HG Wealth Management • 4th Quarter 2017 Letter
Update on the Markets:
January 1, 2018
What a Great Year!
As you see above, 2017 was an incredible year for the stock market. It was a great year to take on risk. Stocks, high yield bonds, investment grade bonds, even the yield on money market funds went up. The environment was just right: not too hot and not too cold. For the first time in a long time, the economies of almost every country in the world improved. Inflation was quite modest. Central banks continued to be accommodative. The Korean peninsula did not blow up. And, perhaps most importantly, investors learned to ignore the noise coming out of Washington. We even ended the year with the most significant change in tax policy since 1986!
Most of these conditions should continue into 2018. The biggest risk may be inflation. In particular, there is a chance that the Federal Reserve may raise rates more than three times – in reaction to an unexpected spike in inflation, say due to higher wages in a tightening labor market. Of course, we always have geopolitical things to worry about. Volatility should increase – valuations everywhere are very stretched so any downside surprise may result in a swift drop in prices. Risks aside, the combination of global economic growth, low inflation and accommodative central bank policy and tax reform should lead to another positive year for stocks. Although most of the gains are behind us, I think clients should be fully invested. Stocks will beat bonds.
The New Tax Law
There are significant changes to the tax law in 2018. Republicans passed the Tax Cuts and Jobs Act at warp speed, and President Trump signed it on December 22, 2017. The corporate tax rate drops from 35% to 21 %. For we individuals the IRS has still to issue its guidance, so you will not see any changes to your paychecks until February. The corporate tax changes are made permanent, but the individual tax provisions will expire after 2025 unless Congress extends them. Here is a brief list of what you need to know:
- The law maintains seven tax brackets, but with different rates and breakpoints.
- Standard deductions nearly double to $24,000 for couples and $12,000 for singles.
- No more personal exemptions.
- The deduction for residential property taxes and state and local income taxes is capped at $10,000 for singles or couples.
- Home mortgage interest can be deducted on up to $750,000 of new acquisition debt on a primary or second residence.
- Interest on home equity loans will no longer be deductible with no grandfathering!
- The miscellaneous write-offs subject to the 2%-of-AGI threshold, including employee business expenses, investment fees, tax return preparation costs, safety deposit box, etc. have been eliminated.
- The AGI threshold to deduct medical expenses has been temporarily dropped from 10% to 7.5% for 2017 and 2018.
- Tax rates on long-term capital gains and qualified dividends remain the same.
- The Obamacare individual mandate is out starting in 2019, but you are still required to have a health insurance plan in 2018.
- 529 college savings now allow withdrawals up to $10,000 per student for elementary and secondary education.
There’s more. Please contact me if you have a question, or you would like to discuss tax planning.
Important IRS Dates
Early Filing: Available now
January 28, 2018: IRS starts processing 2017 returns
April 17, 2018: Tax filing deadline for 2017
October 15, 2018: Deadline for extension filers
File Early! Unfortunately, identity theft issues continue to plague the IRS. Hackers use your personally identifiable information (PII) and file a fake return and take your refund. The only defense is to file as soon as possible.
Please let me know if you have any questions or concerns. – Henry
