2017 Year In Review Letter

Contributed by: Timothy Wyman, CFP®, JD Tim Wyman

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Dear Clients & Friends of The Center:

I hope that this letter finds you enjoying the start of a New Year. Major tax reform, Federal Reserve monetary policy decisions and geopolitical uncertainty already consume headlines and should present opportunities for planning in 2018. 

Our team is always analyzing. Today we are discussing the income and estate tax changes, how they might affect the economy and financial markets, as well as the planning opportunities that you may want to consider in your personal planning.  We look forward to sharing our insights in the coming weeks and throughout the year. However, before fully turning the page to the New Year, we would like to share The Center’s 2017 Review with you, our stakeholders.

Team – Your Team

For a professional services practice like The Center, success starts and ends with people.  The people we serve; our clients, and team members. Once again, we have added talented new team members to serve our growing clientele. These folks understand that success is earned each and every day – sometimes through major breakthroughs but mostly from doing the right thing minute after minute, hour-by-hour, day-by-day, year by year by always putting our clients’ needs first. Client service is deeply woven into our culture as we work tirelessly to help you accomplish your life goals and achieve confidence and peace of mind regarding your financial affairs. 

Please visit our website at www.CenterFinPlan.com for additional information on our entire team.  Below is a brief summary of our new team members:

  • Experienced and talented financial planners Peggy Hall Davenport, CFP®, Bob Ingram and Jacki Roessler, CDFA® joined our Financial Planning Team.

  • The Client Service Team welcomed Andrew O’Laughlin, Abigail Fischer, and Sarah McDonell.

  • James Brown joined us as our new Information Technology Manager.

  • Internships, under the direction of Jaclyn Jackson, continue to be an important ingredient of The Center. Military veteran and then Oakland University student Kevin Kelley joined as an intern and moved to full time status after graduation. University of Michigan student DewRina Lee spent the summer with us and we just welcomed Butler University student Luke Renchik over winter break.

  • We said good-bye to a few team members including Clare Lilek who moved to Chicago to attend law school at Chicago-Kent College of Law.

  • Most recently we just welcomed a new receptionist, Andrea Tomaszewski.

These folks understand and appreciate that great service is viewed as an opportunity, and it happens everywhere at The Center regardless of title or function. We hope that you have a chance to get to know our new team members in the coming year.

Keeping You Informed:

In addition to diligently monitoring investments, we continue to keep in touch in between calls and annual review meetings via a multitude of mediums. In 2017, we shared our knowledge and technical excellence with you, our clients, as well as other professionals and the communities in which we live and serve.  Our team hosted webinars (14) on a variety of financial planning and investment topics throughout the year. We once again held live events on Investment Market Outlook and Medicare planning. Our entire team continues to be avid writers so as to keep you informed on timely and timeless topics via our blog posts (look for our Tax series rolling out as I write). Lastly, some of you were able to join us for some fun at our sponsored Detroit Chamber Winds & Strings concerts, Detroit Bus Tour, and networking events with other professional firms.

In 2017, our team were sought out speakers and community leaders. Matt Trujillo, CFP®, Nick Defenthaler, CFP® and Gerri Harmer presented at the Michigan Association of CPA’s annual CE day sharing their knowledge on Solo 401k and defined benefit cash balance plans.  Sandy Adams, CFP® continues to be a leader in the Elder Care Community and Wayne State University's Institute of Gerontology in addition to teaching at Schoolcraft College. Melissa Joy, CFP®, CDFA® was a presenter at the Raymond James National Conference. Matt Chope, CFP® was a moderator at a national wealth management conference. Matt Trujillo, CFP® and Sandy Adams, CFP® presented to employees at DTE Energy. Nick Defenthaler, CFP® spoke on Social Security strategies at the Wixom, Brighton, and South Lyon libraries. And, Tim Wyman, CFP®, JD shared his knowledge on financial transitions at Right Management.

Record Numbers Once Again

In 1985, our founders wanted to build and create a specialized team who could serve clients in a different, better way.  The concept of financial planning was novel. Starting with a team of three, our growth has been continuous and measured over the years.  Growth for us is more of an outcome than a stated goal. Our clients and professional partners continue to be our biggest advocates, a status we do not take for granted. The Center currently has 29 team members serving roughly 960 clients.

Our client assets under management continues to grow, now exceeding $1.18 billion (that’s US Dollars not Bitcoin). The Center is in a solid financial position with adequate reserves. This strong financial position allows us to reinvest in our current team and consider strategic investments in technology and human capital for the benefit of you, our clients. Perhaps most importantly, a strong financial position allows us the freedom to think long term as we have just embarked on our Vision 2030 that we expect to finalize in 2018.

