Financial Planning Blog

WAIT… Don’t Prepay Property Taxes Yet!

December 29, 2017 by Michael Schupak

Don’t prepay your property taxes until you read this!

As a financial advisor and CFP® Practioner I’ve had numerous discussions in the past few weeks about prepaying 2018 property taxes in 2017. Time is running out, this strategy is picking up steam and homeowners are practically sprinting to their city hall office. Not so fast. Below are three reasons to consider before pre-paying your 2018 property taxes.

1) AMT! There is an Alternative Minimum Tax, also known as AMT. To explain in a nutshell, when your tax liability is calculated, an additional alternative method to calculate your tax is computed and compared to your original tax liability. You end up paying the higher of the two taxes. AMT was put in place to ensure everyone pays a minimum tax. Your AMT calculation is similar to your regular calculation but several deductions are excluded. One of those deductions is property tax! This means that if you are going to pay AMT, additional property tax payments will not help. Unfortunately, it can be difficult to figure out if you will be subject to the AMT and it is best to reach out to your financial or tax advisor.

2) You may not hit the SALT (state and local taxes) cap next year. Starting in 2018, there will be a ceiling of $10,000 on the total of local taxes, state taxes and property taxes eligible for deduction. Many people in New York City and New Jersey will easily blow past this $10,000 cap. However, there will be some who pay property taxes but their SALT is under $10,000. This is more likely in no or low tax states like Texas, Florida and Nevada. Make sure you anticipate to be over the cap of $10K for your 2018 tax year before committing your 2018 property tax payment to 2017.

3) You need the liquidity or the money! It is not a secret that much of America lives paycheck to paycheck or is in debt. If you are living on a tight budget and paying property taxes would eat well into your emergency fund, you should pass on this one. Even worse, don’t go into credit card debt to pay your property taxes early. It is likely the dollars you pay in credit card interest will far outweigh any tax savings you can achieve.

Winter is Coming

December 6, 2017 by Michael Schupak

Ok, now that I have your attention…I actually mean Tax Reform is coming…

As of Saturday (12/2/17), the Senate passed its version of the tax bill and earlier in November, the House passed theirs. Over the coming weeks, the two sides will work together to compromise on a bill.

I’ve been following the situation closely and wanted to share my favorite articles outlining some of the proposed tax bill changes and potential implications.

My top recommended article is from Heritrage.org. This article has a great comparison chart showing the current law vs. the House and Senate proposed changes. http://www.heritage.org/taxes/commentary/1-chart-the-differences-between-the-house-and-senate-tax-reform-bills-0

As the House and Senate work to reconcile their differences, this article by CNN describes the key differences between the two. http://money.cnn.com/2017/12/03/pf/taxes/senate-house-tax-bills-individuals/index.html

One of the major topics of this tax reform is the limited deduction on state and local taxes at the federal level. For us New Yorkers and New Jersey Residents, there is a good chance our tax liability will go up because of proposed limits. https://www.nytimes.com/2017/12/04/business/economy/tax-bill-new-york.html

The Washington Post dives into the analysis by the Joint Committee on Taxation. This gets very interesting as there are illustrations of the impact on households at different income brackets next year and forward looking over the next 10 years. https://www.washingtonpost.com/news/politics/wp/2017/11/30/how-the-republican-tax-bill-benefits-the-rich-according-to-government-analysis/?utm_term=.3e33c5fdabcd

For those who like to get into the details, see below for the Joint Committee on taxation reports! https://www.jct.gov/

It’s still early in the tax reform process and it will be interesting to see where the final tax bill lands. For now, all we can do is wait and see.

Four Ways Fantasy Football is like Investing

September 11, 2017 by Michael Schupak

The league is not won on draft day and your total returns are not only driven by your initial stock picks.

