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The Highlights of GOP Tax Bill

By Echo Huang, CPA, CFP®, CFA

There is a tax bill, but there is no tax reform as it does not simplify the tax codes and will keep tax professionals very busy over the next 12 months to figure out a series of cuts and tweaks. These changes will not affect year 2017 tax returns. These are the highlights of GOP Tax Bill, a final reconciled version of the Tax Cuts and Jobs Act (TCJA) of 2017 that appears to be heading shortly to President Trump for signature:

  • Seven individual tax rates: We will still have seven individual tax rates for year 2018, but the top rate is reduced from 39.6% to 37%. The top rate will kick in at taxable incomes of $500,000 for single and head-of household filers; $600,000 for married filing jointly taxpayers; and $300,000 for married filing separately. The new tax brackets will be 10%, 12%, 22%, 24%, 32%, 35% and 37%, and will remain in place until end of 2025, when they will sunset.

    The good news for most people is that, relative to today’s tax brackets, the new tax brackets will produce at least a small reduction in marginal tax brackets for almost all taxpayers. 

  • Bigger standard deductions: The standard deduction amounts will nearly double next year. In 2017, the standard deduction amounts are $6,350 for single filers; $9,350 for heads of households; and $12,700 for married filing jointly couples. In 2018, these amounts will go to $12,000 for single filers; $18,000 for heads of households; and $24,000 for married couples filing jointly.

  • Personal exemptions will be gone beginning in 2018: $4,050 per person in 2017. For a family of three, removal of personal exemption offsets the increase in the standard deduction mentioned above. For the families with two or more children, this loss is greater than the increase in standard deduction.

  • Fewer families will have to pay alternative minimum tax: The corporate AMT would be repealed, but the individual AMT would stay in the tax code. But the AMT exemption amount would increase to $109,400 for married taxpayers filing a joint return and $70,300 for all other individual taxpayers. The AMT exemption amount for year 2017 is $84,500 for married taxpayers filing a joint return and $54,300 for other individual taxpayers. The AMT kicks in now for individuals earning over $120,700 and married couples earning over $160,900. Under the final Senate bill, that threshold is lifted to $500,000 for individuals and $1 million for married couples.

  • The mortgage interest deduction gets smaller: Under the current tax code, taxpayers can deduct any interest they pay on up to $1 million worth of mortgage loans. In the final version of the bill, Republicans have settled on a $750,000.  The conference bill suspends the deduction for the interest on home equity loans or lines of credit that under current law are allowed up to $100,000.

  • You can deduct up to $10,000 in state, local and property taxes: Under current law, the state and local tax deduction (SALT) is unlimited. In the final GOP plan, all filers (married or single) can deduct up to $10,000 including property taxes, state and local income or sales taxes.

  • Pease limitation repealed: The current Peace limitation phased out 3% of a taxpayer’s itemized deductions once income crossed a certain threshold (in 2017, those with more than $261,500 of AGI as individuals, or $313,800 as married couples). The Pease limitation was effectively a 1% to 1.2% surtax for upper income individuals. Accordingly, the removal of the Peace limitation effectively provides a further reduction in marginal tax rates for upper-income individuals.

  • Working-class families get a bigger child tax credit: The current child tax credit is $1,000 per child. The final bill offers the $2,000-per-child credit (families making up to about $400,000 get to take the credit), with up to $1,400 is refundable tax credit, meaning families that work don’t earn enough to actually owe federal income taxes will get a larger check back from the government.

  • The individual health insurance mandate goes away in 2019: This Obamacare mandate (must purchase health insurance or pay penalties) will not end until January 1, 2019, meaning some republicans hope to make other changes to health care to prevent insurance costs from rising dramatically. Until then, don’t try to skip buying health insurance. The IRS has said it will keep enforcing all ACA rules as long as they are still on the books. The Congressional Budget Office projected that eliminating the mandate will increase insurance premiums and lead to 13 million fewer Americans with insurance in a decade.

  • Charitable donations will still be deductible. This deduction was improved for the very generous. Starting in 2018, you can give cash up to 60% of your annual income to a 501(c)(3) public charity, increased from current cap of 50%.

  • “Pass-through” companies gets a 20% deduction: Most American businesses are organized as “pass through” companies (as S Corporations and LLCs) in which the profit from the business is “pass through” to the business owner’s individual tax return. Services businesses such as law firms, doctor’s offices and investment firms can take only 20% deduction if they make up to $315,000 (for married couples).

  • You can pass your heirs up to $22.4 million tax-free: Estate tax is not repealed but far fewer families will pay it. Under current law, Americans can pass on up to $5.49 million tax-free (that threshold is $10.98 million for married couples). The House wanted to do away with the estate tax entirely, but some senators felt that was too much of a giveaway to the mega-rich. The financial compromise was to double the threshold, so now the each person can pass on $11.2 million to the heirs in property, stocks and other assets without paying estate taxes.

  • The final bill costs $1.46 trillion: Republicans decided it would be all right to go into debt to $1.5 trillion to fund the tax cut. The official estimate - released Friday evening alongside the bill came in at $1.46 trillion.

  • Alimony deductions will end for people who sign divorce and separation agreement after 2018: Currently alimony payments are deductible by the payer and count as income to the recipient.

  • 529 plans can be used for K-12 and for post-secondary education. Currently the distributions from such tax-free accounts can be used for post-secondary education.