Technology

Technology continues to play an increased role in our ability to provide world-class service. We also understand and appreciate that technology alone does not replace the human touch. Last year, I shared a significant change in that we began implementing a new Client Relationship Management system. While this is behind-the-scenes technology, workflows and dialogues have helped us…well, help you.  We continued to commit significant time and resources on training for our team to know and provide the best service experience possible for both clients and team members.  

In 2017, we have made another major technology commitment with expectations to roll out mid-2018.  Tamarac’s Advisor View will provide greater reporting capabilities as well as online dashboards and vaults. The goal is to more effectively communicate with you about your investments and financial picture. For those in the tech industry – I trust that you can appreciate it when I say more to come. :)

Awards & Recognition

In 2017, we were fortunate to receive a variety of Awards & Recognition. Once again, we received the Crain’s Detroit Cool Places to Work recognition – showing up at #7 this year.  Awards such as this allow us to recruit, and even be recruited by, extremely talented new team members that increase our capabilities to serve you.  The practice also received recognition on the Financial Times FT 300 List* as a top national Registered Investment Advisor as well as the Best and Brightest Health & Wellness award, among others.

Two of our financial planners received special recognition in 2017. Nick Defenthaler received mention in the Forbes – Top NexGen Advisors list** and planner/partner Melissa Joy was selected as a Top Wealth Adviser Mom Award recipient***.

Lastly, Director of Investment, Angela Palacios accepted a team award from Investment News as part of their Practice Management/Technology Award in recognition of our commitment to time proven systems and processes.

Summary

It is an exciting time to be a part of The Center. We thank you, our clients, professional partners and friends, for your continued confidence and trust. It is something we work hard at everyday – it’s what we love to do.  As we enter our 33rd year, The Center is on solid footing. We continue to operate in a disciplined manner striving to provide outstanding client service and managing a growing company. To that end, we look forward to working with you in the year to come.

Wishing you and yours a Happy New Year.

Timothy Wyman, CF®, JD
Managing Partner

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc.® and is a contributor to national media and publications such as Forbes and The Wall Street Journal and has appeared on Good Morning America Weekend Edition and WDIV Channel 4. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), mentored many CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

*Financial Times Top 300 Registered Investment Advisors - 2017

The Financial Times FT 300 Registered Investment Advisors 2017 award had about 41.1% of the 730 advisor applicants being recognized as a Registered Investment Advisor. The FT used the database of RIAs who are registered with the U.S. Securities and Exchange Commission (SEC), and selected those practices reporting to the SEC that had $300 million or more in assets under management, and no more than 75% of the AUM with institutional clients. Additionally, the firm must be independent (not the RIA arm of a broker dealer for example). Qualifying RIA firms filled out an online application and questionnaire that gave more information about their practices. That information was augmented with their own research on the candidates, including data from regulatory filings. The FT generated an internal score for each applicant based on six broad factors: advisor assets under management, AUM growth rate, the firm's years in operation, advisors' industry certifications (CFA, etc.), compliance record, and online accessibility. AUM and asset growth comprise roughly 80 percent to 90 percent of each RIA's score. Additionally, to provide a diversity of advisors, the FT placed a cap on the number of RIA's from any one state that's roughly correlated to the distribution of millionaires across the U.S. The ranking may not be representative of any one client's experience, is not an endorsement, and is not indicative of the advisor's future performance. Neither Raymond James nor any of its Financial Advisors or RIA firms pay a fee in exchange for this award/rating. The FT is not affiliated with Raymond James.

**Forbes list of "America's Top Next Generation Wealth Advisors / Top Millennial Advisors “Data provided by SHOOKTM Research, LLCD ata as of 3/31/17.

SHOOK Research considered advisors born in 1980 or later with a minimum 4 years relevant experience. Advisors have built their own practices and lead their teams; joined teams and are viewed as future leadership; or a combination of both. Ranking algorithm is based on qualitative measures derived from telephone and in-person interviews and surveys: service models, investing process, client retention, industry experience, review of compliance records, firm nominations, etc.; and quantitative criteria, such as assets under management and revenue generated for their firms. Investment performance is not a criteria because client objectives and risk tolerances vary, and advisors rarely have audited performance reports. Rankings are based on the opinions of SHOOK Research, LLC. Neither SHOOK nor Forbes receives compensation from the advisors or their firms in exchange for placement on a ranking. Raymond James is not affiliated with Forbes or Shook Research, LLC. This ranking is not indicative of advisor's future performance, is not an endorsement, and may not be representative of individual clients' experience.

