, because many itemized deductions have been reduced or eliminated. Among them: there will be a $10,000 limit on how much any individual can deduct for state and local income, sales, and property tax payments. Before you rush to write a check to the state or your local government, know that a provision in the bill states that any 2018 state income taxes paid by the end of 2017 are not deductible in 2017, and instead will be treated as having been paid at the end of calendar year 2018. It’s not clear yet what happens if your 2017 state withholding exceeds your state liability. Normally, you would deduct the full amount on your current return and report the excess (refund) as income in the following year. But prior year state income tax refunds are no longer includible in income starting in 2018. Nothing is mentioned about paying and deducting already issued property tax bills due early in 2018, so it makes sense to figure out whether paying them in 2017 or 2018 yields a higher tax benefit. If you are in the AMT for 2017, prepaying any taxes will not yield a benefit.

The mortgage interest deduction will be limited to $750,000 of principal for new mortgages (down from a current $1 million limit); any mortgage interest payments on principal amounts above that limit will not be deductible. However, the charitable contribution deduction limit will rise from 50% of a person’s adjusted gross income to 60% under the new bill. If you think you’ll be ineligible to itemize starting in 2018, it makes sense to evaluate accelerating some planned 2018 charitable contributions to 2017, including any non-cash contributions.

Miscellaneous itemized deductions such as safe deposit box fees, unreimbursed employee business expenses, tax preparation fees, investment expenses and other deductions (currently subject to a reduction by 2% of adjusted gross income) are no longer deductible in any amount beginning in 2018. Here again, it make sense to see if prepaying some of those expenses makes sense (it does not if you’re in the AMT for 2017). Any prepayment amount and timing must be reasonable in the eyes of the IRS.

What about estate taxes? The bill doubles the estate tax exemption from, currently, $5.6 million (projected for 2018) to $11.2 million; $22.4 million for couples. Meanwhile, Congress maintained the step-up in basis, which means that people who inherit low-basis stock or real estate will see the embedded capital gains go away upon receipt, because the assets will have a cost basis equal to their fair market value on the date of death.

Public “C” Corporations saw their highest marginal tax rate drop from 35% to 21%, the largest one-time rate cut in U.S. history for the nation’s largest companies.

And pass-through entities like partnerships, S corporations, limited liability companies and sole proprietorships will receive a 20% deduction on taxes for “qualified business income,” which explicitly does NOT include wages or investment income. This is one of the more complicated areas of the tax bill, and will require working closely with your accountant or CPA to assess whether your pass-through entity will save money converting to a C Corporation.

As things stand today, all of these provisions are due to “sunset” after the year 2025, at which point the entire tax regime will revert to what we have now.

Assuming the tax bill is signed into law this week, and it likely will, you’ll have just over a week to project your 2017 and 2018 taxes, and decide which deductions (or income) you may want to defer to 2018 or accelerate into 2017. Only by projecting both years and finding the least combined liability will you know what planning tactics makes sense for you. We can help.

Oh what fun it is…

If you would like to review your current taxes, investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.


The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

To Skimp or Not to Skimp

The majority of my clients, to no one’s surprise, are baby boomers. You may think that their main concern is overspending their retirement dollars, but you’d be wrong. In fact, for many of my retired clients, convincing them that it is OK to spend and enjoy their hard earned nest egg, is one of the hardest things to do. Even among my non-retired clients, getting them to enjoy their “saving years” while being prudent spenders can be a challenge.

I consider myself to be a frugal spender, while allowing myself to indulge in the durable goods (read: electronic toys and gadgets) that simplify my life, last a long time and bring me comfort or pleasure. I personally would never spend $9.50 on a latte (I’m not a coffee drinker, but I doubt I could bring myself to spend that kind of money on a cup of anything.) Some people won’t skimp on a good meal; I won’t skimp on a good hotel room. We each have our own compromises and “do not compromises.”

But save and invest. Save and invest. Isn’t that all you hear when it comes to planning your financial life?

An online article by an individual who refers to himself as “the Financial Samurai” makes a more balanced case regarding how you deploy your money. Yes, you should be capable of deferring gratification and have a healthy savings rate during your accumulation years. But there are a few items that are well worth investing in: your comfort, well-being and certain aspects of your lifestyle. Some of these items might be considered luxuries by people who are perhaps overly frugal.

For instance? The Samurai says you should splurge on a really good mattress—recognizing, of course, that you can avoid markups and still buy quality. His argument: you spend almost a third of your life sleeping. Your waking hours will be more comfortable and productive if you are spending your nights on the most comfortable, supportive mattress you can afford.

Another example? Your glasses or contact lenses. Vision may be your most important sense, so it is worth buying glasses with the thinnest lenses with anti-reflection and a scratch-proof coating. If you wear contacts, splurge on daily wear that contain the latest breathable technology.

If you’re serious about athletic performance, then the Samurai thinks that buying top-of-the-line sports equipment makes sense. If you have a baby, the best baby care products are worth the extra expenditure. If you’re in the habit of watching movies at the theater, then you might consider buying a high definition TV and surround sound system, which makes watching movies (and listening to music) at home more enjoyable—and economical. He also recommends that you take care of yourself with massages, physical therapy and coaching—arguing that physical and mental health are priceless.

Finally, since most Americans receive very little vacation time from work, the Samurai recommends that you make the most of those days or weeks, by selecting the best adventure and the best amenities possible. The point: live a great life while you’re saving and investing.

To his list, I would add comfortable clothing and footwear. A comfortable desk chair and good sized desk can make all the difference in the world for the time you spend in your office. And if your computer is more than five years old, treat yourself to the latest hardware, including at least a 24 inch monitor to save yourself time and strain on your eyes.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.


