CAS News
How Tariffs Impact Your Bottom Line
By Judy Alexander-Wasley, CFP®, MBA
If you’ve been keeping up on economic and market news, you are likely familiar with the Trump administration’s recent assessment of tariffs against major U.S. trade partners.
The new tariffs – taxes on imported goods – have stirred quite a frenzy among investors and economists across the globe and have dominated the financial news headlines throughout the past few months:
Dow drops 250 points on Trump’s tariffs.
Canada tariffs on U.S. goods from ketchup to lawn mowers begin.
Harley-Davidson, stung by tariffs, shifts some production overseas.
The main targets of the U.S. tariffs are (1) China, the world’s second-largest economy and a rapidly developing global power; and (2) three long-standing allies of the United States: Canada, Mexico and the European Union. In both cases, the Trump administration has levied ad valorem tariffs against specific imported products from these countries.
In the case of China, a 25% tariff has been assessed on steel and an additional $34 billion in Chinese goods. The tax, which was announced in April, is being levied on 1,300 products, ranging from medical supplies and machinery to dishwashers and snow plows.
In response, China has announced a plan to retaliate by taxing $34 billion in American agricultural goods, including beef, chicken, pork and soybeans; although these tariffs have not yet been implemented. Additionally, the Trump administration has suggested that any retaliatory measures taken by the Chinese will be met with tariffs on an additional $200 billion of imported goods.
The EU, Canada and Mexico were also hit with a 25% tariff on steel exports and a 10% tariff on aluminum exports. The EU has now imposed tariffs on $3 billion of U.S. goods (e.g. whiskey, peanut butter, Harley-Davidson motorcycles), prompting Trump to threaten a 20% tariff on all European-produced cars sold in America (to be levied on approximately $300 billion in automobiles).
Canada and Mexico have also responded in-kind to the steel and aluminum tariffs. Mexico has imposed a series of taxes on $3 billion in U.S. goods (e.g. pork, apples, potatoes, bourbon), and Canada has assessed tariffs on $12.6 billion of goods (e.g. ketchup, lawn mowers, whiskey).
In light of these recent developments and the looming possibility of further retaliatory actions, let’s examine how tariffs could impact your family and the global economy at large.
Tariffs vs. Reality
Tariffs are often imposed as a well-meaning attempt to protect domestic production of goods and services, as well as to reduce both a nation’s trade deficit with other nations and their overall budget deficit.
However, in a modern global economy, the touted benefits of tariffs rarely materialize. Let’s evaluate three claims that are often made in support of the recent tariffs assessed by the United States federal government.
Claim: Tariffs protect American jobs.
Reality – Mostly false. Tariffs might be effective in protecting domestic jobs in specific industries. For example, those who are employed in steel and aluminum production were ecstatic with the news about tariffs on imported metals. Domestic employment in those two industries should experience short-term preservation and even modest growth.
That being said, increased commodity prices will likely have a negative impact on related U.S. businesses that rely on imports of those goods – leading to net job loss.
The automotive and aerospace industries, for example, are dependent on imported steel to produce vehicles at a competitive price. Steel tariffs will increase their production costs, leading corporations to increase the prices of consumer goods and to take other measures that sustain profitability (scaling back expansion plans, cutting labor costs through downsizing or outsourcing, etc.).
Another prime example of tariff-induced job loss can be observed in the print media industry. The Trump administration levied tariffs against Canadian paper in January and February, leading to a 30% overall increase in the price of newsprint.
The Tampa Bay Times (Florida’s largest independent newspaper) anticipated that the tariffs will result in an additional $3 million in annual costs. Consequentially, the Times cut about 50 jobs to make ends meet.
Other print media companies have expressed similar concerns about the impact of the paper tariffs on their ability to operate in their current capacity. Smaller local newspapers could be forced to cease production altogether, while larger newsrooms will need to cut staff and/or reduce the size and frequency of their print editions.
Claim: The United States’ massive trade deficits with other countries are damaging to our country and need to be corrected.
Reality – Mostly false. Trade deficits can indeed have damaging consequences on national economies, but deficits are not inherently good or bad for an economic powerhouse like the United States.
In theory, running a trade deficit does carry significant risks. Large trade deficits can indicate that a country’s demand for imported goods significantly outpaces demand for their domestic products.
As a result of lackluster demand for domestic goods and services, both employment and currency value within that country would be negatively impacted. These conditions can set the stage for rampant inflation and rising interest rates, which can ultimately put a serious damper on economic growth.
However, the U.S. is largely immune to these negative consequences of trade deficits. Due to the fact that the U.S. dollar serves as the dominant world reserve currency – and given the sheer scope of our economic output – demand for the U.S. dollar remains relatively strong and sustained, regardless of trade deficits or other weak economic indicators.
It is also worth mentioning that trade deficits can lead to positive economic consequences. Countries with whom the U.S. carries a large trade deficit (China, for instance) will often recirculate their nation’s surpluses back into the United States in the form of foreign direct investment.
The best example is the influx of Chinese real estate investors, who have acquired substantial commercial and residential holdings in major U.S. cities since the dawn of permanent normalized trade relations in 2000.
Claim: Tariffs increase revenue for the federal government and reduce our bloated budget deficit.
Reality – Partially true. Tariffs do increase revenue to the federal government in the short term, as they collect duties on imported goods.