***Working Mother and Shook Research's 2017 Top Wealth Adviser Moms

Data provided by SHOOKTM Research, LLC as of July 2017. The Working Mother and SHOOK research ranking is based on an algorithm of qualitative and quantitative data. SHOOK Research considered wealth advisers who are mothers with at least one child living at home and under the age of 18 with a minimum 5 years of industry experience. Ranking algorithm is based on qualitative measures derived from telephone and in-person interviews and surveys: service models, investing process, client retention, industry experience, review of compliance records, firm nominations, etc.; and quantitative criteria, such as assets under management and revenue generated for their firms. Investment performance is not a criterion because client objectives and risk tolerances vary, and advisers rarely have audited performance reports. Rankings are based on the opinions of SHOOK Research LLC. Neither SHOOK nor Working Mother receives compensation from the advisers or their firms in exchange for placement on a ranking. Raymond James is not affiliated with Working Mother or Shook Research, LLC. This ranking is not indicative of advisor's future performance, is not an endorsement, and may not be representative of individual clients' experience. Neither Raymond James nor any of its Financial Advisors or RIA firms pay a fee in exchange for this award/rating. For more information see www.SHOOKresearch.com.

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Tax Reform Series: Business & Corporate Tax, and Pass-Through Entities

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Contributed by: Timothy Wyman, CFP®, JD Tim Wyman

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The Tax Cuts and Jobs Act (TCJA) is now officially law. We at The Center have written a series of blogs addressing some of the most notable changes resulting from this new legislation. Our goal is to be a resource to help you understand these changes and interpret how they may affect your own financial and tax planning efforts.

The elimination of the corporate Alternative Minimum Tax (“AMT”) and a new single 21% tax rate provides significant tax savings for corporations. In general, this is viewed by most as a net positive, at least in the shorter term, for earnings that can influence stock prices and the overall economy.

The purpose of this blog post is to focus on how the TCJA provisions may affect our clients that own businesses and specifically Pass-Through Entities such as partnerships, LLCs, or S corporations.

At this early stage, we see a few potential opportunities and potential trends:

  • Many business owners will want to review the appropriate legal structure of their company in 2018.

  • Pass-Through entities may see significant tax reductions

  • Due to the “Pass-Through entity” changes discussed below, some employees will likely consider becoming independent contractors

  • Large service businesses may consider converting to C corporation status

Pass-Through Entities

Pass-Through entities general include partnerships, LLCs, and S corporations.  Essentially, the net income from the business flows through to the owners; meaning they pay federal income tax at their personal marginal rate, as high as 39.6% in the past.

The good news is that many of these entities, and therefore their owners, will experience meaningful reduction in income taxes. The quid pro quo is that the tax system in this area has become more complex.

How might Pass-Through Entities benefit?

The TCJA provides for a 20% deduction on what is termed Qualified Business Income (“QBI”).  In the end, those that would normally be taxed at the new highest marginal rate of 37% may pay at a top rate of 29.6% (80% of their rate). The chart below, from www.Kictes.com, illustrates the lower Pass-Through rate at different income levels.

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As you might expect, the devil is always in the details. Do all Pass-Through entities receive said benefits? What exactly is considered Qualified Business Income? In addition, will the provisions truly be “permanent” to name a few. To further complicate the issue, the actual deduction will be claimed on the business owner’s personal tax return and not as an above the line deduction or itemized deduction.  Essentially, the affect is that it will not lower Adjusted Gross Income (which can have an effect on taxation of social security, Medicare premiums, and deductibility of some itemized deductions).  On the plus side, this method of reporting will not affect the ability to take the new increased standard deduction if that is of greater value than your itemized deductions.

Ok, what is the big deal? Paraphrasing commentator Michael Kitces, “for the first time ever, self-employed individuals (either as sole proprietors or as owners of partnerships, LLCs, or S corporations) will have a lower tax rate than employees doing substantively similar work, thanks to the 20% QBI deduction.” 

Switch to Independent Contractor status? Proceed with Caution

As you might imagine, the new rules contemplate and try to prevent owners from simply reclassifying their income or wages to benefit from the 20% deduction. Much like under current rules covering social security taxes, “reasonable compensation” to an S corporation owner does not qualify for the 20% deduction. Additionally, there are other limits that are beyond the scope of this article designed to reduce the 20% deduction that generally come into play once the owner’s taxable income exceeds $157,500 for individuals or $315,000 for married couples and become totally phased out at $207,500 and $415,000 respectively.