The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Details of Proposed Tax Reform

The House Ways and Means Committee released draft tax reform legislation on Thursday. Titled “The Tax Cuts and Jobs Act”, H.R. 1, incorporates many of the provisions listed in the Republicans’ September tax reform framework while providing new details. Budget legislation passed in October would allow for the tax reform bill to cut federal government revenue by up to $1.5 trillion over the next 10 years, and still be enacted under the Senate’s budget reconciliation rules, which would require only 51 votes in the Senate for passage. The Joint Committee on Taxation issued an estimate of the revenue effects of the bill on Thursday showing a net total revenue loss of $1.487 trillion over 10 years.

The bill features new tax rates, a lower limit on the deductibility of home mortgage interest, the repeal of most deductions for individuals, and full expensing of depreciable assets by businesses, among its many provisions.

Lawmakers had reportedly been discussing lowering the contribution limits for 401(k) plans, but the bill does not include any changes to those limits.

The Senate Finance Committee is reportedly working on its own version of tax reform legislation, which is expected to be unveiled next week. It is unclear how much that bill will differ from the House bill released on Thursday.

Here are some of the highlights of the House bill:


Tax rates: The bill would impose four tax rates on individuals: 12%, 25%, 35%, and 39.6%, effective for tax years after 2017. The current rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The 25% bracket would start at $45,000 of taxable income for single taxpayers and at $90,000 for married taxpayers filing jointly. By comparison, for 2017, the current 25% rate starts at $37,951 of taxable income for single taxpayers and $75,901 for married taxpayers, so more income gets taxed at lower rates under the proposed tax bill.

The 35% bracket would start at $200,000 of taxable income for single taxpayers and at $260,000 for married taxpayers filing jointly. By comparison, for 2017, the current 35% rate starts at $416,701 of taxable income for both single taxpayers and married taxpayers, so more income gets taxed at higher rates at much lower levels under the proposed tax bill. And the 39.6% bracket would apply to taxable income over $500,000 for single taxpayers and $1 million for joint filers (currently $418,400 for single, $470,700 for married taxpayers.)

Standard deduction and personal exemption: The standard deduction would increase from $6,350 to $12,200 for single taxpayers and from $12,700 to $24,400 for married couples filing jointly, effective for tax years after 2017. Single filers with at least one qualifying child would get an $18,300 standard deduction. These amounts will be adjusted for inflation after 2019. However, the personal exemption would be eliminated.

Deductions: Most deductions would be repealed, including the medical expense deduction, the alimony deduction, and the casualty loss deduction (except for personal casualty losses associated with special disaster relief legislation). The deduction for tax preparation fees would also be eliminated (which most taxpayers never qualified to deduct anyway).

However, the deductions for charitable contributions and for mortgage interest would be retained. The mortgage interest deduction on existing mortgages would remain the same; for newly purchased residences (that is, for debt incurred after Nov. 2, 2017), the limit on deductibility would be reduced to $500,000 of acquisition indebtedness from the current $1.1 million. The overall limitation of itemized deductions would also be repealed.

Some rules for charitable contributions would change for tax years beginning after 2017. Among those changes, the current 50% limitation would be increased to 60%.

The deduction for state and local income or sales taxes would be eliminated, except that income or sales taxes paid in carrying out a trade or business or producing income would still be deductible. State and local real property taxes would continue to be deductible, but only up to $10,000. These provisions would be effective for tax years beginning after Dec. 31, 2017.

Credits: Various credits would also be repealed by the bill, including the adoption tax credit, the credit for individuals over age 65 who have retired on disability, the credit associated with mortgage credit certificates, and the credit for plug-in electric vehicles.

The child tax credit would be increased from $1,000 to $1,600, and a $300 credit would be allowed for nonchild dependents. A new “family flexibility” credit of $300 would be allowed for other dependents. The $300 credit for nonchild dependents and the family flexibility credit would expire after 2022.

The bill greatly changes the landscape for claiming college saving and spending deductions and credits. The American opportunity tax credit, the Hope scholarship credit, and the lifetime learning credit would be combined into one credit, providing a 100% tax credit on the first $2,000 of eligible higher education expenses and a 25% credit on the next $2,000, effective for tax years after 2017. Contributions to Coverdell education savings accounts (except rollover contributions) would be prohibited after 2017, but taxpayers would be allowed to roll over money in their Coverdell ESAs into a Sec. 529 plan.

The bill would also repeal the deduction for interest on education loans and the deduction for qualified tuition and related expenses, as well as the exclusion for interest on U.S. savings bonds used to pay qualified higher education expenses, the exclusion for qualified tuition reduction programs, and the exclusion for employer-provided education assistance programs.

Other taxes: The bill would repeal the alternative minimum tax (AMT).

The estate tax would be repealed after 2023 (with the step-up in basis for inherited property retained). In the meantime, the estate tax exclusion amount would double (currently it is $5,490,000, indexed for inflation). The top gift tax rate would be lowered to 35%.

Passthrough income: A portion of net income distributions from passthrough entities (partnerships and S corporations) would be taxed at a maximum rate of 25%, instead of at ordinary individual income tax rates, effective for tax years after 2017. The bill includes provisions to prevent individuals from converting wage income into passthrough distributions. Passive activity income would always be eligible for the 25% rate.

For income from nonpassive business activities (including wages), owners and shareholders generally could elect to treat 30% of the income as eligible for the 25% rate; the other 70% would be taxed at ordinary income rates. Alternatively, owners and shareholders could apply a facts-and-circumstances formula.