That being said, tariffs almost always translate into higher prices for consumers because businesses transfer their increased production costs onto you. As tariffs increase the cost of living for American families, people will have less disposable income on average.
By decreasing the purchasing power of wages, more and more Americans might need to utilize social welfare programs to make ends meet – especially SNAP (food stamps), Medicaid and subsidized housing. The increased demand for public assistance will require additional funding for these programs.
If the added revenue derived from tariffs is spent on social welfare programs, then the fiscal benefits of tariffs are neutralized.
It is also important to note that any revenue obtained from collecting duties won’t come close to compensating for the lost revenue from the most recent tax cut, which the Congressional Budget Office estimates will add at least $1 trillion to our 2018 deficit.
Three Additional Consequences
The retaliatory exchange of tariffs between two or more sovereign nations is known as a “trade war” and typically leads to negative consequences for all parties involved. In most instances, no one wins a trade war; it’s a matter of which country loses more.
Tariffs often have a negative short-term impact on U.S. stocks and erode investor confidence.
Whenever new tariffs are levied either by or against the U.S., the New York Stock Exchange and other global markets enter a short-lived freefall.
For example, the Dow fell 495 points on April 2 after China announced retaliatory tariffs against the U.S.; the markets surged back within two days. Similarly, the Dow dropped by 250 points on May 31 when Trump announced tariffs on the EU, Canada and Mexico; stock prices recuperated within 48 trading hours.
Although the dramatic headlines about daily market performance and volatility can be worrisome, the long-term impact of tariffs on investors is even more concerning. Tariffs can result in waning investor confidence about the profitability and growth potential of U.S. industries that are affected by the tariffs (both directly and indirectly).
The uncertainty of looming retaliatory tariffs also contributes to investors’ apprehension, which could further suppress economic growth.
American exporters will struggle to compete in foreign markets.
For American-based companies that sell their goods on the global marketplace, tariffs threaten their ability to sell goods at a competitive price. When a good or service is overpriced relative to the alternatives, demand for the product will drop substantially.
The ensuing loss of sales revenue reduces profitability and could even undermine a company’s ability to continue overseas operations in its current capacity.
Perhaps the most high-profile example of this phenomenon is Harley-Davidson. When the EU announced retaliatory tariffs against the U.S. in April, Harley-Davidson motorcycles were slapped with a 31% tax. The cost of every one of their motorcycles sold in the EU increased by $2,200 on average.
In response to the huge increase in production expenses, Harley-Davidson announced in June that they will be laying off workers at one of their Wisconsin plants and outsourcing motorcycle production for its Europe market.
Likewise, agricultural industry experts and farmers alike have expressed deep concerns about how impending retaliatory tariffs could affect food exports. The state of Iowa, which is the leading producer of pork in the U.S., could be especially hard hit.
Mexico imposed a 20% tariff on American pork in June, which caused pork prices to plummet and will cost Iowa’s producers an estimated $560 million in lost revenue during 2018. In addition, China has floated the idea of a tariff on U.S. soybeans (another staple crop of the Iowa state economy). Iowa’s soybean producers could lose up to $624 million.
The United States’ reputation as a dependable and essential international trade partner will likely deteriorate.
Widespread tariffs have the potential to destabilize the global free trade alliances that have underpinned the U.S. economy for decades. The countries that have been impacted by recent tariffs have expressed a diminished confidence in the U.S. as an integral trade partner.
The full ramifications of this international shift in attitude are yet to be seen. However, some new developments suggest that our current trade partners are more likely to take actions that advance their rational economic self-interest rather than affirming their loyalty to the U.S.
Canadian Prime Minister Trudeau has indicated that he will not engage in NAFTA renegotiation talks until the most recent slew of tariffs has been nullified. Also, amidst economic uncertainty and other outside factors on the Korean peninsula, the South Korean government is now pursuing a trade deal with Russia – a nation that has long sought to chip away at the iron-clad alliance between the U.S. and South Korea.
The current U.S. leadership also seems disillusioned with the established system of global trade, as evidenced by the Trump administration’s introduction of the United States Fair and Reciprocal Tariff Act last week. The bill would grant U.S. presidents far more latitude in levying tariffs on 163 World Trade Organization member countries, a move that would effectively terminate U.S. cooperation with the WTO.
If the economic tensions between the United States and our global trading partners continue to heat up, more foreign nations may begin to seek out alternative trade deals with the European Union, China and other emerging economic powers.
The question is: Will the U.S. will be invited to the table for future negotiations if we upend the chessboard of international free trade?
The Bottom Line: Protecting American jobs and preventing foreign nations from taking advantage of us is an appealing message that has resonated with millions of Americans.
Despite the strong rhetoric of the Trump administration, however, the haphazard implementation of tariffs is an ineffective and inappropriate course of action if our goal is to maintain and expand America’s standing as a global economic superpower.
What’s Your Money Personality?
Jill Ciccarelli Rapps, CFP® | èBella Magazine | June 2018
When it comes to the special bond you share with your spouse or significant other, consistent communication can make or break the relationship.
Arguments about personal finances have consistently ranked as one of the primary causes of marital distress. In many cases, minor financial disagreements between married couples have been bubbling under the surface for years; and in the absence of open communication, these unspoken conflicts eventually lead to a heated dispute.