A special note to our Medical, Legal, Accounting, and Consulting Clients:

Your lobbying groups were not as effective as those representing engineers and architects! The TCJA defines your business as a “specific service trade or business” and special rules apply that essentially limit or eliminate a Qualified Business Income Deduction.  By the way, this also includes financial services practices such as ours. The law is designed to exclude “any other trade or business where the principal asset of the business is the reputation or skill of 1 or more of its employees.” As a result, some commentators have opined that large service business may consider converting to a C corporation as the top corporate rate is now 21%.

How are specific service trade or businesses affected? If you are a specified service business and your taxable income exceed the thresholds described above ($207,500 for individuals and $415,000 for married couples filing jointly), then you lose the deduction completely. This means you are subject to the old pass-through rules and therefore pay tax at your individual tax rate.

We hope that you enjoyed our early take on the changes that will likely affect businesses and specifically Pass-Through entities. While tax simplification it is not, many business owners should experience a net gain.   We will continue to monitor the tax landscape, including any Technical Corrections to the legislation and look forward to working with you in 2018.

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc.® and is a contributor to national media and publications such as Forbes and The Wall Street Journal and has appeared on Good Morning America Weekend Edition and WDIV Channel 4. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), mentored many CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Timothy Wyman and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

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Tax Reform Series: Changes to Medical Deductions

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Contributed by: Sandra Adams, CFP® Sandy Adams

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The Tax Cuts and Jobs Act (TCJA) is now officially law. We at The Center have written a series of blogs addressing some of the most notable changes resulting from this new legislation. Our goal is to be a resource to help you understand these changes and interpret how they may affect your own financial and tax planning efforts.

With most of the focus on new tax rates after tax reform was recently given the green light, it is easy to forget that some of the biggest changes don’t have anything to do with tax rate — they are about deductions.  In 2018, the standard deductions will increase, (reference MT’s blog on changes to standard deductions) and many limitations will be put in place for those who typically itemize deductions (historically only about 30% of Americans according to available IRS data).  Here we will focus on Changes to Medical Deductions and provide general information on how they work.

One of the more controversial a proposed limitations on itemized deductions during the tax reform debates was the potential repeal of medical expense deductions.  According to the IRS, nearly three-quarters of tax filers who have claimed the medical expense deduction are age 50 or older and live with chronic conditions or illnesses, and seventy percent of filers who claimed this deduction have incomes below $75,000.  The final tax bill DID NOT eliminate the medical expense deduction; in fact, the deduction was temporarily expanded.  Under the final Tax Cuts and Jobs Act, the 10% of AGI threshold for medical deductions is reduced to just 7.5% of AGI both retroactively for the 2017 tax year and for the 2018 tax year (the threshold will return back to the 10% of AGI threshold for tax year 2019 and beyond).

How do Medical and Dental Expense Itemized Deductions Work?

For 2017 and 2018 tax years, any amount of Medical and Dental Expenses (see IRS Publication 502 for a list of items that qualify for the medical/dental expense deduction) above an individual’s 7.5% of AGI “floor” are deductible.  For example, if your AGI is $40,000 and your medical expenses were $5,000 (assuming you itemized), you could claim $2,000 as a deduction [$5,000 in expenses less the floor (7.5% x $40,000 = $3,000)].  Note that you are not allowed to deduct expenses that were paid with pretax dollars or reimbursed by an insurance company.

Your ability to use itemized deductions versus the standard deduction in future years will likely depend not only on the amount of medical expenses you have to deduct, but those expenses in combination with other possible deductions that will have significant changes in 2018 and beyond.  For changes to additional itemized deductions, please see our additional posts to get more information, and please consult your professional planning team, including your financial planner and your tax advisor, as you develop for forward looking tax strategy.

Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.

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Tax Reform Series: Changes to Charitable Giving and Deductions

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Contributed by: Nick Defenthaler, CFP® Nick Defenthaler

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The Tax Cuts and Jobs Act (TCJA) is now officially law. We at The Center have written a series of blogs addressing some of the most notable changes resulting from this new legislation. Our goal is to be a resource to help you understand these changes and interpret how they may affect your own financial and tax planning efforts.

