The Independent Investor: The IRS Has Its Hands Full This Year
The government's partial shutdown has everyone on edge this year. Despite assurances from the powers that be, many taxpayers are concerned that their tax returns won't be processed on time. Should you be worried?
One misconception many have is that the Internal Revenue Service is closed. Not true, the IRS remains open, despite having no budget since Dec. 21, 2018. The agency is running under a contingency plan, which includes operating with only 12 percent of its staff.
Usually, you can e-file your returns in late January, and that remains doable. The IRS announced it will be accepting 2018 tax returns starting January. 28, 2019. They also said they would be issuing refunds. To do so, they will be bringing back a large portion of their laid-off workers. Those workers, like the other 800,000 furloughed federal workers, won't be getting a pay check until the shutdown is over.
The question remains: how many of those workers are willing to return to their jobs without a paycheck? We are already seeing some departments (such as Homeland's TSA workers) balk at working for free any longer. But the government shutdown is not all the IRS needs to worry about.
Thanks to the Tax Cuts and Jobs Act passed in a hurry by Congress last year, the IRS has been working overtime to deal with the mountain of new changes and adaptions necessary to reflect the new tax laws. To add insult to injury, it took months before the new rules were actually delivered to the IRS from the legislative branch. At the time, the Inspector General said that it would take "massive resources" to do what was necessary to fulfill taxpayer expectations, while making sure the IRS is compliant with the new laws.
The new tax reform legislation contained nearly 120 provisions, affecting both domestic and international taxation of American individuals and corporations. As a result, nearly 450 new forms, sets of instructions, and publications would need to be published and disseminated. On the IT side, another 140 information technology systems would need to be modified so that tax returns could be processed, and compliance monitored.
Conservatively, the IRS estimated that 4 million additional phone calls and other contacts would be required to deal with questions taxpayers and their accountants were going to have about how to file individual returns. And here we are beginning tax season and those calls have just begun! Remember, the IRS warned months ago that there might be delays due to the enormity of changes required of them.
"The tax reform is certainly making life difficult for us," says Barry Clairmont, a partner in Lombardi, Clairmont & Keegan, one of the leading accounting firms in the Berkshires. "Tax preparation is taking longer, and, on the corporate side, there is more reporting required due to what we call 'QIB' or qualified business income."
Clairmont's advice is that corporations should begin the filing process now and not wait until the last minute.
On the other side of the country, Terry Milrany, one of the most respected accountants in Fort Worth, Texas, echoes much of what Clairmont says. He, too, sees the general business deductions of the 20 percent "pass-through" change in the tax law as something that is "still evolving" from within the IRS.
"Just in the last two days," he said, "I received another (and hopefully final) update from the IRS on this rule." As for the shut down's impact on tax returns, Milrany, who has been doing tax returns for 50 years, says, "We just don't know how the shutdown or the tax changes are going to impact returns. We are not deep enough into the filing season yet."
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@theMarket: Markets Retrace December Losses
It was a week where lackluster earnings battled with the Fed's willingness to hold off on rate hikes for investors' attention. The Fed won. Investors bought on the dips and helped to push the markets out of correction territory.
From a technical point of view, however, all the U.S. indexes are overbought, extended, and in need of some kind of pullback. Traders know this and have been shorting the market as it climbs, betting that we will see at least a 100-point decline in the S&P 500 Index. It hasn't happened — yet.
Normally, markets will do what is most inconvenient for the greatest number of traders.
In this case, the indexes simply keep going up. But before you exhale in relief, be advised that when the last bear throws in the towel, that's when the markets will blind-side you.
For those who followed my advice last quarter and have remained invested, your paper losses are rapidly disappearing. I expect that, despite continued volatility through March, the second half of the year should see all your losses recouped and I expect further gains after that.
Earnings, which were not forecasted to match the gains of the last few quarters, have come roughly in-line with investor's lower expectations. So far, the average results indicate about a 7 percent gain for the quarter. In cases where a company announced less than that, traders were quick to punish their share price.
In some cases, for example, banking stocks, where trading profits were down last quarter as a result of the steep drop in equities, the Algos were whipping prices around on almost an hourly basis. Clearly, this is a market where the only smart thing to do is buy and hold for the longer term.
One positive (but suspicious) development occurred on Thursday afternoon. Someone (I'll call him the Trade Whisperer), let it be known through a Wall Street Journal report that the Trump House was considering pulling the Chinese tariffs in a bid to trigger a breakthrough in the U.S./Sino trade negotiations. It took all of 10 minutes for stocks to spike much higher.
Despite the outpouring of denials from all of Trump's men, U.S. markets still closed higher and continued the move into Friday. I found it interesting that, despite the denials, Asian markets, especially China, gained over one percent Thursday night. Where there's smoke, there may be some fire down the road.
I mention this because, in my opinion, events like this illustrates the extreme fragility of global markets. Anything (real or imagined) can spark a violent move in financial markets. A case in point is the troubling (and expanding) revelations that seem to be surrounding Donald Trump.