However, for specified service activities, the applicable percentage that would be eligible for the 25% rate would be zero. These activities are those defined in Sec. 1202(e)(3)(A) (any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees), including investing, trading, or dealing in securities, partnership interests, or commodities. Essentially, any passthrough entity that’s considered a personal service corporation under current law would be excluded from this 25% maximum tax rate provision.

Business provisions

A flat corporate rate: The bill would replace the current four-tier schedule of corporate rates (15%, 25%, 34%, and 35%, with a $75,001 threshold for the 34% rate) with a flat 20% rate (25% for personal services corporations). Remember, shareholders of non-passthrough entities (better known as C corporations), get their income taxed twice-once at the corporate level when earned, and once again when distributed to shareholders. The corporate AMT is repealed along with the individual AMT.

Higher expensing levels: The bill would provide 100% expensing of qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023 (with an additional year for longer-production-period property). It would also increase tenfold the Sec. 179 expensing limitation ceiling and phaseout threshold to $5 million and $20 million, respectively, both indexed for inflation. Essentially, most small businesses would be able to expense all qualified property and not have to depreciate them over their useful lives.

Cash accounting method more widely available: The bill would increase to $25 million the current $5 million average gross receipts ceiling for corporations generally permitted to use the cash method of accounting and extend it to businesses with inventories. Such businesses also would be exempted from the complicated and arcane uniform capitalization (UNICAP) rules. The exemption from the percentage-of-completion method (forcing you to recognize income as you progress towards completion of a project rather than at the end) for long-term contracts of $10 million in average gross receipts would also be increased to $25 million.

NOLs, other deductions eliminated or limited: Deductions of net operating losses (NOLs) would be limited to 90% of taxable income. NOLs would have an indefinite carryforward period, but carrybacks would no longer be available for most businesses. Carryforwards for losses arising after 2017 would be increased by an interest factor. Other deductions also would be curtailed or eliminated:

  • Instead of the current provisions under Sec. 163(j) limiting a deduction for business interest paid to a related party or basing a limitation on the taxpayer’s debt-equity ratio or a percentage of adjusted taxable income, the bill would impose a limit of 30% of adjusted taxable income for all businesses with more than $25 million in average gross receipts.
  • The Sec. 199 domestic production activities deduction would be repealed.
  • Deductions for entertainment, amusement, or recreation activities as a business expense would be generally eliminated, as would employee fringe benefits for transportation and certain other perks deemed personal in nature rather than directly related to a trade or business, except to the extent that such benefits are treated as taxable compensation to an employee (or includible in gross income of a recipient who is not an employee).

Like-kind exchanges limited to real estate: The bill would limit like-kind exchange treatment to real estate, but a transition rule would allow completion of currently pending Sec. 1031 exchanges of personal property.

Business and energy credits curtailed: Offsetting some of the revenue loss resulting from the lower top corporate tax rate, the bill would repeal a number of business credits, including:

  • The work opportunity tax credit (Sec. 51).
  • The credit for employer-provided child care (Sec. 45F).
  • The credit for rehabilitation of qualified buildings or certified historic structures (Sec. 47).
  • The Sec. 45D new markets tax credit. Credits allocated before 2018 could still be used in up to seven subsequent years.
  • The credit for providing access to disabled individuals (Sec. 44).
  • The credit for enhanced oil recovery (Sec. 43).
  • The credit for producing oil and gas from marginal wells (Sec. 45I)

Other credits would be modified, including those for a portion of employer Social Security taxes paid with respect to employee tips (Sec. 45B), for electricity produced from certain renewable resources (Sec. 45), for production from advanced nuclear power facilities (Sec. 45J), and the investment tax credit (Sec. 46) for eligible energy property. The Sec. 25D residential energy-efficient property credit, which expired for property placed in service after 2016, would be extended retroactively through 2022 but reduced beginning in 2020.

Bond provisions: Several types of tax-exempt bonds would become taxable:

  • Private activity bonds would no longer be tax-exempt. The bill would include in taxpayer income interest on such bonds issued after 2017.
  • Interest on bonds issued to finance construction of, or capital expenditures for, a professional sports stadium would be taxable.
  • Interest on advance refunding bonds would be taxable.
  • Current provisions relating to tax credit bonds would generally be repealed. Holders and issuers would continue receiving tax credits and payments for tax credit bonds already issued, but no new bonds could be issued.

Insurance provisions: The bill would introduce several revenue-raising provisions modifying special rules applicable to the insurance industry. These include bringing life insurers’ NOL carryover rules into conformity with those of other businesses.

Compensation provisions: The bill would impose new limits on the deductibility of certain highly paid employees’ pay, including, for the first time, those of tax-exempt organizations.

  • Nonqualified deferred compensation would be subject to tax in the tax year in which it is no longer subject to a substantial risk of forfeiture. Current law would apply to existing nonqualified deferred compensation arrangements until the last tax year beginning before 2026.
  • The exceptions for commissions and performance-based compensation from the Sec. 162(m) $1 million limitation on deductibility of compensation of certain top employees of publicly traded corporations would be repealed. The bill would also include more employees in the definition of “covered employee” subject to the limit.
  • The bill would impose similar rules on executives of organizations exempt from tax under Sec. 501(a), with a 20% excise tax on compensation exceeding $1 million paid to any of a tax-exempt organization’s five highest-paid employees, including “excess parachute payments.”

Foreign income and persons

Deduction for foreign-source dividends received by 10% U.S. corporate owners: The bill would add a new section to the Code, Sec. 245A, which replaces the foreign tax credit for dividends received by a U.S. corporation with a dividend-exemption system. This provision would be effective for distributions made after 2017. This provision is designed to eliminate the “lock-out” effect that encourages U.S. companies not to bring earnings back to the United States.

