Tax Reform Gains Momentum

In the early morning hours of December 2nd, the Senate passed its tax reform bill, with a 51-to-49 vote that mostly followed party lines (Senator Bob Corker was the lone Republican to dissent, citing deficit concerns). The recent Senate vote follows the House’s tax bill which was passed several weeks earlier. While the House could choose to expedite legislation by voting on the Senate bill without amendments, Republican leadership has indicated a conference committee will be assembled to reconcile differences between the bills. Given the slim margin that the bills passed the House and Senate, modifications will need to be done in a manner that finds suitable compromises while still positioning the final bill to carry a majority vote in both houses.

Key Points:

• The Senate bill shifted to align with the House on several key issues, though notable differences still remain (excerpted list below):

• Attention will now shift to the conference committee tasked with creating a unified bill.
  • The goal of the conference committee is to reconcile differences between the House and Senate bills via a conference report (rather than the more arduous process of both houses making amendments to each other’s bills, potentially resulting in prolonged back-and-forth negotiations).
     
  • Each party (Democrats and Republicans) names conferees in proportion to the seats held in each chamber.  
     
  • According to the Congressional Research Service, conferees “as a general rule…may not change a provision on which both houses agree, nor may they add anything that is not in one version or the other. Furthermore, conferees are to reach agreements within the ‘scope’ of the differences between the House and Senate positions.” [1]
     
  •  If the committee’s conference report is passed by a majority of each house’s delegation, the conference report is then submitted for a floor vote (the conference report is not open to further amendment on the floor).
     
  • The first chamber to consider the conference report can choose 1) to accept or reject the conference report or 2) to recommit the conference report back to the committee. After one chamber has taken action on the conference report, the other chamber can only accept or reject the conference report.
     
  • If a chamber rejects the conference report, the committee can make modifications and resubmit for another floor vote. (While possible, it is generally rare for this to occur since the committee solicits input from congressional leaders before finalizing the conference report.)
     
• With year-end fast approaching, Republicans hope to produce a conference report shortly that will pass the House and Senate in time for President Trump to sign the legislation before Christmas.
   
• The House and Senate bills give some indication as to what tax reform might entail, though taxpayers (in consultation with trusted advisors) should continue to monitor tax reform developments to evaluate planning opportunities.
  
  We stand prepared to help clients address financial planning matters resulting from any tax code changes. Please contact any of our professional advisors for more information.
  
  [1] Rybicki, Elizabeth. “Conference Committee and Related Procedures: An Introduction.” Congressional Research Service Report, 9 Mar. 2015.

Nothing Can Stop This Market ... Until Something Does!

Is this not the most nerve-racking stock market rally you can remember? Despite countless reasons for concern — including political uncertainty at home, geopolitical risks abroad, high valuations and Fed rate hikes … just to get started — stocks continue rambling to new highs at a dizzying pace. What’s especially frustrating is that many investors, with a strong recollection of the financial crisis that nearly crippled markets 10 years ago, have positioned portfolios for a breakdown that has yet to occur.

One might argue that many thoughtful acts by investors have resulted in higher frustration levels. Which of the following are you “guilty” of?

• Owning investment-grade bonds
• Rebalancing winning positions
• Owning hedge funds
• Maintaining higher levels of cash
• Owning master limited partnerships

While perhaps prudent, each and every one of these actions would have cost an investor money in the recent past. Owning conservative or diversified investments didn’t pay off. Neither did thoughtfully trimming winning positions that have soared in value. Nope! By the numbers, all these sensible acts simply caused some investors to feel like losers (even though their portfolios may be performing quite well this year).  

This cartoon makes us want to scream out that thoughtful, disciplined investors should never feel like losers. Yes, it can be frustrating when the S&P 500 hits record highs for 12 consecutive months (surpassing the previous record of 11 months) and when the gains seem to come without risk — this is the first year in a dozen years there have been no movements of +/- 2%  days [1].  However, market highs give us a unique, and limited, opportunity to truly optimize our portfolios. 