If you’ve heard the charitable deduction is going away under the Tax Cuts and Jobs Act of 2017, you are certainly not alone – this is a common misconception under our new tax code.  To be perfectly clear, gifts to charity are certainly still deductible!  However, depending on your own tax situation; your deduction may not provide any tax savings due to the dramatic increase in the standard deduction moving into 2018: 

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Standard Deduction vs. Itemizing Deductions

Think of the standard deduction as the “freebie deduction” that our tax code provides us, regardless of our situation.  If you add up all of your eligible deductions (state and local tax, property tax, charitable donations, medical expenses, etc.) and the total happens to exceed the standard deduction, you itemize.  If they fall short, then you take the standard deduction.  Pretty simple, right?

With the standard deduction nearly doubling in size this year, many of us who have previously itemized deductions will no longer do so.  Let’s take a look at how this change could impact the tax benefit of your charitable donations:

Example

Below is a summary of Mark and Tina’s 2017 itemized deductions*:

  • State and Local Taxes = $6,600

  • Property Tax = $6,000

  • Charitable Donations = $5,000

  • Total = $17,600

  

Because the standard deduction was only $12,700 for married filers in 2017, Mark and Tina itemized their deductions.  However, the only reason why they were able to itemize was due to the $5,000 gift they made to charity.  If they didn’t proceed with their donation, they simply would have taken the standard deduction because their state and local tax along with property tax ended up being only $12,600 – $100 shy of standard deduction for 2017 ($12,700).  Their gift to charity created a tax savings for them because it went above and beyond the amount they would have received from the standard deduction!

For the sake of our example, let’s assume Mark and Tina had the same exact deductions in 2018.  It will now make more sense for them to take the much larger standard deduction of $24,000 because it exceeds the total of their itemized deductions by $6,400 ($24,000 – $17,600).  In this case, because they are taking the standard deduction, there was no direct “economic benefit” to their $5,000 charitable donation. 

*This is a hypothetical example for illustration purposes only. Actual investor results will vary.

Planning Strategies

Because many clients who previously itemized will now take the larger standard deduction, reaping the tax benefits for giving to charity will now require a higher level of planning.  For clients who are now taking the standard deduction who are charitably inclined, it could make sense to make larger gifts in one particular year to ensure your charitable deduction exceeds the now larger standard deduction. Or, if you’re over the age of 70 ½, the Qualified Charitable Distribution (QCD) could be a gifting strategy to explore. Of course, we would want to dig deeper into this strategy with you and your tax professional before providing any concrete recommendations. 

For most of us, the number one reason we give to charity is to support a cause that is near and dear to our heart.  However, as I always like to say, if we can gift in a tax efficient manner, it just means additional funds are available to share with the organizations you care deeply about instead of donating to Uncle Sam. 

Don’t hesitate to reach out to us for guidance surrounding your gifting strategy, we are here to help!

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

 

 

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Tax Reform Series: Changes to the Mortgage Interest Deduction (including home equity loans/LOC implications)

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The Tax Cuts and Jobs Act (TCJA) is now officially law. We at The Center have written a series of blogs addressing some of the most notable changes resulting from this new legislation. Our goal is to be a resource to help you understand these changes and interpret how they may affect your own financial and tax planning efforts.

Washington has been busy and after many twists and turns sweeping tax reform was signed into law on December 22, 2017.  There are key changes for homeowners regarding the mortgage and home equity line of credit (HELOC) interest deductions.

Mortgage

If you own a home, mortgage interest is still deductible. The debt cap of deductibility, however, has been lowered.  The new cap limits interest deductibility to the first $750,000 of debt principal.  Debt principal refers to acquisition indebtedness or loans used to acquire, build, or substantially improve a primary residence.  The new $750,000 cap is a reduction from $1,000,000 and an additional $100,000 of home equity debt. 

  • The reduction to $750,000 expires December 31, 2025 and reverts back to $1,000,000 beginning in 2026.

  • Mortgage debt incurred before December 15, 2017 is grandfathered under the $1,000,000 cap

  • In the future, a mortgage refinance for debt incurred prior to December 15, 2017 will retain the $1 million debt limit (but only for the remaining debt balance and not any additional debt). In addition, any houses that were under a binding written contract by December 15th to close on a principal residence purchased by January 1, 2018 (and actually close by April 1st) will be grandfathered.

Home Equity Line of Credit (HELOC)

Home equity lines of credit give homeowners the ability to borrow or draw money using equity in the home as collateral.  New restrictions mean that home equity loan interest is not necessarily eligible for a deduction. 