The bill would also repeal Sec. 902, the indirect foreign tax credit provision, and amend Sec. 960 to coordinate with the bill’s dividends-received provision. Thus, no foreign tax credit or deduction would be allowed for any taxes (including withholding taxes) paid or accrued with respect to any dividend to which the dividend exemption of the bill would apply.

Elimination of U.S. tax on reinvestments in U.S. property: Under current law, a foreign subsidiary’s undistributed earnings that are reinvested in U.S. property are subject to current U.S. tax. The bill would amend Sec. 956(a) to eliminate this tax on reinvestments in the United States for tax years of foreign corporations beginning after Dec. 31, 2017. This provision would remove the disincentive from reinvesting foreign earnings in the United States.

Limitation on loss deductions for 10%-owned foreign corporations: In a companion provision to the deduction for foreign-source dividends, the bill would amend Sec. 961 and add new Sec. 91 to require a U.S. parent to reduce the basis of its stock in a foreign subsidiary by the amount of any exempt dividends received by the U.S. parent from its foreign subsidiary, but only for determining loss, not gain. The provision also requires a U.S. corporation that transfers substantially all of the assets of a foreign branch to a foreign subsidiary to include in the U.S. corporation’s income the amount of any post-2017 losses that were incurred by the branch. The provisions would be effective for distributions or transfers made after 2017.

Repatriation provision: The bill would amend Sec. 956 to provide that U.S. shareholders owning at least 10% of a foreign subsidiary will include in income for the subsidiary’s last tax year beginning before 2018 the shareholder’s pro rata share of the net post-1986 historical earnings and profits (E&P) of the foreign subsidiary to the extent that E&P have not been previously subject to U.S. tax, determined as of Nov. 2, 2017, or Dec. 31, 2017 (whichever is higher). The portion of E&P attributable to cash or cash equivalents would be taxed at a 12% rate; the remainder would be taxed at a 5% rate. U.S. shareholders can elect to pay the tax liability over eight years in equal annual installments of 12.5% of the total tax due.

Income from production activities sourced: The bill would amend Sec. 863(b) to provide that income from the sale of inventory property produced within and sold outside the United States (or vice versa) is allocated solely on the basis of the production activities for the inventory.

Changes to Subpart F rules: The bill would repeal the foreign shipping income and foreign base company oil-related income rules. It would also add an inflation adjustment to the de minimis exception to the foreign base company income rules and make permanent the lookthrough rule, under which passive income one foreign subsidiary receives from a related foreign subsidiary generally is not includible in the taxable income of the U.S. parent, provided that income was not subject to current U.S. tax or effectively connected with a U.S. trade or business.

Under the bill, a U.S. corporation would be treated as constructively owning stock held by its foreign shareholder for purposes of determining CFC status. The bill would also eliminate the requirements that a U.S. parent corporation must control a foreign subsidiary for 30 days before Subpart F inclusions apply.

Base erosion provisions: Under the bill, a U.S. parent of one or more foreign subsidiaries would be subject to current U.S. tax on 50% of the U.S. parent’s foreign high returns—the excess of the U.S. parent’s foreign subsidiaries’ aggregate net income over a routine return (7% plus the federal short-term rate) on the foreign subsidiaries’ aggregate adjusted bases in depreciable tangible property, adjusted downward for interest expense.

The deductible net interest expense of a U.S. corporation that is a member of an international financial reporting group would be limited to the extent the U.S. corporation’s share of the group’s global net interest expense exceeds 110% of the U.S. corporation’s share of the group’s global earnings before interest, taxes, depreciation, and amortization (EBITDA).

Payments (other than interest) made by a U.S. corporation to a related foreign corporation that are deductible, includible in costs of goods sold, or includible in the basis of a depreciable or amortizable asset would be subject to a 20% excise tax, unless the related foreign corporation elected to treat the payments as income effectively connected with the conduct of a U.S. trade or business. Consequently, the foreign corporation’s net profits (or gross receipts if no election is made) with respect to those payments would be subject to full U.S. tax, eliminating the potential U.S. tax benefit otherwise achieved.

Exempt organizations

Clarification that state and local entities are subject to unrelated business income tax (UBIT): The bill would amend Sec. 511 to clarify that all state and local entities including pension plans are subject to the Sec. 511 tax on unrelated business income (UBI).

Exclusion from UBIT for research income: The act would amend the Code to provide that income from research is exempt from UBI only if the results are freely made available to the public.

Reduction in excise tax paid by private foundations: The bill would repeal the current rules that apply either a 1% or 2% tax on private foundations’ net investment income with a 1.4% rate for tax years beginning after 2017.

Modification of the Johnson Amendment: Effective on the date of enactment, the bill would amend Sec. 501 to permit statements about political campaigns to be made by religious organizations.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Source: AICPA

Common Estate Planning Mistakes People Make

“Mortality never prevented the majority of human beings from behaving as though death were no more than an unfounded rumor” – Aldous Huxley

A Rocket Lawyer survey in 2014 indicated that 64% of Americans did not have a will. If you’re one of them, then this is a must-read.

The most common way to transfer assets to your heirs is also the messiest: to have a will that is so out-of-date that it doesn’t even relate to your property or estate anymore, to have your records scattered all over the place, to have social media, banking and email accounts whose passwords only you can find—and basically to leave a big mess for others to clean up. I’ve reviewed over a hundred wills and estate plans in my lifetime, and it never ceases to amaze me how out-of-date or incomplete some of them are.

Is there a better way?

