Investment Newsletter for the end of December, 2017

The market continued upward this month and all of you have significant gains for the quarter and year.

Well the tax bill passed and I have a few observations. Virtually every tax payer ends up with lower taxes. I have been running tax projections all week for tax clients. Only one client had their taxes go up. Everyone else had their taxes go down. The single young person with just a W2 (down over $700), the small business owner (down over $6,000), retired couples, and my favorite CPA CFP (yours truly). I have not found in my small sample that there was any bias for the rich against the poor. In fact, the one client whose taxes went up had very high income.

The $10,000 limitation in state and local taxes does not seem to be the big issue. The lowering of tax brackets is far more significant. Also important, however, is the 20% pass-through deduction. I own three pass-through; a CPA practice organized as a sole proprietorship, an investment practice organized as an S-Corporation, and a rental. Let’s pretend my pass-through profit totals $100,000. I could take 20%, $20,000, as a deduction from income before taxes are calculated. This deduction is a very big issue for many of you. LLC’s and farms are also considered pass-through by the way.

I am not concerned that the individual reductions are temporary. The next congress will mess around with the rules, the one after will change it still more. I am only concerned with how my clients and I do this year. The argument that the individual cuts are temporary and the corporate cuts are permanent is bunk. ABSOLUTELY ALL tax changes are temporary. There is no such thing as a permanent tax change.

The tax bill plus official explanations is 1,100 pages. I got through 700 pages before I thought I was going to die. Pure legalese, references to other code sections, etc. In short bad writing. I do not know why government (both political sides do the same) write tax bills to be unreadable. I hate jargon because it seems to be designed to put the recipient into a junior place. Many professionals (accountants even) use overcomplicated writing and speech so as to control the conversation. I think that is what happened here.

I do not know yet how the changes will affect the state returns. My Washington and Nevada clients can ignore this paragraph. Many state rules are based on the federal rules and some are not. For example, federal rules will no longer allow miscellaneous employee expenses such as uniforms, tools, union dues, mileage, licenses, CPA fees, etc. (I am only talking about employees taking these expenses. There is no problem if they are run through a business). It is now likely the states will not allow these expenses either.

If your new employer gives you a choice of working as a W2 employee or as an independent contractor, think about being an independent contractor very seriously. Employees do not get the 20% reduction in income listed above in section 1. Independent contractors on the other hand would be considered pass-throughs. Same individual, same job, same pay rate but 20% less taxable income. Nice.

Thank-you all for a good year.

Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

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Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

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