While you may have read that interest on HELOC’s is no longer deductible, this is only if the loans are cash out or for purposes other than home purchase or improvement.  It’s important to note that deductibility is not based on whether the loan is a home equity loan or home equity line of credit. Instead, the determination is based on how the proceeds are used.

  • If the money is used to consolidate debt, pay for college or used for any other personal spending not associated with home acquisition or substantial improvement, the interest is not deductible; without grandfathering.

  • Interest on a HELOC up to the total $750,000 cap that is used to build an addition or substantially improve the home is deductible for taxpayers that itemize.

We are here to assist in any way we can.  This summary of mortgage and HELOC interest deductibility changes highlights key areas to keep in mind for 2018 tax planning.  If you have any questions regarding your personal situation, don’t hesitate to contact us.

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc.® In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie is a member of the Leadership Oakland Alumni Association and is a frequent contributor to Money Centered.

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Laurie Renchik and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Raymond James Financial Services and your Raymond James Financial Advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs.

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Tax Reform Series: Changes to State and Local Income Tax

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Contributed by: Matthew E. Chope, CFP® Matt Chope

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The Tax Cuts and Jobs Act (TCJA) is now officially law.

We at The Center have written a series of blogs addressing some of the most notable changes resulting from this new legislation. Our goal is to be a resource to help you understand these changes and interpret how they may affect your own financial and tax planning efforts.

The original proposals for tax reform would have completely eliminated any deductions for taxes paid to a state or local government, including local property taxes.

 “State And Local Tax” (SALT) provision varied, and controversially was projected to have a disproportionate impact on states with big cities with high state and local tax rates (like New York, California, and Maryland have some of the highest state income tax rates, and therefore the higher state income tax deductions).  Many people in these states are considering moving to lower taxed states due to this tax law change.

However, in the final version of the Tax Cuts and Jobs Act of 2017, households will be given the option to deduct their combined state and local property and income taxes, but only up to a cap of $10,000. Notably, it is a $10,000 limit on the combined total of property and income taxes, not $10,000 each! The $10,000 limit applies for both individuals and married couples (which is an indirect marriage penalty for high-income couples), and is reduced to $5,000 for those who are married filing separately.

In addition, to prevent households from attempting to maximize their state and local tax deductions in 2017 before the cap takes effect in 2018, the new rules explicitly stipulate 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 2018. However, this restriction applies only to the prepayment of income taxes (not to property taxes), and applies only to actual 2018 tax liabilities.  

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.

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4th Quarter Investment Commentary

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If you're interested in attending our Annual Client Investment Review Event at the Great Lakes Culinary Center on February 20th at 11:30am, please register here. If you can't attend, consider our Investment Review Webinar on Tuesday, February 20th at 1PM, please register here.

2017 in Review and Outlook for 2018

Fidget spinners, bitcoins, and Trump.  If you have young children, you could not miss the fidget spinner craze that hit in April of this year.  This simple toy rotates on a ball bearing.  By the time I got around to getting my 10-year-old child one in mid-May for her birthday, they were SO yesterday.  My major parenting fail of 2017!  In the financial world, another mania took over.  Bitcoin, while not brand new, certainly gained a ton of traction this year as an alternative cryptocurrency.  The price of Bitcoin surged from below $1,000 per bitcoin to more than $19,000!  This paved the way for many other cryptocurrencies (Bitcoin competitors) making their way to center stage with astonishing returns also.  If you want more information, check out this blog Talking Bitcoin, written by Nick Boguth earlier this year. 

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The news cycle has also revolved around President Trump this year.  While failing to overhaul Obamacare or U.S. trade policy, he was successful in getting some long-anticipated tax reform through to round out his first full year as our President.

The past year turned out to be far more bullish than many expected.  International and emerging markets outpaced U.S. markets.  Growth investing beat value investing, while Bonds returned little more than their yield.  2018 has a tough act to follow!

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Tax Reform and its Impact on the Economy

Although the tax cut seems to favor corporations, much of the net tax cuts are going to the individual.  The tax act should increase after-tax income for most American households both directly, through lower personal taxes, and indirectly, through the impact of higher dividends and stock prices resulting from the cut in corporate taxation.  As people spend more, GDP should increase and unemployment should continue to decrease possibly causing the wage inflation we have been waiting for.  This chart shows the level of unemployment (gray line) and the level of wage inflation the (blue line). The dotted lines for each color are average levels.  You can see that both are below their average levels.  Usually when unemployment is below average the wage growth line rises back to its long-term average level, but this has not happened yet.  Retiring higher-paid baby boomers are being replaced with lower-paid millennials entering the workforce and this has had a significant downward pressure on wages keeping it well below its long-term average growth rate. 