Recently, a group of estate planning experts were asked for their advice on a better process to handle the transfer of assets at your death, and to articulate common mistakes. A list of mistakes, including a few that I identified during my reviews, are covered below:

Not regularly reviewing documents. What might have been a solid plan 5 to 15 years ago may not relate to your estate today. The experts recommended a full review every three to five years, to ensure that trustees, executors, guardians, beneficiaries and healthcare agents are all up-to-date. You might also consider creating a master document which lists all your social media and online accounts and passwords, so that your heirs can access them and close them down. Be sure your documents specifically authorize and instruct your executor to access and shut them down after your death.

Not leaving personal property disposition instructions, keys and passwords for your executor. Untold numbers of safes and safety deposit boxes have to either be drilled open or forced open by court order because no one else held the key or numeric combination. If you have a home or office safe, or a safety deposit box at a bank, make sure that your executor and/or trustee knows where the key(s) are, or what the combination is (and what bank location the safe deposit box is in). Even better, and to facilitate distribution, leave a signed inventory of the valuables left in there and who is to inherit them. Having a schedule of valuable property or heirlooms and who is designated to inherit them is invaluable to your executor after you’re gone. Don’t wait until after the will is executed to do this. Do it before you sign the will and make yourself a to-do to update the list at least once a year. Will your executor know where to find and be able to access all of your original estate planning documents?

Using a will instead of a revocable trust. This relates mostly to people who want to protect their privacy or pass their wealth to under-age children. When assets pass to heirs via a will, the transfer creates a public record that anybody can access and read. A revocable trust can be titled in your name, and you can control the assets as you would with outright ownership, but the assets simply pass to your designated successor upon death.

Establishing a longer term trust for a small amount of assets. If the trust distributes assets over multiple years, be sure the value of the trust assets justify the cost and burden of fiduciary administration. Creating a trust holding $50,000 worth of assets to distribute $10,000 to each of five beneficiaries over five years makes little financial sense.

Failure to require mandatory and timely annual income distributions. Not distributing income annually to the beneficiaries can subject the trust to a 35% maximum tax rate on all income over $12,500 (currently), a much steeper income tax schedule than that of any individual beneficiary. With an inexperienced trustee, he/she may not know that not distributing the income from the trust annually will likely result in much higher taxation. By specifically REQUIRING annual income distributions in the trust, an ignorant trustee has no choice, and can thereby avoid high trust tax rates, and the beneficiaries pay their own (likely lower) tax rates on their distributions.

Not carefully vetting the trustee. The role of the trustee is both a powerful and time consuming one: make sure the person is qualified, willing and able to devote the time to properly understand and execute the trust instructions. Be sure to ask your candidate if they’re willing to serve before naming them in your trust. Family members who may also be beneficiaries frequently become a source of conflict or present a conflict of interest, so you may want to try and appoint a trusted non-relative instead if at all possible, or designate a corporate trustee. Also, provide in the trust document for reasonable compensation, expense reimbursement and indemnification of the trustee.

Failing to fund the revocable trust. You’ve set up the trust, but now you and your team of professionals have to transfer title to your properties out of your name and into the trust, with you as the initial trustee. If you forget to do this, then the entire purpose of the trust is wasted. Be sure to specify at least two successor trustees.

Having assets titled in a way that conflicts with the will or trust. You should always pay close attention to account beneficiary designations, because they—not your will or trust—determine who will receive your life insurance proceeds, IRA distributions and employer retirement plan assets. Meanwhile, assets (like a home) owned in joint tenancy with rights of survivorship will pass directly to the surviving joint tenant, no matter what the will or trust happens to say. Review beneficiary designations at least once a year. Does that old employer 401(k) beneficiary still list your former spouse as the beneficiary?

Not using the annual gift exemption. Each person can gift $14,000 a year tax-free to heirs without affecting the value of their $5.49 million lifetime estate/gift tax exemption. That means a husband and wife with four children could theoretically gift the kids $112,000 a year tax-free. Over time, that can reduce the size of a large estate potentially below the gift/estate exemption threshold, and in states where there is an estate or inheritance tax, it can help as well.

Not understanding the generation-skipping transfer tax. A husband and wife can each leave estate values of $5.49 million to any combination of individuals. But if there’s anything left over, there’s a 40% federal estate tax on those additional assets left to heirs in the next generation (the children), and an additional 40% on assets left to the generation after that (the grandchildren). Better to transfer $5.49 million out of the estate before death (tax-free, since this fills up the lifetime gift exemption) into a dynastic trust for the benefit of the grandchildren. You can also transfer that annual $14,000 to grandchildren. If your estate is that large, it is imperative that you seek the assistance of an estate planning attorney unless you favor leaving half or more of your assets to your federal and state governments.

Not taking action because of the possibility of estate tax repeal. Yes, the Republican leadership in Congress includes, on its wish list, the total repeal of those estate taxes (the estate tax is based on the value of the estate on the date of death). But what if there’s no action, or a compromise scuttles the estate tax provisions at the last minute? Federal wealth transfer taxes have been enacted and repealed three times in U.S. history, so there’s no reason to imagine that even if there is a repeal, the repeal will last forever. Meanwhile, dynastic trusts and other estate planning tactics provide tangible benefits even without the tax savings, including protecting assets from lawsuits and claims. And while the estate tax may be going away, the tax on estate and trust income is not, and may become a focus of the IRS as replacements for lost revenue are sought out.

Thinking that having just a will is enough. A health care directive (to allow your designee to speak on your behalf regarding health care decisions when you can’t) and a durable power of attorney (to perform duties on your behalf when you’re possibly incapacitated) are essential for every adult to have, in addition to a will.

Leaving too much, too soon, to younger heirs. Nothing can harm emerging adult values quite like realizing, as they start their productive careers, that they actually never need to work a day in their lives. The alternative? Create a trust controlled by a trusted individual (again, preferably not a family member or beneficiary) or a corporate trust company until the beneficiaries reach a more mature stage of their lives, perhaps 30-35 years old.

