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US Large Cap Equities
The S&P 500 is currently in a LONG-TERM BULLISH UPWARD TREND since the election on 11/9/2016.
Those working in retirement as sole-proprietors or LLCs can deduct 20% of their business income but their full income will count against the Medicare PartB premium threshold.
The new year provides a package of changes to federal income tax laws which go into effect. Here are the salient changes which impact financial planning and retirement.
Unless you've been consumed in of the bowl games, you're likely aware there are no longer $ 4,050 exemptions to your partner, you and your kids, although the deduction has approximately doubled to $ 24,000 for joint filers. There is a2,000 per child tax credit with a at $400k AGI, and the era deductions still apply.
If you've been itemizing and live in a high tax state, property tax deduction and your joint state income is capped at $10,000. The individual $250k and filer $500k gains exclusion for the sale of a house as a primary residence 2 of the five years remains in effect.
Unless you have a huge family and currently high itemized deductions tax rates and mounts are lower with all the changes in exemptions and deductions, you will probably pay lower taxes. For example, the 25% bracket is currently 22 percent and breaks at $165k instead of $153k. The 28% bracket becomes 24 percent and breaks at $315k rather than $233k, so you pay taxation on income within that mount. Unless there is renewing them a law enacted the rates and mounts revert to current law in 2026.
If you've been subject to the Alternate Minimum Tax program (AMT) previously, it might no longer apply for you since the thresholds and exceptions are raised significantly. Provisions for taxes on long-term capital gains and qualified dividends remain unchanged, including the 0%, 15%, and 20% taxation thresholds, which no longer track with the aged 15% and 35% joint filer tax brackets.
Provisions of qualified retirement plans, IRAs, HSAs, and MSAs for deductibility and donations are unchanged. Roth back-door and conversion provisions are unchanged.
So present strategies for tax optimization by strength place in after-tax, pre-tax, and tax-free (OTCPK:ROTH) accounts are unchanged,
Should the reduced tax rates and brackets not be revived in 2026, taxes for all those nearing retirement today may be higher. This implies that Roth (after-tax) gifts might be marginally more favorable in 2018 and beyond pre-tax contributions, because pre-tax contributions might be taxed at a higher speed in the long run than their deduction credits beneath the rates and brackets in effect before 2026. Then this differential goes away if the new rates are extended before 2026. It could be wise to at least hedge the tax instability by splitting contributions involving pre-tax and Roth (after-tax) options.
This uncertainty indicates maxing out pre-tax 2017 donations at the current pace, up before the April 15th deadline for IRA contributions if necessary. It is probably too late to make extra giftsHR is probably on holiday.
Charitable contributions are deductible, but the charitable deduction may be supplanted by the standard deduction. For all those 70-1/2, the Qualified Charitable Deduction (QCD) for charitable gifts in any amount up to $100,000 annually produced directly from an IRA to the charity depend against RMDs, lowering taxes required distributions exactly enjoy a charitable deduction on the aged Schedule A for itemized deductions. This only works if your RMD exceeds the amount you want out of the accounts that are deferred and would likewise just bank .
Setting up a Donor Advised Fund is yet another option for creating a sizable bunched deduction over the standard deduction amount that is new. When the financing contribution is made, the DAF can dole out the contributions over as many years. Of course, you can still just make charitable contributions out of the goodness of your heart and be happy with the24k standard deduction, too.
Those still working or who plan to operate in retirement as sole-proprietorships or even LLC/LLP small businesses are going to have the ability to subtract 20% of their qualified company income beginning in 2018, but from taxable earnings not from AGI, so the full amount pre-deduction will go into the Medicare Part B premium calculation for retirees. You'll pay income taxes that are lower, however your full income will count from the Medicare Part B income test for higher premiums.
Now those combined filers with MAGI above $ 170k will continue to pay an extra $ 642/year in effect, as in Part B premiums. Premiums for higher grade 3 and tier 4 surcharges will begin beginning in 2018, not from the tax legislation but by the Medicare Access and CHIP Reauthorization Act of 2015.