At last count, 16 of his closet aides and/or campaign staff have been linked to Russian nationals in an effort to tilt the presidential election in Trump's favor. His former closest confidant, Michael Cohen, is now admitting that his ex-boss actually conspired to obstruct justice (committed a crime) and that the Mueller investigation can prove it.
These are developments that every investor should take on board and treat seriously, regardless of political affiliation. There is potentially a risk that, despite Trump's repeated denials, Mueller does have the goods on the president. If so, look out below.
The bottom line: There is simply too much lurking out there to make an informed investment decision. As such, the best option is to stay invested, but keep looking over your shoulder.
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The Independent Investor: Pay Gap for Women Is Growing
If Citigroup, one of the world's largest banks, is any indication, women earn 29 percent less than their male counterparts. It also revealed that only 37 percent of its managerial jobs were held by females.
Wall Street has long been known as "the last bastion" for white males. But to Citigroup's credit, it just made public its internal assessment of the existing pay gap between the genders. One reason it did so was the new disclosure standards that are now required in the United Kingdom since last April.
Last year, when Citigroup first reported these numbers for its U.K. workforce, women were paid 44 percent less, and if bonuses were counted, the gap widened to 67 percent. Kudos to Citigroup for at least narrowing the gap over the last 12 months, but much more needs to be done.
However, let's not pick on Citigroup. Plenty of the nation's top financial institutions are in the same boat. But, as a result of increasing shareholder pressure, many American companies are being required to fess up and supply data of their own inadequacies in this area.
Historically, the wage gap for women in this country has been reported to be 80 cents for every dollar a man receives in compensation. Critics argue that there has been real progress since the Equal Pay Act was passed in 1963. Back then, women only earned 60 percent of what men did.
Over the next 30 years or so that disparity was reduced by half, but it is still 80 cents.
Those who think this gap is justified (mostly white, middle-aged and older males) argue that women get paid less because they do a disproportionate share of child-rearing and household work. As such, women have a higher chance of only working part-time or dropping out of the workforce to care for children or their elderly parents. In addition, critics say that women tend to cluster into low paying sectors like administration, secretarial work, and teaching.
I say this is hogwash! Studies reveal that even in high-paying jobs, as a woman ages, the gap widens between her and her male counterparts. The idea that women should stay home and have babies is a bankrupt myth at best. I contend that "the 80 cents to the dollar" headline is also inaccurate. The real gap is far higher than that.
I have been in this business long enough to know that the way numbers are assembled can be tilted to justify any point of view. If you, for example, track women's earnings over the last 15 years, you would find that women earned 49 cents to every male dollar. At the same time, all this vaunted progress over the last thirty years has been slowing not increasing.
Part of the reason for the wage gap is Corporate America's insistence that only men (and white men at that) belong in the corner office. Despite their abilities, far fewer women have managerial roles in this country. That, in itself, explains why women overall receive less than men. I believe that all these statistically-adjusted numbers hide half the problems facing women in the workplace.
Clearly, we need more women in higher-paid jobs and in leadership positions. Our own company, small as it might be, has long recognized this fact. Our president is a woman, as is 50 percent of our staff. Women here are all in leadership roles and there are no wage discrepancies.
Unfortunately, under this presidency, Donald Trump reversed an Obama-era rule that compelled companies to report wage information to the government. As such, the vitally-important statistics women need to bolster their case will be much more difficult to find. In the meantime, if you are a woman shareholder, or a male who believes in equal pay, like I do, lobby companies you own at every opportunity to follow Citigroup's lead.
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The Independent Investor: Changes to Social Security and Medicare Benefits
As the year begins, those who are retired, or who plan to soon, need to know the changes the government has recently announced to your benefits.
The good news is that retirees will get a 2.8 percent increase in Social Security payments. While that doesn't sound like much, it happens to be the largest cost-of-living adjustment in seven years. What that amounts to for the average couple in retirement is about $67 per month, or an average monthly payment of $2,448.
If you are one of those workers like me, who waited until 70 years of age before collecting benefits and are considered a "high earner," then you will be receiving as much as $73 more per month up to $2,861. On the opposite end of the scale, individuals who want to claim their benefits earlier than their full retirement age, (but still plan to work) get a benefit. The amount of money they can make before their Social Security benefits are reduced or eliminated has increased. This year, a worker younger than 66 can earn up to $17,640 before losing any social security benefits. That is $600 more than last year. After that, they will lose $1 in benefits for every $2 of earnings over that limit.
If you are going to turn 66 this year, you can earn as much as $46,920 without jeopardizing your benefits, which is $1,560 more than you could last year. Anything over that new limit will mean you will lose $1 in benefits for every three bucks you make. The earnings cap goes away once you reach full retirement age. That means you can earn any amount without forfeiting your benefits.