While having regular conversations about money is a good start for maintaining harmony with your spouse, you have almost certainly encountered a situation in your relationship where he or she seems to be speaking an entirely different language. So how do you engage in meaningful financial conversations when your spouse’s attitudes and behaviors seem entirely disconnected from reality?
When you and your spouse are struggling to find common ground in regards to your personal finances, it may be beneficial to closely evaluate your individual philosophy about money. Because conversations about money are often considered taboo in our society, a surprising number of people haven’t taken the time to reflect on their own beliefs and assumptions.
What is a Money Personality?
At the core of our own financial habits and attitudes, we all possess a guiding principle about money. For instance, some people equate wealth with success, happiness, or power; whereas others associate money with anxiety or evil.
This deeply rooted belief – known as your money personality – is shaped by experiences during your upbringing and by sociocultural norms. Take a minute to consider 2-3 core beliefs you have about money.
Psychotherapist and author Olivia Mellan has focused extensively on the distinctive money personalities that are most prevalent among Americans. In her book Money Harmony: A Road Map for Individuals and Couples, Mellan outlines five major personalities:
1) Spenders derive great pleasure from putting their money to immediate use. In some cases, this may lead them to spend most or all of the money they earn.
Most spenders view money as a means of achieving short-term gratification and happiness – not only for themselves, but for their loved ones and community as well. It may be difficult for spenders to save or invest enough money for future-oriented purchases and long-term financial goals.
2) Hoarders prefer to delay gratification in pursuit of long-term financial security. They most likely have a hard time spending money on themselves and their loved ones – even on practical purchases that other personality types would consider necessities.
Hoarders typically have well-defined financial goals and budgets and take a conservative approach to investing. They view money as the key to stability and are fearful of any financial dilemma that could threaten their orderly lives.
3) Avoiders seek every possible opportunity to procrastinate or delegate their personal financial decisions. Most avoiders believe that the day-to-day details of financial management are a nuisance. Most avoiders want simple, automatic ways to handle their money, or seek out a financial planner to handle financial affairs on their behalf.
Financial avoidance is often rooted in feelings of uncertainty or incompetence when dealing with the details of managing money, but can also be a sign of a deep-seated, paralyzing anxiety that arises when faced with money tasks.
4) Amassers view money as the source of power and self-worth. The more money they have at their disposal to spend, invest and save, the more alive they feel; and a lack of money may lead to feelings of emptiness or depression.
As a result, amassers have a tendency to obsess over generating more money to sustain and enhance the lifestyle they have come to enjoy.
5) Money Monks have a disdain for wealth, believing that money has a corrupting and evil influence on people. They tend to live modest, frugal lives, and they feel uneasy – even guilty – when they believe that they possess too much money.
Many people with this personality also believe that their money should serve as a reflection of their deeper moral values and convictions. As a result, money monks tend to donate money to charities or social causes in lieu of spending, saving or investing.
Discover Your Money Personality!
Take the Money Harmony quiz on Olivia Mellan’s website: www.MoneyHarmony.com
Achieving Money Harmony
Throughout your life, you have probably known someone who matches the description of one of the money personalities to a tee. However, most people can relate to several of these personality types, with one or two dominant traits that guide their financial behavior.
While there is some degree of overlap between certain money personalities (i.e. amassers and hoarders), others are diametrically opposed (i.e. amassers and money monks). That being said, none of the personalities are inherently good or bad. Each personality carries both positive and negative characteristics, and the triumphs and struggles you experience in your financial life are often the result of this underlying philosophy.
Once you have gained a better understanding of your own tendencies, you must learn to appreciate your partner’s money personality. In doing so, you can empathize with your partner’s strengths and weaknesses and actively bridge any gaps that exist between your perspectives.
As you develop a deeper understanding of money personalities, you will open the door to more fruitful conversations about personal finances with your spouse – empowering you to work towards money harmony in your love life.
Preserving Your Family Legacy – Part I
How to Properly Designate and Update Beneficiaries
By Kay Anderson, CFP®
Having an up-to-date will and legal documents is an essential part of your legacy plan; however, these documents alone may not be enough to ensure that your assets are transferred to future generations in a manner that is consistent with your wishes.
Whenever you open a new account, you should ask yourself, “What will happen to this account if I pass away?”. In some cases, you may find the default option to be surprising.
Name that Beneficiary!
For retirement accounts, insurance policies and annuities, you always have the ability to specifically designate who will receive these assets in the event of your death.
Most custodians allow you to elect multiple primary and contingent beneficiaries, and you can often select what percentage of the assets are to be passed on to each beneficiary. These elections will override the provisions of your will.
Failing to appoint beneficiaries can be a costly mistake. If no beneficiaries are named, the custodian that houses your assets will follow their default rules to determine how your money is handled upon your death. Some will default to a surviving spouse, while others may follow the instructions of the account holder’s will and estate plan or simply name your estate as beneficiary. Why leave it up to a custodian to determine how to handle your legacy?
Naming a single beneficiary on an account could also lead to unwelcome consequences. For instance, if your account lists only your spouse as the primary beneficiary but has no contingents, what would happen if you both were to die in an accident? The process will depend on how the death occurs and who is deemed to pass first.
As an example, if your spouse is deemed to die after you, then the assets will flow according to their will and probate. In cases where you are in a first marriage and both spouses have same beneficiary wishes, this could work out fine; but what if that is not the case? It is important to consider your family dynamics and to ensure that your legacy wishes are specifically detailed.