Tax mounts for trusts are simplified from 5 to 4, and trust tax thresholds and prices reduced, but the top 37% rate (down from 39.6 percent) still kicks at $12,500 taxable income, so trusts continue to need careful tax administration.
Last but not least on our list, the unified federal estate and gift tax lifetime exemption was doubled to $11.2 million per person, or a combined $22.4 million together with portability to a spouse, keeping the step-up in basis for property land (property, investments, etc). You have to expire after 12/31/17 to find the exemption, therefore try to keep it together for the next few days.
The number of estates cuts on to a few thousand guaranteeing an audit for any estate nearing the threshold. If you live in one of the 15 countries (CT, DC, DE, HI, IL, MA, MD, ME, MN, NJ, NY, OR, RI, TN, WA, VT) and DC still levying an estate tax, you may still gain from a marital charge trust arrangement to grow the state exemption. IA, KY, NE, NJ, MD, PA have. MD and DC have raised their exemptions in keeping with federal amounts, DC for 2018, and MD at 2019.Note that of the countries with estate taxes CT and TN have present taxes and only KY, MD, NB, NJ, and PA have deathbed present principles. Therefore, if you're widowed with a 22 million estate and live in a country with real estate taxes aside from CT, KY, MD, NB, NJ, PA and TN, and have forgotten to receive your estate plan in sequence, you may be able to give it away as the lights go out and avoid both state and federal estate taxes.
8 Key Income Tax Provisions:
1) It eliminates personal exemptions which could result in families with many children paying higher taxes.
2) It eliminates most itemized deductions such as moving expenses, alimony payments, etc.
3) It limits the deduction on mortgage interest to the first $750K of the loan and interest on home equity line of credits can no longer be deducted.
4) Taxpayers can deduct up to $10K in state and local taxes. They must choose between property taxes, and income or sales taxes.
5) It expands the deduction for medical expenses.
6) It repeals Obamacare tax on those without health insurance in 2019.
7) it doubles the estate tax exemption from 11.2 million to 22.4 million and it keeps the alternative minimum tax but increases the exemption.
8) it increases the child tax credit and it allows parents to use 529 savings plans for tuition at private schools.
10 Key Business Tax Provisions:
1) It limits corporations' ability to deduct interest expense to 30% of income.
2) It allows businesses to deduct the cost of depreciable assets in one year instead of amortizing them over several years.
3) It stiffens the requirement on carried interest profits from 39.6 percent of income to 23.8 percent.
4) It eliminates the corporate Alternative Minimum Tax.
5) It allows drilling in the Arctic National Wildlife Refuge.
6) It cuts deductions for orphan drug research from 50% to 25%. Orphan drugs target rare diseases.
7) The Act cuts taxes on beer, wine, and liquor.
8) It allows companies to repatriate $2.6 trillion they hold in foreign cash stockpiles. They pay a one-time tax rate of 15.5% on cash and 8% on equipment.
The Main Benefits of Alternative Investments Include:
Income -Investors have varying needs for dependable current income, whether to meet monthly expenses or achieve long-term financial goals. Especially during periods of low interest rates, some alternatives may offer higher yields than traditional investments.
Alternative investments have the potential to improve the risk and return profile of a portfolio. Investing in alternatives can provide access to a broader set of investments and strategies beyond traditional investments, which may help grow an investor’s total return.
The types of alternative investments
Alternatives include a spectrum of assets, strategies and structures, each designed to deliver different benefits. Alternative investments strategies, while not guaranteed, may help meet specific objectives and complement a traditional portfolio allocation.
The global expansion in risk assets and economic activity spilled over to both developed and emerging markets. Markets also experienced reduced volatility, especially in US markets, primarily due to continued quantitative easing, accommodative fiscal policy, and strong consumer sentiment.
2017 was a good year for the buy-and-hold investor where broad-based gains were captured across all major US & global equity markets. In addition, volatility hit historically low levels, which was a far step away from the past several years where investors have been bombarded with above-average volatility.
As we enter 2018, practically all major US and global economic indicators are positive and no signs of recession exist in the near future. The good news is that the US & global economies are expanding, the bad news is that all this positive news is already priced into the markets.