If wages finally start to increase, this could cause inflation to pick up somewhat. This would be a positive influence on the stock market in the short run.

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Tax Reform and its Impact on Equities

Looking at the influence tax reform will have on corporations, smaller companies will likely see a more impactful tax benefit with the corporate tax rate cut to 21% (which consequently is just below the average of the countries in the OECD or the organization for economic co-operation and development).  Currently, small cap companies pay the highest tax rates.

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After a strong year for equities, the impact of tax reform could be more muted than you might think as the markets already anticipated some corporate tax reform passing. Quite often, equity prices factor these events in long before the pen hits the paper.

Tax Reform and its Impact on Fixed Income

Bond markets will have mixed implications from tax reform.  Companies that over-levered and don’t have strong positive cash flow will be penalized.  This new law places limits on the interest that corporations can deduct.  This will likely affect companies who are issuers of high yield debt negatively.  While companies investing for growth by making capital expenditures will be rewarded as, they are now allowed to expense a larger amount of these capital expenditures.

Municipal bonds should fare well next year with limits being placed on state tax and property tax deductions, especially in states with higher tax rates.  Other opposing forces could affect supply within the municipal bond market in the coming year from tax reform.  The law eliminates the issuance of advance refunding bonds that are used to retire old debt.  These bonds help boost supply by 10-20% each year in the municipal bond market.  On the flip side, corporations will be less incentivized to hold onto municipal debt as their tax rates have been slashed. If they sell these bonds into the market place that could increase supply, which could lower bond prices.  However, these two forces may cancel each other out.  It looks like the elimination of advance refunding bonds will likely offset any boost in supply from corporations selling.

Interest rates on the rise

The Fed raised short-term interest rates again in December, which was highly anticipated.  They are planning to continue with three more rate hikes in 2018. The bond market already anticipates these rate hikes, which means they should be priced in.  Jerome Powell is set to take over for Janet Yellen in February as the new Federal Reserve Chairperson.  It is unlikely he will change the trajectory of increases expected in 2018. 

The rate hikes have resulted in a flattening of the yield curve this year.  The charts show side-by-side where the yield curve started 2017 and where it is finishing 2017.  If you recall, an inversion of the yield curve, downward instead of upward sloping from left to right, or short-term rates higher than long-term rates, usually signals an oncoming recession.  While we aren’t there yet, this can happen quickly, so it is something we are keeping a close eye on.

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Source: http://stockcharts.com/freecharts/yieldcurve.php

Source: http://stockcharts.com/freecharts/yieldcurve.php

Low volatility

The exciting part of 2017 was the lack of excitement.  2017 saw incredibly low average daily moves in the S&P500.  You can see from the below chart that standard deviation, or the variation of price movement by percent, for the S&P 500 is well below the typical range.  It is currently below 6%, which has only occurred five times since 1940.  Typically, it is between 10% and 18% each year.

Source: https://www.mutualfundobserver.com/2017/09/historically-low-volatility/

Source: https://www.mutualfundobserver.com/2017/09/historically-low-volatility/

During times like this, it is easy to get lulled into a false sense of security causing you to potentially reach for a little more risk to spice up your returns.  But, it is important to remember that your risk tolerance isn’t nearly as stable as you think it is.  Outside of our natural behavioral tendencies to want to chase great returns or hide from stocks after a sharp drawdown, our natural progression through life’s milestones can influence our tolerance for risk.  Milestones like a house sale, job change, or death of a loved one can influence our desire to take on risk just like the market performance and volatility.  This makes it hard to compare yourself and your portfolio’s returns to a static benchmark over the years.  Before making any drastic changes to your investment strategy, it is important to discuss with your financial planner the importance of a diversified portfolio that fits with your unique long-term goals and tolerance for risk. 

As we welcome the New Year, we don’t want to miss the opportunity to express our gratitude of the trust you place in us each and every day.  Thank you!

On behalf of everyone here at The Center,

Angela Palacios, CFP®, AIF®
Director of Investments
Financial Advisor

Angela Palacios, CFP®, AIF® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

The information contained in this commentary does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the professionals at The Center and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Investments mentioned may not be suitable for all investors. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The prominent underlying risk of using bitcoin as a medium of exchange is that it is not authorized or regulated by any central bank. Bitcoin issuers are not registered with the SEC, and the bitcoin marketplace is currently unregulated. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment, and a potential total loss of their investment. Securities that have been classified as Bitcoin-related cannot be purchased or deposited in Raymond James client accounts.