Once you have established an account and listed your desired beneficiaries, you must not “set it and forget it.” Rather, you should review your elections on all accounts every 2-3 years and immediately following any significant life event, whether it be family-related or financial.
Accounts with up-to-date beneficiary designations can also provide you with an added benefit: simplifying the probate process. Although probate is a necessary component of estate settlement, it can be an expensive and time-intensive ordeal.
By selecting beneficiaries for your accounts in advance, these assets can bypass the probate process. In contrast, any holdings that are settled through your will (or lack a specific designation) are subject to the probate process.
Two other key factors to contemplate for your financial accounts are (1) establishing POD/TOD provisions and (2) understanding the difference between per capita and per stirpes beneficiaries.
A payable-on-death (POD) designation can be added to a bank account or CD to allow the money in that account to be inherited by a beneficiary immediately upon your death. The appointed person does not have control over these assets during your lifetime.
Similar to a POD, a transfer-on-death (TOD) designation serves the same purpose for an individually owned brokerage account or other investment that you wish to pass directly to a beneficiary. In both cases, taking this simple step will allow the accounts to bypass probate court.
Finally, when designating beneficiaries, you can stipulate either per capita or per stirpes as the path of succession for your assets. The distinction here is essential.
Per capita means that equal weighting is given to each surviving beneficiary. For example, if you have three children and one predeceases, then the inheritance that was granted to the deceased beneficiary will be evenly split between your two surviving children. If your deceased child had any descendants, they would not receive a share of the inheritance.
Per stirpes continues your inheritance along the family line. In the previous example where you have three children and one predeceases, the deceased beneficiary’s portion – 1/3 of the total inheritance – would be passed along and evenly split among that deceased child’s descendants (i.e. not split between your two surviving children).
Family Dynamics – Questions to Ponder
Every family situation is unique and often involves constant change – divorce/second marriages, new children and grandchildren, and much more.
For this reason, it is critical to regularly review and update your accounts to ensure that your vision for the succession of your assets is executed as desired.
Here is a list of considerations that can easily be overlooked as your family dynamics shift over time:
Spousal Considerations
If you are divorced, is your ex-spouse still listed as your primary beneficiary?
If your spouse is deceased, have you removed them as primary beneficiary? Have you designated a contingent beneficiary?
Considerations for Stepchildren and Adopted Children
Are you in a second marriage and have children from your prior marriage and/or new marriage?
Do you have stepchildren or adopted children?
What is your intent for the assets – keeping money within the blood line or including other family members?
Note: The legal nature of your relationship with a child/grandchild will drive how a beneficiary designation is viewed. Stating “my children, per stirpes” as your account beneficiaries, for example, would not include stepchildren unless this provision is formally adopted.
Additional Considerations
Do you have a child who is under 18, has a learning disability or other mental disorder, struggles with drug or alcohol issues, or simply cannot handle money?
What will they do with an influx of cash/assets without restrictions or guidance?
Have you considered establishing a special needs trust or guardianship to accommodate these circumstances?
Above all, it is essential to have proper documentation for all of your financial accounts and beneficiary designations. We recommend maintaining and organizing all of this information within one easy-to-access file, along with verified date stamps.
Our CAS team can facilitate this process on your behalf – compiling your account and beneficiary listings for your annual review and suggesting updates when appropriate. If it’s been a while since you have reviewed your accounts, we always welcome the opportunity to discuss your legacy plan.
Together, we can ensure that your beneficiary designations align with your current family circumstances and your vision for the future – empowering you to preserve wealth for generations to come.
Jesus Delgado & Heather Martinez Join Ciccarelli Advisory Services
Our CAS team is pleased to welcome two new
Client Services team members to our family-focused firm!
Jesus Delgado will primarily assist Paul Ciccarelli’s team with the financial planning and implementation process, as well as servicing various client needs and requests. Before joining CAS, Jesus spent four years working for various financial firms – including Bank of America, Regions Bank and AXA Advisors.
Jesus is currently pursuing a Bachelor’s degree in Finance at Florida International University and recently enrolled in the CERTIFIED FINANCIAL PLANNER™ program through the American College. Jesus holds his Series 7 and 66 registrations, as well as FL health and life insurance licenses.
Jesus was born in Cuba and has lived in the Naples area since he was a young child. He is passionate about health and fitness (especially weightlifting, biking, hiking, and cooking) and enjoys reading, traveling and playing guitar.
Heather Martinez will play a key role on Jill Ciccarelli Rapps’ team: handling incoming client requests, preparing materials for client reviews meetings, and assisting with various administrative tasks.
Prior to joining our team, Heather gained 18 years of experience working as a Senior Financial Account Representative with OppenheimerFunds. Previously, she worked for the ASPCA as a Veterinary Technician and studied Veterinary Medicine at Bel-Rea Institute for Animal Technology in Denver, CO.
Originally from Hawaii, Heather moved to Naples in 2017 from the Denver area. She lives with her husband of 23 years, Patrick; her daughter Larkin (18) and son Logan (16); and her two dogs and bunny. Outside of work, Heather enjoys playing tennis, going to the beach, camping, and discovering all of the wonderful activities of Florida! She also likes volunteering and mission trips.
