Plenty of investors will be faced with an unpleasant surprise. Any day now, one or more of the mutual funds that you own will be sending out their capital gain distributions for the year.

 

The tax hit could be quite large this year.

 

Many investors are not aware that mutual fund companies are required to distribute at least 95 percent of their capital gains to investors each year. Given the double-digit gains in the stock market last year, those gains could be an unwelcome liability when tax time rolls around.

 

At this late date, there is little one can do about it, other than pay the piper, but this year you can take steps to minimize 2018's potential tax liability. Since the tax reform act did not change capital gains taxes, you can expect that short-term capital gains (less than 12 months) will be taxed at the same rate as your income tax bracket. Long-term capital gains, however, will continue to be taxed at 15 percent.

 

The job of most mutual fund managers is to buy low and sell high. That's what creates track records, which, in turn, attracts investors to their funds. But mutual funds are just like individuals when it comes to capital gains. Anytime a mutual fund sells a security, no matter what the asset, that gain is taxable. And since mutual funds are considered pass-through entities, they are required to pass along to you any of these taxable gains.

 

In the grand scheme of things, capital gains distributions could be considered a luxury problem since we want the mutual fund we are invested in to turn a profit for us. So producing capital gains (as opposed to capital losses) is a good thing. But some caveats do apply.

 

Distributions reduce the fund's net asset value, regardless of whether they are long-term, or short-term capital gains, qualified dividends, or a return of capital. The problem might be in the timing of your purchase. If, for example, you purchased such a fund after all the gains were made, but before the distribution, you will be sent the capital gain (plus the taxes you will owe) while the mutual fund you purchased would decline by the amount of the distribution. You would be left with an after-tax loss on that mutual fund investment.

 

So the morale of this tale is if you are going to stay invested in mutual funds in a non-retirement account you better start tracking the upcoming capital gains distributions on the funds you own or are considering purchasing. In general, most mutual funds pay one or two capital gain distributions each year, normally sometime during the summer, and the last one toward the end of the year (late November or December). Try to avoid buying mutual funds at those times.

 

The mutual fund industry is aware of how these sudden taxable events impact shareholders. Most managers try to avoid dumping huge gains on investors, especially short-term gains, which are taxed at a higher rate. However, at certain times, they are forced to do just that.

 

During market declines, for example, when they are faced with unusually large redemption requests, then fund managers may be forced to liquidate positions that they would have preferred to hold, but can't.

 

Today a shareholder of mutual funds can easily find out when and what upcoming distributions will be made by simply accessing each mutual fund's website. There, you will find a wealth of information concerning distributions. Many fund websites will give you distribution guidance several months before the event. That makes it easier for you to make informed investment decisions.

 

Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

At the best of times taxes are confusing, so much so that most people hire an accountant to prepare them. This coming year should be a real doozy for the accountancy industry.

 

Given the massive changes to the tax code that will go into effect next year, taxpayers are rightly concerned (and confused) on exactly what the rules will be and how they will impact their families. 

 

"Most (although not all) taxpayers would owe less under the new rules, according to analyses by various independent think tanks, including the Tax Foundation and the Tax Policy Center," according to Charles Schwab and Co. 

 

In high tax states, lines are already forming at the local assessor's offices. New York Gov. Cuomo just signed an emergency executive order that urges counties in the state to send 2018 property tax bills now before the end of the year. That way, residents can pay next year's taxes before the end of the year thereby still taking a tax deduction against their federal tax bill.

 

Money management firms across the country are also being besieged by clients who want to pay next year's fees in advance in an effort to take advantage of that tax deduction before those too expire in 2018 under the new legislation. Phone lines to most accountancy firms ring busy and even office voice mails are full.

 

Let's start with your tax brackets. There are still seven tax brackets but the new legislation generally lowers rates across income levels. For a couple filing jointly, the new brackets will be 10 percent for taxable income up to $19,050, 12 percent on $19,050 up to $77,400; 22 percent on income up to $165,000; 24 percent up to $315,000; 32 percent to $400,000; 35 percent to $600,000; and 37 percent on income above $600,000.

 

In addition, since most Americans do not itemize their tax deductions, the standard deduction available to those taxpayers has doubled from $12,000 for individuals and $24,000 for couples. However, what the government giveth, the government can also taketh away. The personal exemptions for individuals were also removed, which comes out to $4,050 per person.

 

However, overall, if you're a low- or middle-income household, an increased standard deduction combined with an increased child tax credit should lower your tax bill.

 

The new tax law has placed a cap on itemized state and local tax deductions that have been up to this point fully tax deductible against your federal taxes. The cap on combined state and local taxes amounts will be no more than $10,000. People with heavy tax burdens in high-tax states such as New York, New Jersey, California and Massachusetts will be hurt the most.

 

And in order to close as many loopholes as possible, the Republican lawmakers barred these taxpayers from prepaying in 2017 any state or local taxes that will be due next year.

