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Monthly Updates

Don’t Confuse Me With The Facts, Crypto Hell, A Lesson From KISS, and More

18 Mar 2019

Sometimes what we don’t know about money isn’t the problem—it’s what we do know for sure that just isn’t true.

I was reminded of this when recently reading media coverage of one of the most stressful times of the year for many—tax filing season.

The narrative that you keep reading about is that millions of people this year are receiving smaller tax refunds. The implication is this is a bad thing, and therefore the tax bill passed by Congress in December 2017 was a bad thing.

For those with a limited education in financial matters, that’s about where the buck stops. But when you look under the hood, you’ll find that in practicality, there are millions of people who are actually paying less in tax on their 2018 returns, all things being equal. It’s all about how you view things. Read on for the proper perspective.

Millions of Taxpayers To Get Smaller Refunds

Millions of Taxpayers to Pay Less In Tax

Imagine a news story with one of the above headlines.  I can tell you that the likelihood of the first headline being used is much greater than the second, but in reality, BOTH headlines are true.  But, they each give off a different vibe, don’t they?

The first one smacks of this kind of thinking—“those people in Washington are at it again, taking more of my hard earned money.  I bet they just gave more tax breaks for the rich.”

This has been an overhyped media story, but here’s the truth of what really happened.  According to the Tax Policy Center, the tax overhaul of the U.S. tax code in late 2017 cut individual income taxes for 65% of filers, raised them on 6%, and left them unchanged for the remaining 29%.  In the early part of 2018, the Treasury Department cut withholding requirements for employees and pension recipients, and this act boosted take-home pay for up to 90% of workers.

The government knew this change was not entirely accurate, so Treasury officials urged taxpayers to check their withholding status and make appropriate changes.  But, apparently, very few people did this.  In total, economists estimate that $140 billion less was withheld from paychecks in 2018.  Guess what?  Viola!  Less in the way of refunds, and in many cases, people are having to ante up and pay additional taxes when they file.

But, getting a smaller refund should not be confused with higher taxes.  A quick, easy example.  Let’s say in 2017 you received a $5000 refund on your federal tax return.  But, assuming all else was equal, in 2018, your twice per month paychecks gave you $150 more, or an extra $300 per month in net income.  That’s $3600 for the year.  Now, your refund is $1400.  Did you pay more in tax?

The only way to really know is to look at line 63 on your federal tax return, and compare the amount paid in 2017 with 2018.  But, that doesn’t go far enough, unless all of your figures were exactly the same as 2017, which is unlikely.  To really compare apples to apples, you should have had your CPA do a side-by-side comparison during the year, using the new tax law, so you would know what to expect.  We encouraged clients to do this all year long.

If you didn’t do this, and got disappointed in the result, well, shame on you.  And, if your CPA didn’t volunteer to do this for you, well, shame on them.  Remember, the size of your refund (if any), is not the same question as “how much in tax did I pay.”

What is clear to me about the tax bill that was passed is that it really helped corporations, given that the corporate tax rate was slashed from 35% to 21% (most companies didn’t pay 35% because of loopholes and deductions).  By eliminating many key tax deductions, yet raising the standard deduction, it has also simplified the tax returns of many individuals and couples.

The Tax Policy Center notes that in 2017, about 30% of all tax filers itemized, and this is expected to drop to around 14% in 2018.  What’s also clear about the tax bill is that contrary to any media narrative, it did not benefit high income earners (aka the rich).  In fact, just the opposite.  I estimate that all things being equal, individuals and couples with earnings of about $250,000 and up are all paying more in tax under the new law, and perhaps especially so in the higher tax states, such as California, Oregon, Minnesota, New Jersey and New York.

What Can You Do About It?

It’s been said that actions to avoid paying more in taxes have likely cost investors much more than the taxes owed over time.  I remember in the 1980s when tax shelters were all the rage, mostly real estate and oil and gas limited partnerships, many of which offered 3 to 1 write-offs.  They were happily peddled by the likes of Prudential Securities ( my former employer), and all of the rest of the big name firms, not to mention all the independent broker-dealers.  Candidly, most all of them were crap, or worse, another four-letter word with the same meaning.  Thankfully, in my 19 years at Prudential, I sold hardly any of the stuff, realizing just what it was.

I think most of us are shaped by our past, so even today, I cringe when I hear clients say something like “I need a write-off.”  What, it’s not good enough to pay off your mortgage and eliminate an expense, but geez, I don’t have any interest to write-off?”  Do the math.  It’s not that good of a deal, even when combined tax rates are 50%.