Heather Martinez is not registered with FSC Securities Corporation or Ciccarelli Advisory Services, Inc.
Brenda Johnson & Carol Mikelsavage Join Ciccarelli Advisory Services
Our CAS team is pleased to welcome two new
Operations Specialists to our family-focused firm!
Brenda Johnson will play a key role in processing securities, establishing new accounts, and providing general account service for our entire team. She joins our team with more than 10 years of financial services experience. Brenda has served in a variety of roles – including financial advisor, operations, registered representative and executive assistant – for large firms such as Morgan Stanley, Smith Barney and Raymond James.
Originally from Connecticut, Brenda first moved to Ft. Myers in 1995. She spent time living in Alpharetta, GA, and southern Indiana and has recently returned to the area in 2017. She enjoys yoga, cooking, equestrian sports, fishing and hiking.
Carol Mikelsavage will facilitate the onboarding of new clients and pulling new account paperwork. Carol has more than 20 years of diversified experience in the financial industry. Before joining CAS, she served as an investment associate for Comerica Wealth Management; a trust operations manager for the PrivateBank and Trust; and a financial advisor with American Express Financial. Carol earned her degree from the Dorsey Business School in Michigan.
Carol moved to Naples from the Detroit, MI, area in 2017. Outside of the office, she volunteers for the Accounting Aid Society and the American Cancer Society. Carol also enjoys swimming, gardening, arts and crafts, and appreciating all of the beauty Naples has to offer.
Brenda Johnson and Carol Mikelsavage are not registered with FSC Securities Corporation or Ciccarelli Advisory Services, Inc.
The Royal Treatment?
By Carol Girvin
This weekend, the world will direct its collective gaze upon the United Kingdom to observe the joyous wedding of Prince Harry of Wales and Meghan Markle.
Notably, their wedding will mark the first time in British history that a U.S. citizen has married into the royal family.
Amidst the fanfare of their highly anticipated union, Ms. Markle will likely face some tax-related hassles behind the scenes. A recent article in the Wall Street Journal outlined some of the challenges that the princess-to-be could encounter as a result of her trans-Atlantic matrimony. Ms. Markel is not alone; many Americans who marry foreign nationals could experience a lifetime of harassment from the U.S. Internal Revenue Service.
The greatest impact on Ms. Markel will be the need to constantly report her financial activities to U.S. authorities. For example, suppose that Ms. Markel’s new grandmother-in-law, the Queen of England, lends her a tiara or diamond bracelet. She would be obligated to report this exchange to the IRS.
In addition, if she shares free rent for the residence at Kensington Palace, its value is reportable to the IRS. And if Harry and Meghan have a joint bank account or credit card with a balance that exceeds $10,000, the account has to be reported.
The penalties for improperly reporting her information to the IRS are severe, with the potential to consume as much as half of her account values.
That being said, it is possible that none of these regulations will significantly increase Ms. Markel’s tax bill. Assets that are held in trusts can be taxed at a rate of 37%, and many of the British royal family’s assets are organized in this fashion.
Photo Credit – The Wall Street Journal
The WSJ article also dives deeper into other odd provisions within the convoluted tangle of international financial requirements. For example, if a U.S. citizen works in Australia, Australian law requires that a person have a retirement account; however, U.S. tax law treats these accounts the same as offshore trusts, with very complex reporting rules.
Of course, Ms. Markle could simply opt out of U.S. citizenship, which thousands have done over the years. However, she would not receive U.K. citizenship for a potentially significant period of time (due to a long waiting period in England); so it appears she will have to adhere to U.S. tax rules for the foreseeable future.
As you watch the coverage of the wedding, keep your eyes peeled for the guys in plain dark suits and glasses. There’s a good chance they are the IRS agents – the unwelcome guests at the happy couples’ special day.
How the New Tax Law Could Impact You
By Samantha Webster
In December, our team compiled an overview of the various provisions found within the Tax Cuts & Jobs Act of 2017.
The new tax legislation brought about significant changes to several areas of the federal tax code, some of which could impact you and your family.
Although the tax legislation is far-reaching and nuanced, one of the key themes of the new law is increasing the standard deduction while phasing out certain itemized deductions. Single filers can now claim a $12,000 standard deduction; $24,000 for joint filers.
As such, we would like to take the opportunity to hone in on three specific itemized deductions that have been reduced – mortgage deductions, state and local tax (SALT) deductions, and medical expense deductions.
These particular changes to the tax bill could influence the approach you take when filing your 2018 tax return, as well as the financial decisions you make throughout the course of the year.
Important: Several areas of the new law were implemented on a “sunset provision” basis, meaning that the changes will revert to previous levels at the end of 2026 unless Congress reauthorizes the provisions.
Mortgage Deductions
For many Americans, becoming a homeowner is seen as an integral part of the American dream. Owning a house is not only a source of pride and stability, but your home is also a key asset that constitutes a considerable proportion of your net worth.
Owning a home also carries substantial tax benefits in the form of deducting mortgage debt interest from your individual tax return.
What Changed? – Prior to the new tax law, homeowners could deduct interest on up to $1 million in mortgage debt on their primary residence, as well as deduct interest on up to $100,000 in a home equity line of credit (HELOC).
Under the new tax law (effective December 14, 2017), homeowners may deduct interest on up to $750,000 in mortgage debt on the primary residence. The HELOC deduction has been eliminated entirely.