Therefore, 2018 will likely experience higher volatility than 2017 with one or two corrections possibly up to 15%. However, I do believe we will likely end the year higher in the US markets and especially emerging markets.
We also seem to be at the crossroads in long-term treasuries and interest rates. 2018 could very well be the pivotal point where interest rates finally break to the upside, reversing the trend of 30+ years of declining interest rates. (see below chart)
Finally, commodities have the potential to break-out to the upside and experience sizable gains in 2018. We saw crude oil, steel and copper rebound in 2017 and, giving higher inflation and increased economic activity, we may be at the beginning of a worthwhile bull market in commodities.
Investment Considerations, Opportunities & Risks
My advice for 2018 would be to maintain a risk-on trade for US & Global equities with extra attention to protecting gains by paying close attention to warning signs of a pullback. It is worth noting that the 10-year US Treasury rate (2.56%) now exceeds the dividend rate on the S&P 500 (1.8%), making equities less attractive as an alternative for income for long-term investors versus the last several years were interest rates on bonds was less than equities.
As interest rates continue to rise, publicly-traded REITs will likely see short-term pullbacks, creating excellent buying opportunities at discounted prices.
Commodities and commodity-related equities should fare well in 2018, especially if a definitive break-out occurs in the next several weeks.
Emerging markets will outperform as US dollar remains soft. The US Dollar will likely experience some upward movements temporarily, which would be an opportune time to re-allocate additional funds in the emerging market space as emerging markets will pullback on dollar strength.
Finally, I would consider dollar-cost-averaging out of positions that have experienced sizable gains and re-allocating that capital to non-correlated, income-producing investments that may provide enhanced diversification, such as non-traded alternative equity and credit investment funds. What's more, as interest rates rise, bond funds will experience pressure on prices. Utilizing a credit manager that focuses on floating rate and secured loans will allow for attractive income and a hedge against rising rates.
For a full list of the most popular and widely-referenced economic charts for tracking the economy, please visit www.StrategicStockInvestor.com.
Besides the 37-year chart of US 10-Year Treasury Yield, below you will find a chart of the 1YR, 3YR, 5YR, 10YR and 30YR US Treasury Yields. Historically, yield spread tightening has predicted major downturns in equity markets. Today, we have yet to see the yield spreads tighten to the similar levels that foresaw a major downturn. While history can't predict the future, yield spreads are indicating further growth in equities at the moment.
Altanta's Fed's GDPNow tools is showing a 2.8% GDP growth rate for Q4 2017:
US Dollar has been flatlined for 3 years and steadily declining throughout 2017.
The House has currently passed their version of a reform bill and the Senate Finance Committee passed its bill on to the full Senate for a likely vote this week. Indications are that the Senate will pass its bill, triggering the reconciliation process between the two Houses of Congress. It is expected that this process will be difficult, but many experts believe a compromise bill will be passed during the first quarter of 2018.
If so, this may thrust the US Dollar above its 12-month resistance and head higher.
In addition, the passing the Tax Reform bill may also push small caps higher, especially if the US Dollar appreciates. Coincidentally, small-caps just broke above their 10-year rising resistance level, a bullish indicator:
• Earnings Growth: For Q3 2017, the estimated earnings growth rate for the S&P 500 is 4.2%. Eight sectors are expected to report earnings growth for the quarter, led by the Energy sector.
• Earnings Revisions: On June 30, the estimated earnings growth rate for Q3 2017 was 7.5%. Ten sectors have lower growth rates today (compared to June 30) due to downward revisions to earnings estimates, led by the Energy sector.
• Earnings Guidance: For Q3 2017, 75 S&P 500 companies have issued negative EPS guidance and 43 S&P 500 companies have issued positive EPS guidance.
• Valuation: The forward 12-month P/E ratio for the S&P 500 is 17.7. This P/E ratio is above the 5-year average (15.5) and above the 10-year average (14.1).
• Earnings Scorecard: For Q3 2017 (with 6 companies in the S&P 500 reporting actual results for the quarter), 4 companies have reported positive EPS surprises and 4 companies have reported positive sales surprises.
Oil breaks out of three-year downward trend pushed to the top-ranked asset class for this week.