There are so many other estate planning provisions that may be unique to you, your family and your business. A fee paid to a legal professional who specializes in estate planning is a final act of love to your loved ones to help them understand your dying intentions, and minimize the hassles inherent in estate administration and disposition.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Third Quarter 2017 YDFS Market Review

“No light, no phone, no motor car, not a single luxury, like Robinson Caruso, it’s primitive as can be…”-Theme from Gillian’s Island TV Show

And in a similar manner, no tax reform, no health care reform, not a single hurricane or threat from North Korea could derail the stock market gains in the 3rd quarter.

The last few years of a bull market are always a bit of a mystery to professional investors; the market rises faster than it did in the early, cautious years when nobody believed there WAS a bull market, even though there appear to be fewer fundamental or economic reasons for it. The current bull market churns on, even if nobody can explain it, and people who bail out in anticipation of a downturn do so at the risk of missing out on an untold number of months or years of (still somewhat inexplicable) gains.

A breakdown shows that just about everything gained at least modestly in value these last three months. The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—rose 4.59% for the most recent quarter, finishing the first three fourths of the year up 13.72%. The comparable Russell 3000 index is up 13.91% for the year so far.

Looking at large cap stocks, the Wilshire U.S. Large Cap index gained 4.50% in the third quarter, to stand at a 14.19% gain so far this year. The Russell 1000 large-cap index finished the first three quarters with a similar 14.17% gain, while the widely-quoted S&P 500 index of large company stocks gained 3.96% for the quarter and is up 12.53% in calendar 2017.

Meanwhile, the Russell Midcap Index has gained 11.74% so far this year.

As measured by the Wilshire U.S. Small-Cap index, investors in smaller companies posted a 5.39% gain over the third three months of the year, to stand at a 9.55% return for 2017 so far. The comparable Russell 2000 Small-Cap Index is up 10.94% this year, while the technology-heavy Nasdaq Composite Index rose 5.79% for the quarter and is up 20.67% in the first three quarters of the year.

As nice as the returns have been domestically, international stocks this year have been even kinder to investment portfolios. The broad-based EAFE index of companies in developed foreign economies gained 4.81% in the recent quarter, and is now up 17.21% in dollar terms for the first nine months of calendar 2017. In aggregate, European stocks have gone up 19.87% so far this year, while EAFE’s Far East Index has gained 12.31%. Emerging market stocks of less developed countries, as represented by the EAFE EM index, rose 7.02% in the third quarter, giving these very small components of most investment portfolios a remarkable 25.45% gain for the year so far.

Looking over the other investment categories, real estate, as measured by the Wilshire U.S. REIT index, posted a meager 0.61% gain during the year’s third quarter, and is now up 2.44% for the year so far. The S&P GSCI index, which measures commodities returns, gained 7.22% for the quarter but is still down 3.76% for the year. By far the biggest component is the ever-unpredictable price of oil. Since the bottom on February 11, 2016, crude oil prices have actually risen by 50%, but the trajectory has been choppy and unpredictable.

In the bond markets, you know the story: coupon rates on 10-year Treasury bonds have risen incrementally from 2.30% at this point three months ago to a roaring 2.33%, while 30-year government bond yields have also risen incrementally, from 2.83% to 2.86%.

If you’re invested in a diversified portfolio, you should not expect that your gains will be as high as the quoted above returns. Your risk score, time horizon and monetary goals all directly affect how invested you are in any particular market, industry, sector or asset class. Risk management, a cornerstone of any sound financial and investment plan, means that your portfolio will return less (sometimes much less) than the overall markets. But a risk managed portfolio will also never suffer the full effects of a market downturn when it comes, whenever it comes. And therein lies the problem with risk management: no one knows when the downturn will hit.

As alluded to above, one might imagine that the uncertainties around government policy and fundamental economic issues (failed attempts to repeal the Affordable Care Act and a new promise to write a new tax code, for example) would spook investors, and if those weren’t scary enough, there’s the nuclear sabre rattling sound coming from North Korea. Hurricanes have disrupted economic activity in Houston and large swaths of Florida, while Puerto Rico lies in ruins. Yet the bull market sails on unperturbed.

How can this be? Because if you look past the headlines, the underlying fundamentals of our economy are still remarkably solid this deep into our long, slow economic expansion. Corporations reported a better-than-expected second quarter earnings season, with adjusted pretax profits reaching an annualized $2.12 trillion—which means that American business is still on sound footing. Unemployment continues to trend slowly downward and wages even more slowly upward. The economy as a whole grew at a 3.1% annualized rate in the second quarter, which is at least a percentage point higher than the recent averages and marks the fastest quarterly growth in two years. There is hope that the new tax package will prove as business-friendly as the Trump Administration is promising.

Economists tell us that the multiple whack of hurricane damage will slow down economic growth figures for the third quarter, although the building boom fueled by the destruction will mitigate that somewhat. There are no economic indicators that would signal a recession on the near horizon, and one of the potential panic triggers—a Federal Reserve Board decision to recklessly raise interest rates—seems unlikely given the Fed’s extremely cautious approach so far.

Meanwhile, as you can see from the accompanying chart, fourth quarters have historically been kind to investors—much kinder than third quarters. I’ll admit some concern that some of the 4th quarter returns, particularly the year-end “Santa Claus” rally, might have already been pulled forward.

Bull Markets

There are still potential speed-bumps down the road. The Trump Administration has threatened multiple trade wars with America’s major trading partners: the NAFTA members Canada and Mexico, and with China. Tight immigration rules could lead to limited labor supplies.