However, the government both giveth and taketh away. As I predicted in past columns, the government has increased the retirement age yet again. For those readers born after 1954, the new current retirement age is 66 years old. Those of us born in 1957 or later have just had six months tacked on to full retirement age. You now have to wait until you reach 66 1/2. You can still opt for early retirement at 62, but your benefits will now be reduced by 27.5 percent (compared to 25 percent last year).
As most readers know, in order to qualify for Social Security in the first place, you must earn at least 40 "credits" with a maximum of 4 credits each year. That came to $5,280 worth of credits per year. Now, those four credits must be worth at least $5,440, or a $40 increase from 2018.
Social Security benefits, despite the tax cut this year, will still be taxed in the same way. That is, your tax will be based on your adjusted gross income, plus tax-exempt interest (such as municipal bonds) and half of your Social Security benefits.
Let's say you bring home between $25,000 and $34,000 in income this year all-in. In that case, half of your Social Security benefits will be taxed. Anything more than $34,000 and 85 percent of Social Security income will be taxed. What happens if you are married? If your combined incomes range between $32,000 and $44,000, up to 50 percent of your benefits will be taxed. Over $44,000, 85 percent will be taxed.
While income taxes for many may be going down this year, payroll taxes are going up — at least for high-income workers. Maximum wages subject to FICA taxes have increased by $4,500 in 2019. What that means is that high-wage earners could be paying as much as an additional $344.25 in payroll taxes this year.
Medicare, by the way, receives 1.45 percent of the tax on all wages. Individuals making over $200,000 and married couples pulling in more than $250,000 a year will be required to fork over an additional high-income surcharge of 0.9 percent in Medicare taxes this year. Speaking of Medicare, the good news is that your Part B premiums (outpatient service charges and doctor visits) will only increase slightly this year.
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The Independent Investor: The Fed Stands Tall
Sometimes it takes a while, but financial markets almost always test a new incoming Federal Reserve Bank chairman. On Wednesday, Jerome Powell faced his test and passed with flying colors. Of course, a glance at the stock market averages at the end of the day on Wednesday would have the casual observers scratching their heads.
As most readers know, the stock market has been declining since October. One of the reasons for the sell-off is the fear that the Federal Reserve Bank's gradual tightening policies have gone too far. Their continuous interest rate hikes coupled with the selling of $50 billion of U.S. Treasury bonds every month had started to reduce the excess liquidity from the financial markets.
Investors fear that these actions will slow the growth of the economy and tip the country into a recession as early as next year. No one is sure that this will happen, although most economists are already ratcheting down our forecasted growth rate to somewhere around 2-2.5 percent for 2019. That is by no means a recession, simply a slowing of growth, but nonetheless, investors have decided to sell first and see what happens as events unfold.
The continued losses in the stock market, after so many years of gains, have driven the level of angst to a point where the markets (and the president) have demanded that the Fed stop tightening — now. The media and Wall Street, coming into Wednesday's FOMC meeting, were convinced that the Fed would cave-in to their demands and announce a cessation of their tightening policies. Investors wanted him to say no more rate hikes and possibly a slow-down in the amount of bonds the Fed planned to purchase in the future.
None of that happened. Instead, Jerome Powell, while bowing to the fact that the economy was slowing a wee bit, simply reduced the Fed's planned rate hikes next year from three to maybe two, depending on the economic data. As for his bond sales, that process will continue at its $50 billion monthly clip until circumstances warrant a change.
Clearly, given the 1-2 percent declines in the U.S. stock market averages for the day, investors were dismayed and sold stocks in protest. In the past, many investors have talked about the "Fed Put." Initially, this concept was coined to reflect the Federal Reserve's willingness to intercede and support the equity and bond markets during the financial crisis.
Markets understood at the time that the Fed "would have their back" in times of crisis. Through the last decade, when Greece and the Euro seemed to be in crisis, when political in-fighting in Washington jeopardized our ability to pay interest on our debt, through the various government shut-downs, etc., the Fed was there to ensure market stability.
However, those days are gone. The Fed did its job. The global economy recovered and grew. It was, the Fed explained, time to normalize their relationship to the financial markets. Their traditional job is to control the nation's inflation rate and support employment, not make sure that investors always make money in the markets. That, I believe, is the lesson everyone must re-learn.
Back in the day, you took risks and you generated returns. If you were wrong, you paid heavily, depending upon your investment choices. As we face the new year and the possibility of a recession sometime in the period of 2020-2022, the Fed's message is clear. We are returning to a time where you (and your adviser) will be responsible for your investment choices, where there is no "Fed Put" to save you if you guess wrong. And, no, the Fed has not abandoned us. It is simply returning to its historical duties. You can't have it both ways.
From the president on down, most Americans espouse the concept of a free market; how we want our economy to run with the minimum of government interference, fewer rules and regulations and, for the most part, the Darwinian concept of "every man for himself." I suggest we start practicing what we preach.
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