1.    Just because the market is high doesn’t mean it will soon fall. In other words, there’s no assurance that this bull market will end anytime soon. Prudent investors may grow even more frustrated, but that’s no reason to abandon thoughtful strategy. 

2.    Examine, or re-examine, your goals. Market highs afford investors great opportunities to revisit their risk/return profile and to adjust accordingly. We're not referring to market timing but instead to clinically review the expected return of your portfolio and consider whether you still require as high a return. Have circumstances changed? Can you tolerate a lower risk/lower return portfolio and still accomplish your financial goals? A good example of this is a client that, because their portfolio has grown considerably in recent years, is rebalancing the portfolio and reducing leverage.  It’s a unique opportunity to reduce their financial risk (reducing leverage) and reduce portfolio risk (rebalancing to a less aggressive allocation) while continuing to meet their long-term financial and investment goals.

3.    Stick with a thoughtful rebalancing strategy. Watching new market highs can seduce investors to stay with or even load-up on the winners and underweight target allocations in those investments that haven’t fared as well. Remember that balanced portfolios are built to perform across a variety of market conditions. Just because we haven’t seen volatility and downturns of late, certainly doesn’t mean we won’t. Disciplined portfolio rebalancing strategies, help investors seal out the noise and maintain a thoughtful approach.  

So while prudent investors might feel some frustration, they never should feel like losers.  We stand prepared to help clients address financial planning matters such as these. Please contact any of our professional advisors for more information.

[1] Schwab Market Perspectives, September 29, 2017

Year-End Tax Planning Strategies

With year-end quickly approaching, now is a great time to plan ahead with strategies that may provide meaningful tax savings. Included below are several planning opportunities to consider before year-end:

Harvest Losses
Review unrealized gains and losses in taxable investment accounts and harvest losses where available. Realized losses can offset other realized gains. To the extent that realized losses exceed realized gains, net realized losses can offset up to $3,000 of ordinary income with any remainder resulting in a loss carryforward to be used in future years. 

Given strong market returns in 2017, loss harvesting options may be fewer than in years past, though still worthwhile to review. Beware of the ‘wash sale’ rule which states that a loss cannot be realized (for tax purposes) if a substantially identical position was bought within 30 days before or after the sale.

Watch Out for Mutual Fund Year-End Capital Gain Distributions
Mutual funds are required to pass along capital gains to fund shareholders. Regardless of whether the fund shareholder actually benefited from the fund’s sale of underlying securities, the shareholder would receive (and be taxed on) the capital gain distribution if the mutual fund is held as of the dividend record date.

Mutual fund families typically give estimates for year-end distributions from mid-October to early November, with such distributions most commonly occurring in December. Capital gain distributions can be either short-term or long-term. Short-term capital gain dividends are treated as ordinary income and thus cannot be offset by realized losses. In contrast, long-term capital gain dividends can be offset by realized losses. It is important to review unrealized gains and losses across mutual fund holdings in taxable accounts and to compare those figures against capital gain distribution estimates to determine if selling a mutual fund position before the year-end dividend distribution could result in tax savings.

Charitable Giving
Many taxpayers opt for the convenience of donating cash or writing checks to charities, though it is preferable from a tax planning standpoint to gift long-term appreciated securities from a taxable investment account. By gifting long-term appreciated securities, the charity receives the same benefit as a cash donation, however the taxpayer receives a tax deduction for the full market value of the gift and avoids paying capital gains taxes on the security (if it were otherwise sold). 

In high income years, a taxpayer might benefit from giving a greater amount to charity, though the taxpayer may not have a list of charities in mind. In such a situation, giving to a donor-advised fund can be an effective strategy, as the taxpayer receives a current year tax deduction for the gift to the donor-advised fund while charitable grants (from the donor-advised fund) can be made at a later date.