 

Those who have been choosing to itemize deductions may now have to reconsider which is better: a reduced level of itemized deductions versus the standard deduction. Some families may now fare better taking the simpler standard deduction.

 

The Internal Revenue Service has also warned high-property state taxpayers not to prepay property taxes before the end of the year unless your local government has already assessed your property for 2018. For example, my town has already billed me for next year's taxes, while across the border in New York State, the local authorities bill in the year taxes are due.

 

Mortgage interest amounts will also be limited to the first $750,000 of a loan for a newly purchased first or second home. Although it is early days, many analysts believe this tax change will have a devastating effect on areas that rely on second homes and their owners for their livelihood. People who might have considered buying a second home will find the new rules will be a disincentive to purchase. It could also make it harder for home owners in those markets to sell their homes. The net effect would be a dampening of economic activity in those areas.

 

This would impact many lower income families who depend on second home owners for their livelihood. Those who provide landscaping, lawn care, house maintenance and repairs, snow plowing and a myriad of additional services supplied by mostly blue collar workers would feel it the most.

 

There are countless other areas from healthcare to pass-through income that has been affected by the new rules. In future columns, I will examine many of these changes. But for now, rest assured that as 2018 unfolds, there will be countless variations to this legislation that will continue to impact the economy and all of us in unexpected ways.

 

Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

You can't say enough about a stock market that continues to climb, day after day, month after month. Best of all, it looks like it will continue to do so through the end of the year. What happens in 2018? Well, that may be a different story.

 

There is no evidence, however, that things will have to change in the New Year. Thanks to the big fat tax refund check that Corporate America will receive next year, investors will be expecting several quarters of better earnings. At the very least, that should support stock prices for a few months, if not more.

 

Let's not get into whether the tax cuts are good or bad for the economy. If you have been reading my columns, you know my opinion on that. Instead, let's just focus on the stock market and how things might change within the markets. For example, technology shares, especially the FANG names, have been leading the market all year. So have semiconductor stocks, a major ingredient in so many technology products, as well as large cap growth stocks.

 

Recently, small cap stocks have started to outperform. This is largely due to the tax reform legislation. The thinking behind these gains is that small businesses who are mostly focused on domestic markets will gain the most from the tax cuts. As such, the sector has seen some outsized gains in the last few months.

 

The question I am asking is will the leadership change in the new year?

 

 I have noticed that since the beginning of December some lagging sectors are beginning to join the party. Energy stocks are getting some buying interest, as are basic material companies. Even precious metals are participating in the market's move higher. Why then should that be the case?

 

One explanation could be that "a rising tide lifts all boats," meaning even the laggards get to participate, whether they deserve to or not. Another explanation may have to do with President Trump's recent comments that 2018 might be the time to refocus America's attention on infrastructure spending. All sorts of basic material companies, producing everything from steel to cement, would benefit.

 

While energy might not be directly impacted by infrastructure spending, it helps support prices, as does the recent production cuts engineered by OPEC. Those factors, combined with continuing global economic growth, have convinced the majority of oil analysis that the worst is behind us in oil price declines. Many are looking for oil to rise into the sixty dollar-plus range next year. At that price, most energy companies will do okay earnings-wise and the stocks are cheap.

 

Then there is also a growing camp of worry-warts, who fear that the $1.5 trillion in tax cuts, combined with additional infrastructure spending, layered on top of an already-growing global economy may spell rising inflation in the near future. Commodities usually do quite well in an inflationary environment and since these sectors are already selling at a steep discount to the rest of the market, why not take a bet on these groups.

 

But all of these topics are for next year's columns. It is enough to know that we have all done quite well in the markets this year. The fact that I have urged you to stay invested throughout all of it makes me feel grateful and happy. I am going to carry that feeling with me throughout this holiday season. Happy Chanukah and Merry Christmas to all of you and give your loved ones a hug for me.

 

Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

Rolling your 401(k) or 403(b) into an IRA can be a good idea for some savers but not for others. Here are some things to think about before you make a decision.

 

In my last column, I outlined some of the more obvious reasons for rolling over your retirement accounts: cost savings, larger selections of investment choices, more flexibility. I also discussed some of the cons against rolling it over: the ability to borrow against your 401(k), a lower age for beginning distributions from your 401(k) (55, versus 59 ½ for an IRA), the ability to delay minimum required distributions after 70 1/2, if you are still working.

 

This week, I want to focus on one of the greatest weaknesses of just about all employee tax-deferred retirement accounts. When the public and private sector came up with the concept of tax-deferred retirement accounts to replace pension funds, they forgot one extremely important detail. Pension funds for a company's employees were managed by full-time professionals.

 

That makes sense because managing retirement savings is a full-time job. Unfortunately, the government ignored that fact when they gave the responsibility of managing tax-deferred retirement savings to the worker. Few workers are qualified to do that. They are totally focused on the full-time job of making a living, getting ahead and providing for one's family, as they should be.