But it’s hard to be pessimistic when your portfolio seems to grow incrementally every quarter. The current 12-year stretch of economic growth below 3% a year is America’s longest on record. But if the U.S. charts a prudent economic course, it’s possible that the current expansion could at least set new records for longevity. This current expansion just turned 99 months old. The all-time record is 120 months, from 1991 to 2001. We may have to wait two more years for the next great buying opportunity in U.S. stocks.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Wilshire index data:
Russell index data:
S&P index data:–p-us-l–
Nasdaq index data:
International indices:
Commodities index data:
Treasury market rates:
Bond rates:
The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Tax Reform or Accountant’s Re-employment Act?

For as long as I can remember, tax reduction and simplification have been on the table for congress and past presidents. So why not President Trump? File your next tax return on a postcard (not likely)? I might be a bit cynical, but the only result of the next tax act I see will be extending my employment as a tax planner and preparer for the foreseeable future.

I sincerely doubt I’ll see significant tax simplification in my lifetime, so my fellow CPA’s and Turbotax employees can probably breathe a sigh of relief-their jobs are likely safe for years to come.

You can be forgiven if you’re skeptical that Congress will be able to completely overhaul our tax system after multiple failures to overhaul our health care system, but professional advisors are studying the newly-released nine-page proposal closely nonetheless. We only have the bare outlines of what the initial plan might look like before it goes through the Congressional sausage grinder:

First, we would see the current seven tax brackets for individuals reduced to three — a 12% rate for lower-income people (up from 10% currently), 25% in the middle and a top bracket of 35%. The proposal doesn’t include the income “cutoffs” for the three brackets, but if they end up as suggested in President Trump’s tax plan from the campaign, the 25% rate would start at $75,000 (for married couples–currently $75,900), and joint filers would start paying 35% at $225,000 of income (currently $416,700).

The dreaded alternative minimum tax, which was created to ensure that upper-income Americans would not be able to finesse away their tax obligations altogether, would be eliminated under the proposal. But there is a mysterious notation that Congress might impose an additional rate for the highest-income taxpayers, to ensure that wealthier Americans don’t contribute a lower share than they pay today.

The initial proposal would nearly double the standard deduction to $12,000 for individuals and $24,000 for married couples, and increase the child tax credit, now set at $1,000 per child under age 17. (No actual figure was given.)

At the same time, the new tax plan promises to eliminate many itemized deductions, without telling us which ones other than a promise to keep deductions for home mortgage interest and charitable contributions. The plan mentions tax benefits that would encourage work, higher education and retirement savings, but gives no details of what might change in these areas.

The most interesting part of the proposal is a full repeal of the estate tax and generation-skipping estate tax, which affects only a small percentage of the population but results in an enormous amount of planning and calculations for those who ARE affected. Anyone with enough money to be subject to the estate tax, has probably paid lawyers and accountants enough for planning to avoid paying a single dollar of it.

The plan would also limit the maximum tax rate for pass-through business entities like partnerships and limited liability companies (LLC’s) to 25%, which might allow high-income business owners to take their gains through the entity, rather than as personal (1040) income and avoid the highest personal tax brackets.

Finally, the tax plan would lower America’s maximum corporate (C-Corporation) tax rate from the current 35% to 20%. To encourage companies to repatriate profits held overseas, the proposal would introduce a 100% exemption for dividends from foreign subsidiaries in which the U.S. parent owns at least a 10% stake, and imposes a one-time “low” (not specified) tax rate on wealth already accumulated overseas.

What are the implications of this bare-bones proposal? The most obvious, and most remarked-upon, is the drop that many high-income taxpayers would experience, from the current 39.6% top tax rate to 35%. That, plus the elimination of the estate tax, in addition to the lowering of the corporate tax (potentially leading to higher dividends) has been described as a huge relief for upper-income American investors, which could fuel the notion that the entire exercise is a big giveaway to large donors. But the mysterious “surcharge” on wealthier taxpayers might taketh away what the rest of the plan giveth.

But many Americans with S corporations, LLCs or partnership entities (known as pass-through entities because their income is reported on the owners’ personal returns and therefore no company level tax is paid) would potentially receive a much greater windfall, if they could choose to pay taxes on their corporate earnings at 25% rather than nearly 40% currently. (No big surprise: The Trump organization is a pass-through entity.)

A huge unknown is which itemized deductions would be eliminated in return for the higher standard deduction. Would the plan eliminate the deduction for state and local property and income taxes, which is especially valuable to people in high-tax states such as New York, New Jersey and California, and in general to higher-income taxpayers who pay state taxes at the highest rate? Note that on average, only about 35% of Americans itemize their deductions on Schedule A, most of them higher income taxpayers.

Currently, about one-third of the 145 million households filing a tax return — or roughly 48 million filers — claim state and local tax deductions. Among households with income of $100,000 or more, the average deduction for state and local taxes is around $12,300. Some economists have speculated that people earning between $100,000 and around $300,000 might wind up paying more in taxes under the proposal than they do now. Taxpayers with incomes above $730,000 would hypothetically see their after-tax income increase an average of 8.5 percent.

Big picture, economists are in the early stages of debating how much the plan might add to America’s soaring $20 trillion national debt. One back-of-the-envelope estimate by a Washington budget watchdog estimated that the tax cuts might add $5.8 trillion to the debt load over the next 10 years. According to the Committee for a Responsible Federal Budget analysis, Republican economists have identified about $3.6 trillion in offsetting revenues (mostly an assumption of increased economic growth), so by the most conservative calculation the tax plan would cost the federal deficit somewhere in the $2.2 trillion range over the next decade.