The changes to mortgage and HELOC deduction caps were passed as a “sunset provision” and will be reverted to their previous level in 2026 if Congress does not reauthorizes the new thresholds.
Who Is Impacted? – Anyone who took out a mortgage after December 14, 2017, will be subject to the $750,000 mortgage interest deduction cap. If you purchased your home prior to this date, the $1.1 million in deductions are still available to you.
The Bottom Line – Since the vast majority of homes in the U.S. are valued at under $750,000, the change should not directly impact most homeowners.
However, the new tax law may reduce the incentive for potential homebuyers to take out a mortgage that exceeds the $750,000 threshold. Also, homeowners who were considering whether to sell a house that is valued at more than $750,000 may opt to hold off until the deductions are reverted to previous levels in 2026.
These two factors could increase competition over an already limited supply of homes valued under $750,000 – which could cause home equity to rise for these residences, while also boosting the appeal of renting over buying for potential first-time homebuyers.
Lastly, homeowners may be more hesitant to open a home equity line of credit for a second mortgage or when refinancing their house.
State and Local Tax Deductions
Across the U.S., there is a great disparity between both states and cities in terms of the taxes you owe. Whereas Florida and Texas have no state income taxes, people living in Manhattan are faced with hefty taxes from both New York State and New York City.
The state and local tax (SALT) deduction provides some relief to residents of high-tax, high-cost areas of the country on their federal tax returns.
What Changed? – The old tax code allowed you to deduct all property taxes paid to your state and local government from your federal tax return. Income or sales taxes paid at the state or local level were also eligible to be deducted from your federal taxes.
The new law mandates that the amount of state and local taxes you may deduct from your federal taxes will be capped at $10,000 per household. This limitation applies to both individual and joint filers.
As with the changes to mortgage deduction thresholds, the new SALT deduction cap will sunset in 2026 if Congress does not reauthorize.
Who Is Impacted? – Residents of high-tax states (e.g. New York, California, Connecticut) and residents of coastal cities where property values and cost of living are high (Boston, Seattle, Washington, D.C.) will bear the brunt of the federal tax liability that results from the SALT deduction cap. This is especially true for people whose combined mortgage and SALT itemized deductions exceed the new standard deduction.
People residing in areas where taxes and cost of living are relatively low will see little (if any) impact on their federal taxes as a result of this provision.
The Bottom Line – For many residents of New York and the other high-tax states/cities listed, $10,000 may not cover the full amount of your property taxes – let alone other state and local taxes you have paid.
Although state legislatures in New York and California are brainstorming new ways to circumvent the added federal tax burden on their constituents, it appears that – for now – residents of the high-tax coastal states will be left picking up the tab.
Medical Expense Deductions
Given the skyrocketing cost of health care, it is reassuring to know that a portion of your annual out-of-pocket medical expenses may be deducted from your federal taxes.
What Changed? – For your 2017 tax return, you could claim an itemized deduction for out-of-pocket medical expenses that exceeded 10% of your adjusted gross annual income.
The new legislation allows you to deduct out-of-pocket medical expenses that exceed 7.5% of your adjusted gross annual income for the year 2018 only. By lowering the threshold, you can deduct more medical expenses from your taxes. Without Congressional reauthorization, the floor will be raised back to 10% in 2019.
Who Is Impacted? – People with substantial medical bills (relative to their income) – especially those with chronic illnesses or disorders that require continual care – will be able to deduct a larger share of their medical expenses. In particular, those who are in poor health and do not yet qualify for Medicare would receive the greatest assistance in 2018.
If your medical costs are less than 7.5% of your income, there is no added benefit.
The Bottom Line – The new tax law provides a welcome gift – albeit fleeting – to Americans who are plagued with hefty medical bills. The medical expense deduction could help to temporarily alleviate the financial strain on these families – potentially offsetting any increases in insurance premiums that might occur in 2018.
Although these tips provide you with a more detailed understanding of three particular provisions in the new tax law, you should review your unique circumstances with your advisor before making any substantial life changes (selling a home, undergoing a major medical procedure, etc.) to determine the best opportunities for tax relief.
Our CAS team is constantly monitoring any proposed legislation that could impact your financial wellness, and we will continue to keep you abreast of any pertinent topics that might affect you and your family.
SpelLIFE 2018 – The Power of Food
The fifth annual SpelLIFE Women’s Wellness Summit provided more than 300 people in the Southwest Florida community with the knowledge, resources and inspiration needed to pursue a wellness-focused lifestyle.
The summit – presented by A Euphoric Living Foundation, Inc., and èBella magazine – was on Saturday, April 21 at the NCH Telford Center in Naples.
Ciccarelli Advisory Services was a primary sponsor of the 2018 SpelLIFE Women’s Wellness Summit. In addition, 30 local organizations sponsored resource exhibit tables, providing attendees with the opportunity to explore the wellness-focused services that are available in our community.
SpelLIFE 2018 honed in on the relationship between dietary choices and long-term brain health. This message was articulated by keynote speaker Dr. David Perlmutter, a board-certified neurologist and four-time New York Times bestselling author.
Dr. Perlmutter discussed the damaging effect of consuming excessive carbohydrates – especially sugar and grains – on the health of the body and the brain. He emphasized that a low-carb diet is essential to maintaining peak brain function and preventing dementia, in conjunction with regular exercise and consumption of dietary fat.