 

Even if they had the education, knowledge and skill to manage money, (which most don't), they have few resources to do that job successfully. And as years of contributions have accumulated, many retirees now have hundreds of thousands of dollars (if not millions) invested in these employee-sponsored plans.

 

At the same time, the financial markets have changed enormously. It is a world of derivatives, leveraged investments and the commoditization of everything from individual stocks to Bitcoin, the individual investor is increasingly outgunned.

 

As a result, most 401(k) contributions are funneled into funds that automatically change your exposure to bonds and stocks based on the date you plan to retire. These target date retirement funds tend to be expensive and have a number of unintended consequences. One of which is that the closer you get to retiring, the more bonds are added to your portfolio (since bonds are considered a safer investment). In an environment where interest rates are rising and bond prices are falling, however these "safe" investments are fraught with risk.

 

In today's constantly-changing, global financial markets, the set-it- and-forget-it approach to investments does not work very well, just witness the debacle in losses back in 2008-2009 to most savers' 401(k) assets.

 

By rolling over your 401(k) to an IRA, the option of professional money management becomes available. It is one of the reasons that brokers, annuity salesmen and investment advisers are so focused on the area. This "gold rush" by the financial community to manage these assets has led to a myriad of abuses. Unscrupulous brokers, financial planners and advisers have stuffed these rollover accounts with high-priced investments with sub-par returns that have generated big commissions and fees for their firms while stiffing the poor retirees.

 

Worst of all, countless elderly retirees have been sold annuity products that are not federally-insured or regulated. These restrictive investments are inappropriate for the vast majority of savors. They command some of the highest fees of almost any investment product (as much as 15-20 percent of the entire investment over the lifetime of the annuity contract). What's

worse, if you try to sell them (as many do) they are saddled with huge penalties for years.

 

Money management, on its own, is no panacea; there are good advisers and bad ones, so you still need to do your due diligence. Make sure that whoever you select is registered, is a fiduciary and, if possible, offers more than just money management. In planning for retirement there are a number of other areas besides money management that are important, everything from financial and estate planning to Medicare, Social Security and elder care issues.

 

Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

With less than two weeks until Santa Claus shimmies down your chimney, investors are betting that what the Big Man has in his sack is lots and lots of gains to finish out 2017.

 

Now some might say that the signing of a massive tax cut is all the present investors need. After all, despite the rhetoric, we all know that the Republican tax cut is solely directed toward the wealthy, big business, and the stock market. As such, the indexes should continue to levitate between now and the New Year.

 

Investors are stocking up on the shares of those companies that will benefit most from the windfall profits they will receive as part of the reduction in the corporate tax rate from 35 percent to around 21 percent. Many of these Fortune 500 companies, such as Cisco Systems, Pfizer Inc. and Coca-Cola, have already said they will turn over their tax cut gains to shareholders.

 

Jamie Dimon, JP Morgan Chase Chairman and CEO, says companies will buy other companies, raise their dividends and buy back stock. Some may even raise wages, he added, as an afterthought. These stated plans fly in the face of claims by President Trump and Republican lawmakers. They have promised that corporations will invest this money in plant and equipment, use the funds to raise wages, and hire new workers-- none of those statements appear to be true.

 

The very politicians who decry "fake news" have been working overtime to spread their own brand of this dubious commodity.

Since my focus has always been on the economy and financial markets, I see some troubling ramifications of this tax cut for the future. As readers know, the U.S. economy as well as the global economy, has been picking up steam. Our economy should finish the year with a gain of between 2.3-2.5 percent. The global economy will do better (3.4 percent or so). Next year should see our economy nudge up to 2.9 percent while worldwide growth should hit 3.7 percent. This is before the effect of any tax cut.

 

Now, the political rhetoric maintains that we should see our economy explode next year, based on all this corporate tax cut money. Yet, few economists outside of those paid by the GOP to come up with rosy forecasts, see much evidence that the tax cut will have any impact on growth next year. But let's say the Republicans and their president are correct; what happens

next?

 

There is a high probability that the Federal Reserve Bank, which would then be headed by Trump appointees (who are decidedly more hawkish than the Yellen crowd), would be forced to hike interest rates sharply in order to stave off any inflation threat. This is an especially clear and present danger, if all this supposed new growth creates job openings in an economy that is already at an historic low rate of unemployment.

 

As it is, corporations still cannot fill many of the job vacancies they have because they can't find enough skilled labor. Even if the Fortune 500 embarked on a massive job training drive, it will be several years before the first graduates could fill the existing job openings. In the meantime, a bidding war could ensue, sparking unbridled wage growth. The Fed wouldn't like that either.

 

These would be luxury problems as far as the economy is concerned. The stock market, on the other hand, might see it differently. The good news, however, is that these potential scenarios will not appear until at least the second half of next year, if they do at all. In the meantime, I expect we will see future gains into the first half of 2018.

 

Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.