 

 

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Tax Reform Series: Changes to Standard Deduction, Personal Exemption, Misc. Deductions, and the Child Credit

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Contributed by: Matt Trujillo, CFP® Matt Trujillo

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The Tax Cuts and Jobs Act (TCJA) is now officially law. We at The Center have written a series of blogs addressing some of the most notable changes resulting from this new legislation. Our goal is to be a resource to help you understand these changes and interpret how they may affect your own financial and tax planning efforts.

Key Highlights:

  • Personal exemptions, which were previously used to reduce adjusted gross income, have been eliminated entirely

  • The standard deduction has been increased to $12,000 for single filers (previously $6,350) and $24,000 for joint filers (previously $12,700)

  • Several deductions that used to be available to tax filers that itemized their deductions have been eliminated or reduced such as:

    • The deduction for state and local taxes is now capped at $10,000 as opposed to the unlimited amount that was deductible under previous tax law

    • Lowers the threshold for mortgage interest deductibility; now only the interest on debt up to $750,000 is eligible to be deducted as opposed to $1,000,000 under previous tax law

    • Miscellaneous itemized deductions have been eliminated entirely as a category; these deductions included things like unreimbursed business expenses, tax preparation fees, and investment fees.

  • The child tax credit is expanded to $2,000 per child and is refundable meaning even if you have zero tax liability you can still get a check back from the IRS for this credit

    • This credit was previously $1,400 per child and would begin to phase out for joint filers at $110,000 of adjusted gross income; the credit now doesn’t begin to phase out until you reach $400,000 of adjusted gross income (for joint filers)

If you are curious to know more about how the changes may impact your specific situation please contact our office to discuss!

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

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Tax Reform Series: Changes to Federal Income Tax Brackets

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Contributed by: Robert Ingram Robert Ingram

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The Tax Cuts and Jobs Act (TCJA) is now officially law. We at The Center have written a series of blogs addressing some of the most notable changes resulting from this new legislation. Our goal is to be a resource to help you understand these changes and interpret how they may affect your own financial and tax planning efforts.

The TCJA brings many changes to both corporate and individual tax laws in 2018.  You may be asking yourself, “what do these changes mean for me?” A good place to start may be with the new personal income tax brackets.

How tax brackets work

When calculating our Federal tax liability on regular income, we apply a tax rate schedule to our taxable income. The taxable income is a filer’s income after any adjustments and exclusions (adjusted gross income) and after subtracting applicable deductions and exemptions. Specific rates are then charged on different ranges of income (tax brackets) as determined by tax filing status. Currently, in 2017 there are 7 brackets where the rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The tax bracket structures and how the taxes would be assessed for two of the most common filings statuses (single and married filing joint returns) are as follows:

Current 2017 Individual & Married Tax Brackets

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Under the current 2017 tax brackets, for example, a married couple filing jointly with taxable income of $150,000 would have the first portion of their income up to $18,650 taxed at 10%.  The amount from $18,651 up to $75,900 would be taxed at 15% and then the remaining amount of their income from $75,901 up to the $150,000 would be taxed at 25%.

What is changing?

While the House of Representatives’ original tax reform proposal would have consolidated the 7 brackets down to 4, the final Tax Cuts and Jobs Act retains 7 brackets but reduces the tax rates on most the brackets by a couple of percentage points and adjusts the income ranges within them.  The examples for those filing as single and for married couples filing jointly are below.

New 2018 Individual & Married Tax Brackets Under the TCJA

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If the bracket rates are generally lower, does that mean my taxes will be lower?

Well, the good news is that the answer is…maybe.

If taxpayers apply the new tax rates in 2018 to the same level of taxable income they would have in 2017, many people would see a lower overall, effective tax rate on that taxable income. (Good news, right?)  However, other changes outlined in the TCJA, such as the new standard deduction amount, the elimination of the personal exemptions, and the cap on the amount of state and local taxes that are deductible could have an impact on your taxable income amount.  As a result, the actual taxes applied may or may not see as much of a reduction. 

Ultimately, how your own tax situation may change in this new tax landscape will depend on a combination of factors and decisions.  It is important to consult with your advisors.  As always, if you have any questions surrounding these changes, please don’t hesitate to reach out to our team!

Robert Ingram is a Financial Planner at Center for Financial Planning, Inc.®

This information and all sources have been deemed to be reliable but its accuracy and completeness cannot be guaranteed. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax matters. Tax matters should be discussed with the appropriate professional.

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