At least under the new law, there are limited things one can do, and that’s not necessarily bad.  Maximize your contributions to retirement plans (see below).  And, if you have the resources and a generous heart, significantly increase your charitable contributions.  This latter process will only help, though, if you have enough to itemize deductions.  Sure, one can invest in real estate, but why?  If it is strictly tax-motivated, in our view, it’s for the wrong reasons.  In the long run, real estate is an inferior asset class compared to the stock market, with many more maintenance issues and expenses.  It’s also important to measure apples to apples.  Many real estate transactions are leveraged—stock market returns are typically not.

Bottom line, we’d rather clients earn more money, and pay more tax.  Of course, one way to pay less in tax is to earn less.  Ah ha, that’s not what you had in mind, was it?  No, we’d all like to earn more, and pay less in tax, but that seems less likely under the current tax code.  At present, the current tax code is due to stay in force until 2025.  It’s possible, though, that much of it could be overturned in 2020 if the Democratic party were to take control of the Presidency, Congress and the Senate.  What would happen then is anybody’s guess.

Retirement Plan Contribution Limits

Below is a summary of the new limits for 2019 for retirement plan contributions.

 

 

 

Hey Honey, Our Retirement Savings Are Gone.  They’re In Some Guy’s Computer, He Died, And Nobody Has The Password

The only thing sadder about the above headline is that it’s true.  According to a story in the Wall Street Journal back in February, stockholders in a Canadian cryptocurrency exchange say about $136 million worth of customers’ holdings are stuck in an electronic vault because the company’s founder, and sole employee, died without sharing the password.

There’s a reason why we’ve not written one word (up to now) about Bitcoin.  It’s not a legitimate investment, and likely never will be.  It’s about as legitimate as investing in Tulips in the 1600s.  It’s pure speculation.  In the next paragraph, you’ll see all you need to know about investing in Bitcoin and other so-called cryptocurrencies.

 

 

Get it.  Nothing.  Stay away from this stuff.  If you want to speculate, I’d advise you to go to Las Vegas and gamble a limited amount of money.  The hotels are great, the food awesome, the shows spectacular and the girls prettier.

Lessons From KISS

No, I’m not talking about the slogan, Keep It Simple, Stupid.  Rather, I’m talking about one of the greatest rock and roll bands of all-time, KISS, led by co-founders Gene Simmons and Paul Stanley.

I saw them live in concert a few weeks ago at the Honda Center in Anaheim, for the second time, with my first being about six years ago.  They were in their heyday in the 70s and 80s, but like many of the epic bands and performers from those eras, they are still touring to mostly sold out crowds, consisting primarily of men and women in their 50s and 60s (like me), who perhaps are fondly remembering their high school and college days.  Below is a shot from the concert which I took with my smartphone.

 

I got reconnected with KISS back in 2014 when I purchased Paul Stanley’s autobiography, “Face The Music, A Life Exposed.”  It sat on my book shelf for two years when I finally said, I should read this.  For me, it was an inspiring story.  Two young Jewish boys who have now worked their asses off for over 40 years and made their dreams come true.

Ironically, a few weeks ago, while KISS happened to be playing in Southern California on what they claim to be their final tour, the Wall Street Journal had an interview with Gene Simmons on KISS and capitalism.  Below are two of the questions that reporter Chris Kornelis asked, along with the responses from Simmons.

Do you think that money is a corrupting influence in music or an enabling one?

Money is the blood and the fuel that powers the Earth.  Even God passes the hat around.  So, if you’re a church or a rock band or even the Wall Street Journal that you work for, try running a newspaper–who are all dying–without making money.  It doesn’t work.

Money is the most important thing.  Wars are fought for it.  But without money there’s no philanthropy, you can’t feed your children, you can’t buy your mother the hip operation she needs.  Without money, you’re screwed (actually he used another word).

People have said that even if artists like Bruce Springsteen and Bob Dylan didn’t make a living off their music, they would continue making music even if that meant playing on a street corner.  Do you believe that?

No.  And by the way, I’ve met Bruce before and Dylan was over to my house, and we talked about it.  And would they play for free?  No, ’cause you have to figure out a way to pay your rent and feed yourself and insurance, and health, and so on.  It takes a lot of money to be comfortable and live in health.