Dr. Perlmutter also cited other methods for preventing inflammation in the body, such as avoiding artificial sweeteners and supplementing turmeric and probiotics to the diet.
During the breakout sessions at the event, four guest speakers from the Naples community shared their expertise on various topics related to holistic health and wellness:
Chris Edwards, owner of TriCore Wellness;
Dr. Pamela Hughes, owner of Hughes Center for Functional Medicine;
Dr. Caroline Cederquist, founder of Cederquist Medical Wellness Center; and
The Alternative Therapies Panel – Frank Corvino, DeAnna Graziano, Carol McDermott, and Nancy Molidor.
Partial proceeds from the SpelLIFE Women’s Wellness Summit will benefit the Senior Friendship Health Center, a nonprofit organization that offers low- or no-cost medical and dental care to underserved seniors in Collier County.
To get involved and stay up-to-date about the SpelLIFE Women’s Wellness Summit, visit AEuphoricLivingFoundation.org and follow the SpelLIFE Facebook page.
The Business of Family – Your Guide to Legacy Planning
By Kim Ciccarelli Kantor, CFP®, CAP®
When we hear the term estate planning, most people consider the “nuts and bolts” of your plan:
Estate documents (wills, powers of attorney, health care proxies);
Financial vehicles that can support your family and your community for years to come (various types of trusts, donor-advised funds, etc.).
While the tangible aspects of your estate plan are absolutely necessary to your family’s long-term financial success, your legacy plan encompasses more than just your investments and assets. When properly prepared and executed, the plan should serve as a blueprint to prepare your children and grandchildren to become good stewards of your wealth.
Unfortunately, many personal fortunes have been squandered more quickly than they were amassed as a result of poor family communication and inadequate planning.
All too often, the intangible component of legacy planning is overlooked and future generations are left without a guiding framework for how to best sustain and enhance family wealth.
Key Considerations for Family Founders
As the family matriarch or patriarch, a well-thought-out legacy plan affords you with a unique opportunity to guide your children and grandchildren in achieving long-term personal and financial success.
At the very core of the legacy planning process should be your family’s mission and deeply held values. A mission or values statement serves as a succinct, powerful means for articulating financial priorities and creating mutual understanding about how to align your money with your principles and purpose.
In order for your legacy plan to achieve its full potential, you must consistently communicate your family mission and story – including the core values and key lessons that were instrumental during your lifelong journey of building and sustaining your wealth.
Perhaps the most important consideration as the family patriarch/matriarch is how to prepare your children and grandchildren to inherit wealth and embrace a healthy perspective about money.
In our experience, families realize the greatest benefit when they move beyond a simple explanation what is given to heirs. Rather, the heart of your family discussions should focus on (1) why the assets are being passed forward and (2) your intentions for how the wealth should be utilized.
If you have neglected to lay out clear expectations during your lifetime, your children and grandchildren could misinterpret your wishes and use their inheritance in a manner that is not consistent with your family mission and values statement.
While some of your descendants may indeed view their inheritance as a legacy to be preserved and passed on to future generations, others may see the windfall as a means for immediate gratification and short-term indulgence.
With these considerations in mind, the question remains: As the family founder, what is the most effective way to convey my wishes for how my legacy plan ought to be carried out?
Based on our extensive work with client families, we have identified five vital components of most successful plans – known as the “capital” in the business of family. By fostering strong development in each of these crucial areas, your family members will gain clarity and insight into your distinctive vision for the future.
Figure 1. The five types of capital serve as the building blocks of the business of family, with each component playing a critical role in constructing a legacy for future generations.
Financial capital consists of the tangible assets you have accumulated during your lifetime – investments, business interests and possessions – as well as the future growth potential of these assets.
Sustaining family capital is best accomplished when you have clear, realistic expectations and a strategic approach to long-term growth. Through the family financial and legacy plan, your children and grandchildren should gain a mechanism for investing appropriately, conserving values and appreciating the end use for the wealth.
Human capital is expressed through the personal character development of individual family members. In order to serve as good stewards of your wealth, your descendants must value responsibility and productivity, as well as a desire to continuously learn and expand their skill set.
To successfully cultivate these traits, you must talk about the meaning of money as a family unit – sharing your values about spending, saving, sharing and investing. Assisting your children and grandchildren in developing these traits will empower them to pursue worthwhile ambitions during their life – in essence, utilizing their human capital in an impactful way.
Family capital involves the process of creating and reinforcing mutual understanding so that you can strengthen your existing familial ties into positive, productive relationships. Families learn to respect and trust each other through the open exchange of ideas, by mitigating past misunderstandings, and by listening to and learning from each other.
Mastering the ability to compromise is necessary, as well as striving to achieve a win/win outcome for all parties involved.
Societal capital manifests through community action and your family’s involvement in service and philanthropy. To be effective, societal capital must be expressed both in individual and collective family choices.
Depending on your circumstances, family foundations, donor-advised funds and charitable trusts are useful vehicles for carrying out your philanthropic goals (as may be reflected in your family mission statement).
Structural capital serves as the foundation required to hold the legacy plan together, to bridge the gap between generations in a concrete way.