Draft day is a great time to see your friends, catch up over beers and trash talk, but it doesn’t drive the winner of the season. Important decisions such as who to bench, waiver pickups and trades will likely drive the winner of your league. In investing, your total return will be driven by what securities you hold, but also, how long you hold them, what type of taxes you have to pay (short term, long term, ordinary income or none!), what other securities you pick up, how much you pay in trading fees, AND how and when you decide to rebalance, reinvest and withdraw.

There are Value players and Growth players, just like you have Value stocks and Growth stocks.

Value players would be ones that consistently perform well every single year, sometimes an all-star and other times not, but their production is well forecasted. Matt Forte, Tom Brady, Julio Jones and Frank Gore to name a few. Then, there are those growth players who are more volatile and likely to over or under perform. CJ Spiller of 2013 comes to mind (I picked him #4 at the time) as he was supposed to be a breakout performer and was filled with disappointment. Beckham in 2014 surpassed expectations. My growth callout this year would be Adrian Peterson as he can be a big hit or miss.

Waivers is like an IPO.

It’s frustrating in fantasy football when, in week 8, the starting running back tears his ACL and the backup is somebody with great potential. You put in a waiver claim for the promising back-up, along with everyone else in the league and only one person walks away with him. Well, many IPO’s are in such high demand they are nearly impossible to get your hands on. It’s not uncommon to see an IPO up 20% on opening day. For the person who was able to pick up that hot waiver, they likely see their team’s value increase sharply and instantaneously.

Diversify!

I’m a big fan of diversifying, whether you are buying stocks or mutual funds. I like to diversify across a number of metrics: stocks vs. bonds vs. REITS, US vs. international vs. emerging markets, small cap vs. large cap, value vs. growth and I believe the same should be said in fantasy football. Remember what happen to those who predominantly owned technology stocks during the dot-com boom? Similarly, you don’t want the running back and top two receivers from a single team, even if they are the number one ranked offense. If the QB gets hurt, the team faces the top rated defense or if the weather is poor, you’re bound to have a loss that week. Therefore, diversify your players across different teams.

The Sneaky and Costly Financial Mistakes You Could Be Making!

August 14, 2017 by Michael Schupak

A few weeks ago I discussed several mistakes people make with their finances that they are often aware of but fail to correct. This week, we dive into some of the sneakier financial mistakes people are making that they are not aware of!

Substantial assets are tied up in company stock. Company stock can be found in many forms; a 401k plan, employee purchase plans, restricted stock units (RSU’s), options, bonus payouts and more. These are all great opportunities to benefit from your company’s success and I often recommend employees take advantage when given the opportunity. However, over time it is wise to watch what percentage of your net worth is tied to the company you are working for. If the company struggles, chances are everything takes a hit at once: options become worthless, your bonus is smaller, the RSU’s decline sharply in value and in severe situations, you can even lose your job. Make sure to keep your net worth diversified!

Nondeductible IRA contributions. The problem here stems with many financial firms working to increase their assets through IRA contributions regardless of whether or not it’s beneficial for the client. I have seen this with all types of firms: large institutions, small banks and robo advisors. Contributing to one’s IRA is generally a great idea, if one gets a tax deduction. However, if you don’t qualify for a tax deduction the benefit is minimal (if existent) and can even lead to additional taxes if not documented properly. The qualifying rules can be confusing, Nerdwallet has a good article outlining the rules and limits. Nonetheless, there are select times when nondeductible IRA contributions can make sense. I suggest reading up on the details and consult with your tax or financial advisor before contributing to an IRA.

Insufficient or lack of disability insurance. Disability insurance is one of those items I hope my clients never have to cash in on. However, it is important to have, and can be crippling to your wealth if your coverage is weak. For many of the clients I work with, I have recommended they select the highest option within their group plan. Unfortunately, sometimes this isn’t enough as you should look at the policy holistically. For instance, when a highly compensated employee easily maxes out the monthly benefit. Also, many group policies don’t include bonuses in their calculations. The intricacies continue as the benefit is sometimes taxable and sometimes not (it is based on who is paying the premiums). At the end of the day there are several items that play a major role in the adequacy of one’s disability insurance. When you look at these items together make sure it provides an adequate salary replacement. If not, you should consider gap coverage. If you want to know more, here is an article that discusses aspects to disability insurance in greater detail.