For the most part, I very much agree with Gene’s thinking, and I’m quite respectful of how hard these men have worked to get to the level they are at.  Try running a business without making a profit.  His comments about newspapers really hit home, since I’m an avid reader and have lamented the shrinking size of all print publications.  When you give away content for free, you are devaluing your product.  Taylor Swift, Garth Brooks and others realize this, and it’s why they have gone to great lengths to protect their music.

Besides their showmanship and music, the other thing I really like from Paul Stanley and the band is Stanley’s comment on social activism.  “I am of the belief that you leave your politics at the bottom step of the stage.  I am here to give people a break from what they do 24 hours a day.”  Amen, Paul.

Portfolio Allocations

Since our last update on February 5, the S&P 500 Index and other stock indexes have gained approximately 4%, and have reached the highest level off the December 24 low.  Our stock market risk models continue mostly in a positive mode, with 5 of 7 bullish, and tactical equity exposure now at about 70%.  This is actually down from 85% the past few weeks, but one of the models turned negative, closing out a profitable trade.

In addition, our corporate high yield bond model remains on its January 14 BUY, and prices have reached new weekly highs, thus far confirming the stock market advance.

The narrative continues to be–is this just a strong rally in a bear market, or is this part of the old bull market and we’re eventually going to new highs above 2950 on the S&P 500 (and beyond)?  As mentioned last month, breadth and volume thrust measurements favor the latter interpretation, but as the chart below shows (courtesy of www.stockcharts.com), there is a lot of overhead resistance in the 2820-2880 area to overcome.

 

 

As always, we’ll take the evidence as it emerges, but for now, our view is mostly positive.  Market seasonality will be turning bearish at the end of April, but that factor has not been as reliable the last six years versus its prior history.

Material Of A Less Serious Nature

A couple of women were playing golf one sunny Saturday morning.  The first of the twosome teed off and watched in horror as her ball headed directly toward a foursome of men playing the next hole.  Indeed, the ball hit one of the men, and he immediately clasped his hands together at his crotch, fell to the ground and proceeded to roll around in evident agony.

The woman rushed down to the man and immediately began to apologize.  She said, “Please allow me to help.  I’m a physical therapist and I know I could relieve your pain if you’d allow me.”

“Unmph, oooh, nooo, I’ll be all right. . . .I’ll be fine in a few minutes,” he replied breathlessly as he remained in the fetal position still clasping his hands together at his crotch.

But, she persisted, and he finally allowed her to help him.  She gently took his hands away and laid them to the side, she loosened his pants and she put her hands inside.  She began to massage him.  She then asked him, “How does that feel?” to which he replied, “It feels great, but my thumb still hurts like hell.”

 

Here’s hoping tax season isn’t too painful for you.  Even so, joy is ahead.  College baseball is in full swing, major league baseball starts in about two weeks, and the hockey and basketball playoffs are about three weeks away.  What’s not to like?  🙂  As always, thank you for your continued trust and confidence in all of us at TABR.

Sincerely,

bkargenian_signature

Bob Kargenian, CMT
President

TABR Capital Management, LLC (“TABR”) is an SEC registered investment advisor with its principal place of business in the state of California.  TABR and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisors by those states in which TABR maintains clients.  TABR may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements.

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Comparison of the TABR Model Portfolios to the Vanguard Total Stock Index Fund, the Vanguard Total International Stock Fund and the Vanguard Total Bond Index Fund is for illustrative purposes only and the volatility of the indices used for comparison may be materially different from the volatility of the TABR Model Portfolios due to varying degrees of diversification and/or other factors.

Past performance of the TABR Model Portfolios may not be indicative of future results and the performance of a specific individual client account may vary substantially from the composite results above in part because client accounts may be allocated among several portfolios. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable.

The TABR Dividend Strategy presented herein represents back-tested performance results. TABR did not offer the Dividend Strategy as an investment strategy for actual client accounts until September/October 2014. Back-tested performance results are provided solely for informational purposes and are not to be considered investment advice. These figures are hypothetical, prepared with the benefit of hindsight, and have inherent limitations as to their use and relevance. For example, they ignore certain factors such as trade timing, security liquidity, and the fact that economic and market conditions in the future may differ significantly from those in the past. Back-tested performance results reflect prices that are fully adjusted for dividends and other such distributions. The strategy may involve above average portfolio turnover which could negatively impact upon the net after-tax gain experienced by an individual client. Past performance is no indication or guarantee of future results and there can be no assurance the strategy will achieve results similar to those depicted herein.

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By Bob Kargenian | Monthly Updates

TABR