Personal Giving
As the law currently stands, individuals with assets in excess of the estate exemption ($5.49 million per person for 2017) are potentially subject to federal estate taxes at a top 40% tax rate. The law provides for annual exclusion gifts ($14,000 per person for 2017) which do not count against the $5.49 million exemption amount.

In addition, payments for tuition and medical expenses which are made directly to the educational/medical institution do not constitute as gifts. Utilizing annual exclusion gifts (as well as direct payments for tuition and medical expenses) can be beneficial for high net worth individuals as it effectively reduces the size of an estate that might otherwise be subject to estate taxes.

Satisfy Required Minimum Distributions (RMDs) using the IRA Charitable Rollover
Taxpayers over age 70½ are required to take minimum distributions from retirement accounts (except for Roth IRAs). Taxpayers over age 70½ can transfer up to $100,000 each year from an IRA to qualified charities (generally, public charities other than supporting organizations and certain foundations and donor-advised funds are excluded). The charitable transfer does not count as an itemized deduction nor count as a taxable IRA distribution. This provision may be helpful to individuals with a certain portion of itemized deductions phased out due to income limits as well as to individuals who do not itemize deductions. 

Monitor Tax Reform Negotiations
In late September, Republicans released a proposal for tax reform, "Unified Framework for Fixing Our Broken Tax Code”. Given the potential for broad revisions to the tax code, taxpayers are encouraged to follow negotiations over the coming weeks and months in anticipation of what changes may occur. 

To the extent that income may be taxed at a lower rate in future years versus the current year, it might make sense to defer income items to a future year. To the extent that certain itemized deductions would be limited or eliminated in the future, it might make sense to accelerate those deductions into the current year barring any Alternative Minimum Tax (AMT) issues. Given the complexity involved with estimating year-over-year tax liabilities, consulting with a qualified tax professional is recommended.

We stand prepared to help clients address financial planning matters such as these. Please contact any of our professional advisors for more information.

John Sauder, Former CliftonLarsonAllen Managing Principal, Joins Fi3 Financial Advisors

Fi3 Financial Advisors is pleased to announce that John Sauder, CPA, the former Managing Principal of CliftonLarsonAllen in Indianapolis, has joined Fi3. Sauder brings his perspective from more than 34 years of consulting for small- to mid-sized privately held companies.

“We are thrilled to have John join the Fi3 team,” said Ivan Hoffman, CFP®, Managing Partner of Fi3 Financial Advisors, LLC. “John shares our view of client service as an opportunity to help families integrate their personal and business goals through creative solutions to financial complexities. His experience in tailoring solutions to the unique needs of each family is the same highly personalized approach that we take at Fi3. John’s perspective will be a valuable addition to our firm.”

Sauder retired from CliftonLarsonAllen (CLA) at the end of 2015. He joins Fi3 as a Senior Director, with a special focus on cultivating relationships and family succession planning. During his time with CLA, Sauder worked with many business clients including manufacturers, contractors, and professional practices. His expertise is in guiding owners of privately-held companies through financial decisions, including financing options, tax planning, sales and acquisitions, and succession planning. Sauder will leverage his experience and deep relationships to support growth at Fi3.

“I was drawn to Fi3 because of the team’s energy and entrepreneurial spirit,” said Sauder. “Fi3 is taking a creative approach to helping clients through their Family CFO model. The firm is focused on innovation and is strongly positioned to help clients integrate all aspects of their financial and investment planning. I’m glad to be a part of the team.”

Sauder currently serves on the board of advisors for Little Engine Ventures, a hybrid fund that is motivated to help customers, founders and investors prosper by working smarter and harder. He holds a Series 65 license, and is a Certified Public Accountant. Sauder served five years on the board of the Indiana CPA Society, the final year as the Chair. He also serves on the board of Conner Prairie, Indiana’s first Smithsonian Institute affiliate, located in Fishers, Ind.

John Sauder, CPA, Senior Director