Two Financial Updates for 2019

Market Update

The US bull market is getting long in the tooth. We have just witnessed a V-shaped partial recovery from the rather dramatic sell-off from the 4th quarter of 2018. The MSCI All-World Index was up nearly 11% for the first two months of this year. However, it was still negative for the twelve months then ended. In retrospect, it seems that the Federal Reserve might be to blame / credit for both these moves.

Remember QE 1, 2, and 3? Those were the rounds of quantitative easing that the Fed used to inject capital into the open market by buying trillions of dollars of US Debt after the Great Recession. It was supposed to stimulate growth in the economy. Back in October 2018 they reversed course and started Quantitative Tightening. The Fed simply had to suspend renewal of the bonds that were coming due. They also signaled that interest rates would be on the rise. That resulted in the stock and bond market slide that marked Q4, 2018.

Last month, they signaled that future interest rate hikes would be put on hold for the time being. China’s central bank was even more aggressive in its accommodation by reducing reserve requirements for its member banks, thereby creating more liquidity. These steps have led to rallies in stocks and bonds as interest rates have fallen.

Add to this mix uncertain trade talks, economic growth numbers that are declining, and relatively low but stable inflation, and you have the makings for a market outlook that goes from extreme bullishness to extreme panic in a matter of days. If you are investing for the long term (whatever that is) you are right to be challenged by this market.

These past few months, perhaps more than at anytime in the recent past, have been an excellent time to take note of your risk tolerance. Ask yourself, with which are you more uncomfortable: 1) holding stocks while the market is falling? OR 2) holding cash as the market is rising? Making sure that you are in the strategy that suits you will insure that you have the staying power to weather the storms and still accomplish your long-term goals and objectives.

“Making sure that you are in the strategy that suits you will insure that you have the staying power to weather the storms and still accomplish your long-term goals and objectives.”— Scott Neal

Tax Update

Early last year, after the Tax Cuts and Jobs Act of 2017 became effective, we predicted that without planning, taxpayers would be surprised when 2018 tax returns were prepared. Sure enough, that is coming to pass. There have been news reports in the popular press about people who are surprised that they owe taxes for the first time in their lives. I cannot overstress the importance of projecting 2019 taxes now and adjusting accordingly.

The standard deduction has been raised for everybody, and fewer people are finding it advantageous to itemize deductions. In fact, it’s been reported that nearly 90% of taxpayers are likely to be better off taking the new standard deduction ($24,000 for married joint filers and $12,000 for single filers). There are a couple of ideas that are worth considering for this year.

Bunching several years’ worth of charitable deductions into one year is one such idea. That is accomplished with a donor-advised fund (DAF). Let’s say that you typically give $10,000 in charitable contributions in any one year. This year, you could make your 2019 and 2020 contributions ($20,000) into the DAF and take the entire deduction this year. The funds remain in the donor-advised fund until you distribute them to charity as you normally do. There is no deduction taken when the funds are distributed out to the charity. In some cases, the funds in the donor-advised fund can be invested for return.

It’s almost always a good idea to donate securities that have appreciated in value rather than simply donating cash.

If you are over 70½ and are subject to taking a required minimum distribution (RMD) from your IRA, AND you are charitably inclined, you should consider making your charitable gifts directly from your IRA. This is called a Qualified Charitable Distribution (QCD) and enables you to meet the requirements for the RMD while reducing your Adjusted Gross Income. You don’t get to take the deduction as an itemized deduction, but the amount of the distribution doesn’t get into income in the first place. This could have the added benefit of increasing other deductions or exclusions that are based on adjusted gross income.

Of course, these strategies could be combined in any given year to your advantage. The best way to know for sure is to have your advisor prepare a detailed tax projection that covers at least two years. If you would like to have our free 2019 Financial Facts with all the current tax rates and much more, go to www.dscottneal.com/2019facts.

Scott Neal is the president of D. Scott Neal, Inc. a fee-only financial planning and investment advisory firm with offices in Lexington and Louisville. Call him at 1-800-344-9098 or email scott@dsneal.com