Sentimental value influences – Inheriting property is sometime tricky because one may have an emotional tie to what has been inherited. For example, a client doesn’t want to part with a piece of rental property or XYZ stock because it meant so much to their dad. I’ve seen the emotional tie to the property cloud the optimal financial decision. Maybe you are swimming in high interest debt and could sell that stamp collection to get out of it, or now you have 50% of your net worth in one business and seriously need to diversify. There are no words to describe what it is like losing a loved one and sometimes our decisions become focused on keeping the individual with us vs. being financially savvy. Thus, it is important one understands the consequences of holding onto a property solely for its sentimental value.

I hope you enjoyed this article and possibly uncovered some areas of opportunity in your financial life that you were not aware of.

You Know Better! Stop Making These Financial Blunders!

July 27, 2017 by Michael Schupak

Have you ever committed to a healthy night – gone to the gym, had a healthy dinner, skipped the wine, only to wind up with a late night trip to Ben and Jerry’s? Of course you have, at least in some sense… even though you knew that would wreck all of your hard work, you excused away your better judgement for the momentary gratification.

This article is not about ice cream, but how savvy people make financial mistakes they know they are making. These are the 5 most common I see.

No emergency fund. An emergency fund is vitally important for all households. The “book” says 3 – 6 months of living expenses is a good target depending on whether you are in a single income or duel income household. To be more precise, you should customize the amount based on your unique situation; such as; employment stability, industry variability, earnings volatility (salary vs. bonus vs commission) and expense composition.

Unqualified withdrawals from a 401k/IRA. There are times when it makes sense to partake in an unqualified withdrawal from a 401k/IRA. However, most of the time it does not. It is important to explore all possible options available before doing this, as it can’t be undone. Some alternatives that could make better sense are: spending down on one’s emergency fund, cut ongoing expenses, take a loan out of your 401K and even filing for bankruptcy.

Dismissing employers 401K match. If you have a 401k match available to you, take full advantage of it. This is a great opportunity to catapult your retirement savings. The caveat is, you are tying money up in a qualified retirement account, but you will likely thank yourself down the road. There are countless calculators online to show you the power of compounding in a retirement account. When you throw in an employer match, the downstream impact is enormous.

Carrying credit card debt and only paying the minimum balance due when one has cash available. Most of us know this is a bad habit, but many of us don’t know how bad or why. Many credit cards average an APR (Annual Percentage Rate) between 15% – 22%¹, which is much higher than any reasonable expectations for an investment return. A better strategy would be to take your savings, pay off your credit card in full and build your savings back up over the next several months. Carrying credit card debt and trying to improve your financial situation is like swimming with sandbags, it is going to weigh you down and wear you out.

Building up and sitting on cash in your bank account. The S&P 500 has an average return of ~10% annually over the last 90+ years. 10 year treasuries are paying over 2% right now. If you don’t have a short term need for money in your bank account and can handle some volatility, you are better off investing it. Whether you want to be risky and invest all in equities or more conservative and invest in treasury bills is a discussion you should have with your advisor. For example, imagine you had invested $300K in a conservative portfolio and received a 4% return annually. After eight years you would have made $110K with your investments. If it sat in a savings account earning 1%, you would have just an extra $25K in your pocket.

Are you making any of these mistakes? You already know you’re doing yourself a disservice, so act now and realigned the ship! These issues only take you further off course with time.

Be on the lookout for Part 2 next week when we will dive into the issues that are less obvious, but just as important, 5 Common Financial Mistakes People Make that they are NOT Aware of!

1) https://www.valuepenguin.com/average-credit-card-interest-rates