Others, notably the Brookings Tax Policy Center (see graph) see the new proposals actually raising tax revenues for individuals (blue bars), while mostly reducing the flow to Uncle Sam from corporations.

CA - 2017-9-30 - Tax Reform Proposal_2

These cost estimates have huge political implications for whether a tax bill will ever be passed. Under a prior agreement, the Senate can pass tax cuts with a simple majority of 51 votes — avoiding a filibuster that might sink the effort — only if the bill adds no more than $1.5 trillion to the national debt during the next decade.

That means compromise. To get the impact on the national debt below $1.5 trillion, Congressional Republicans might decide on a smaller cut to the corporate rate, to something closer to 25-28%, while giving typical families a smaller 1-percentage point tax cut (gee…thanks?). Under that scenario, multi-national corporations might be able to bring back $1 trillion or more in profit at unusually low tax rates, and most families might see a modest tax cut that will put a few hundred extra bucks in their pockets.

Alternatively, Congress could pass tax cuts of more than $1.5 trillion if the Republicans could flip enough Democratic Senators to get to 60 votes. The Democrats would almost certainly demand large tax cuts for lower and middle earners, potentially lower taxes on corporations and higher taxes on the wealthy. Would you bet on that sort of compromise?

We shall see, and I’ll keep you posted on tax developments. For now, put away that post card–you’re probably going to need an envelope and more postage.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post


Can Any Monkey Make Money in an Uptrending Stock Market?

Looking back in history at a chart of the stock markets, in hindsight, it seems so simple to make money in the markets. Buy some index funds, periodically add to them, and “voila”, your money grows over time. Buy Amazon shares at $4.00 and sell them several years later at $1,000. Easy peasy, right?

You probably didn’t notice, but Monday, September 11 marked a milestone: the S&P 500 index’s bull (up-trending) market became the second-longest and the second-best performing in the modern economic era. Stock prices are up 270% from their low point after the Great Recession in March 2009—up 340% if you include dividends. That beats the 267% gain that investors experienced from June 1949 to August 1956. (The raging bull that lasted from October 1990 to March 2000 is still the winning-est ever, and may never be topped.) Any diversification, trimming of positions or risk management over this period of time cost you profits and reduced your returns. Nonetheless, it’s what any prudent investor should do.

With the benefit of hindsight, it’s easy to think that the long eight-year ride was easy money; you just put your chips on the table when the market hit bottom and let them ride the long bull all the way to where we are today. We tend to forget that staying invested is actually pretty difficult, due to all the white noise that tries to distract us from sound investing principles, not to mention some gut wrenching declines that test our meddle.

Consider, for example, that initial decision to invest in stocks that March in 2009. We had just experienced the worst bear market since the Great Depression (S&P 500 index down 57.7% from the peak in October 2007), and were being told many plausible reasons why prices could go lower still. After all, corporate earnings were dropping from already-negative territory. Was that the time to buy, or should you respond by waiting out the next couple of years until a clear upward pattern emerged?

The following year, investors were spooked by the so-called “Flash Crash,” which represented the worst single-day decline for the S&P 500 since April 2009. Then came 2011, two to three years into the bull, when the S&P 500 declined almost 20% from its peak in May through a low in October. Remember the double-dip recession we were in for? The pundits and touts proclaimed that another recession was looming on the horizon, which would take stocks down still further. Surely THAT was a good time to take your winnings and retreat to the sidelines.

By the time 2012 rolled around, there was a new reason to take your chips off the table: the markets were hitting all-time highs. Of course, historically, all-time highs are not indicative of anything other than a market that has been going up. If you decided to take your gains and get out of the market when the S&P 500 hit its first all-time high in 2012, you would have missed an additional 98% gain.

The headline distraction in 2013 was rising interest rates, which were said to be the “death knell” of the bull market. Low rates [it was declared] were the “reason” for the incredible run-up from 2009-2012, so surely higher rates would have the opposite effect. (The “experts” were wrong. The S&P 500 would advance 32% in 2013, its best year since 1997.)

In 2014, the U.S. dollar index experienced a strong advance, as markets began to expect the U.S. Fed to end its quantitative easing (bond buying) program. A falling dollar and easy Fed money were said to be responsible for the “aging” bull market, so this surely meant that it was time to head for the exits. Instead, the index ended 2014 with a 13.7% gain.

The following year, a sharp decline in crude oil prices was said to be evidence of a weakening global economy. The first Fed rate hike (in December 2015) since 2006 led many institutional investors to sell their stocks in the worst sell-off to start a year in market history. The 52-week lows in January and February were said to be extremely bearish; the market, we were told, was going much lower. Instead, the S&P 500 ended 2016 up 12% after being roughly “flat” for 2015.

Today, you’ll hear that the bull market is “running out of steam,” and is “long in the tooth.” New record highs mean that there is nowhere to go but down. In other words, you are, at this moment, subject to the same noise—in the form of extreme forecasts, groundless predictions, prophesies and extrapolation from yesterday’s headlines—that has bombarded us throughout the second-longest market upturn in history.

This is not to say that those dire predictions won’t someday come true; there is definitely a bear market in our future, and several more after that. But investors who tune out the noise generally fare much better, and capture more of the returns that the market gives us, than the hyperactive traders who jump out of stocks every time there’s a scary headline. This is also not to say that prudent risk management should not be part of your investing plan (trimming shares, re-balancing, hedging). As I like to say, making money in up-trending markets is not terribly hard if you don’t get scared out; keeping your profits (risk management) before a big decline is much harder.

As we look back fondly at the yellow line in the middle of the graph below, let’s recognize that holding tight through big market advances and allowing your investments to compound, is never easy. But it can be extremely profitable in the long run.

Bull Markets_3

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post