The framework of your legacy plan – the business of family – is demonstrated through the development of the family mission and value statement, regular communication between family members, and decision-making procedures that promote accountability and boundaries for managing your money.
Successful family governance is best achieved through clearly written, living agreements among family members, with an eye towards perpetuating the family’s mission and values for posterity.
Figure 2. By gathering multiple generations for a family meeting, you can promote open communication between all parties and reinforce the desired mission and goals of your legacy plan.
By facilitating intergenerational communication about your family mission, values and purpose of the plan, our CAS team aims to help you build mutual understanding and cohesiveness among family members and prepare your heirs to leverage all five types of capital to their fullest potential – today, tomorrow, and for generations to come.
Discover how our team of experienced advisors go above and beyond the traditional, tangible financial planning role to simplify the transfer of your intangible wealth and values to your children and grandchildren.
Social Security Loopholes for Married Couples
By Josh Espinosa, CFP®, CIMA®
Most of us are familiar with the analogy of the “three-legged stool” of retirement income: (1) Social Security; (2) savings and investments; and (3) pension plans.
As the saying goes, your level of stability during retirement depends upon the combined strength of each of these three legs; and a lack of planning in one of these areas could knock out a key structural component of your financial security.
As private pensions have steadily been phased out by most employers, the remaining two legs – investments and Social Security – have become even more critical for sustaining your desired lifestyle throughout retirement.
While the reality of today’s retirement income “stool” may be more wobbly than in years past, a strategic approach to maximizing your Social Security income can compensate for the lack of a private pension plan.
Changes to the Rules
As a result of the Bipartisan Budget Act of 2015, two Social Security loopholes for married couples were closed or restricted. The legislation could impact couples who are approaching retirement age with respect to their flexibility in claiming individual and spousal benefits.
Loophole #1 – File & Restrict
Under the previous law, if you are eligible for benefits both as a retired worker and as a spouse (or divorced spouse) and are not yet full retirement age (66 years), you must apply for both individual and spousal benefits. You will receive the higher of the two benefits.
The loophole allowed some married individuals to start receiving spousal benefits at full retirement age while letting their own retirement benefit grow by delaying it.
The new law is known as “deemed filing.” By applying for one benefit, you are “deemed” to have also applied for the other. Deemed filing has now been extended to apply to those at full retirement age and beyond.
Who’s Affected: If you were born after January 1, 1954, and will be eligible for Social Security benefits both as a retired worker and as a spouse (or divorced spouse), then the new law applies to you.
Note: File and restrict is still available if you were born before 1/1/1954 and your spouse is receiving benefits.
Loophole #2 – File & Suspend
The earlier law allowed a worker at full retirement age or older to apply for retirement benefits and then voluntarily suspend payment of those retirement benefits; which allowed a spousal benefit to be paid to his or her spouse while the worker was not collecting retirement benefits.
The worker would then restart his or her retirement benefits later (for example, at age 70), with an increase for every month retirement benefits were suspended.
Under the new law, you can still voluntarily suspend benefit payments at your full retirement age in order to earn higher benefits for delaying. But during a voluntary suspension, other benefits payable on your record – such as benefits to your spouse – are also suspended.
Also, if you have suspended your benefits, you cannot continue receiving other benefits (such as spousal benefits) on another person’s record.
Who’s Affected: The new law applies to individuals who request a suspension on or after April 30, 2016, which was 180 days after the new law was enacted. In short, the file and suspend loophole is no longer available unless already doing it.
Case Study – Maximizing Social Security Benefits
Despite the recent regulations surrounding Social Security, you and your spouse can still take steps to make the most of your benefits during retirement. Let’s explore a situation where we helped one of our client families maximize the value of their Social Security benefits.
George (age 66) and Doris (age 65) are a married couple who retired and moved to Naples in 2015. George served as the chairman of a large packaging and coatings company, and Doris was a small business owner.
Prior to becoming a CAS planning client, Doris started claiming Social Security benefits at age 63. The couple has sufficient cash flow to meet their retirement lifestyle needs before accounting for their Social Security income.
Based on their situation, we recommended that George delays his Social Security benefits until he reaches age 70. Because they do not need the extra income at this time, waiting until age 70 allows the benefits to grow at a rate of approximately 8% annually (increasing his annual benefits from $2,687/year to $3,538/year.
Since Doris is already taking Social Security benefits, George can also claim half of Doris’ spousal benefit until age 70 (based on her full retirement amount).
When George reaches age 70, Doris will also be able to activate her spousal benefits based on his increased benefit. Because she started claiming benefits before reaching full retirement age, she will get the difference of her income and half of George’s spousal benefit minus the early retirement reduction.
Doris also benefits from an increased benefit should George pass away before her. In this case, she would qualify for widow benefits at George’s full amount.
Overall, this strategy will maximize their total combined benefits based on both their life expectancies.
Note: There is no “one-size-fits-all” approach to managing your Social Security income flow. Your unique circumstances will serve as the foundation for developing an appropriate strategy for you and your family.
In some instance, delaying retirement income is not the most suitable option (especially if you are considering an assisted-living housing situation, in which case current income could be a more important criterion for admission than net worth).
Our CAS team has had the opportunity to help hundreds of client families determine the best approach for claiming their Social Security benefits. Before making any final decisions about your Social Security income, we recommend speaking with your advisor to establish a sustainable cash flow plan that fulfills your needs throughout retirement.