  • What are not changed: Student loan deduction, medical expense deduction, the graduate student tuition waivers and retirement accounts such as 401(k) plans and IRAs remain unchanged. Home sellers can continue to exclude from taxes $250,000 of profit on a primary home ($500,000 for married couples) if the seller has lived there for two of the previous five years.

  • No change to investors’ ability to choose which shares to sell to calculate capital gains/losses: The Senate had proposed raising taxes on certain stock sales and taking away investors’ ability to choose which shares to sell. Instead would have had to unload their oldest shares first, a process known as “first-in, first-out” method of accounting. The decision to omit this proposal was a relief for investors. I was concerned about this change as it would take away an important tool for us to help clients manage taxes.

  • Capital gains and qualified dividends retain old thresholds: While the new TCJA rules introduce new tax brackets, preferential rates for long-term capital gains and qualified dividends will continue to use the old thresholds. In addition, the 3.8% Medicare surtax on net investment income will continue to apply thresholds of $200,000 of AGI for individuals ($250,000 for married couples).

  • Investment advisory fee & other miscellaneous itemized deductions repealed: All miscellaneous itemized deductions that are otherwise subject to the 2%-of-AGI floor are repealed. This includes all tax preparation expenses, various unreimbursed employee business expenses (including the home office deduction), losses on a variable annuity, safety deposit box fees, and the deduction of investment advisory fees.

  • Recharacterizations of Roth conversions are repealed. Currently if the converted Roth IRA has losses, you can revert it back to IRA by October 15th of the following year so you do not pay taxes on this Roth IRA conversion. This tax bill will not allow you to change your mind after you have converted any amount to Roth IRA. However, you can still contribute to your IRA if you have earned income and convert the balance to Roth IRA regardless of your income level.

Thanksgiving is More Than Just a Day

By Echo Huang, CPA, CFP®, CFA

Thanksgiving is my favorite holiday for several reasons:

  1. I get to share my best cooking with family and friends. Our Thanksgiving dinner menu was planned about a week in advance. Alton Brown’s Food Network turkey recipe is the best! My most reliable dish is a wild rice with mushrooms side that is a recipe from my mother-in-law Mary Lou's cookbook (she actually hand-made a cookbook for each of her children by typing recipes using her typewriter and carbon paper!) Every year I experiment with a Brussels sprouts or a green beans side dish with different recipes. Instead of mashed potatoes, I baked sweet potatoes. I added Pillsbury flaky biscuits this year, but for other years I’ve tried crescents rolls. Sharing my best creations with family and friends gives me joy and appreciation for abundance of food. After a turkey dinner with a nice wine, I enjoyed listening to the kids playing piano while others played ping pong, as everyone headed off the tryptophan.
     
  2. I get to avoid stress about shopping for gifts. Unlike Christmas, I don't get stressed out about shopping for the right gifts right now. I never get up early to go to the malls on Black Friday perhaps because I am not a morning person and the deals are just as good when I shop online and skip the crowds. My rule for shopping on Black Friday is to save at least 50% for clothes and shoes by shopping online and I use EBATES to get cash back (www.ebates.com).
     
  3. I have extra time off to reflect what I am thankful for. The year is ending soon and this is the perfect time to slow down a little bit and just reflect:
    My wealth management business is growing and now I manage over $70 million for 55 households, better than I expected when I first started my own company in March 2015. I feel appreciated by my clients as I help them make smart decisions about money to achieve their goals. This year I have four households retiring (having achieved financial independence!) after working with me for the past few years to plan for this special day! It feels great to get up in the morning and say to myself "I'm destined to do great things, starting now."
     
  4. I have freedom to pursue various hobbies such as travel, playing piano and ballroom dancing to enrich my life.

Echo Wealth Management Now Hiring an Associate Wealth Manager

starting in spring or early summer 2018

Company Website: www.EchoWealthManagement.com

About the Company

Echo Wealth Management is an independent, focused wealth management firm located in Plymouth, Minnesota that takes the complexity out of wealth management.  We offer integrated, comprehensive strategies that address every facet of our clients’ financial lives.  We do this by building the highest levels of trust, integrity and respect while always collaborating using a team approach.  Our clients range from corporate executives planning a secure retirement, to families looking to preserve their assets for future generations, to businesses seeking expert investment advice.  Echo Wealth Management was formed in February 2015 as a Registered Investment Advisor (RIA) and is looking for an Associate Wealth Manager to join a growing firm and support Echo Huang, CPA, CFP®, CFA, founder of this firm who has over 20 years of experience.

What is an Associate Wealth Manager, you ask? Our Associates are more like apprentices than support staff, and go through a rigorous three-year program where they learn to be a wealth manager, and not just any Wealth Manager... an Echo Wealth Manager.

Qualifications 

  • Bachelor’s degree (Financial Planning, Finance, Accounting, Economics, or a related field)
  • Driven to succeed in a collaborative environment
  • Excellent interpersonal and relationship management skills
  • Positive attitude and an extraordinary client service orientation
  • A genuine interest in serving and caring for other people
  • Dependable, ability to multi-task, manage time effectively, and work unsupervised
  • Intellectual curiosity, with a high attention to detail
  • Strong written, verbal, math, financial analytical, problem solving, and organizational skills

My "Me Too" Story

By Echo Huang, CPA, CFP®, CFA

As the Harvey Weinstein story has been in the news for the past month, I am grateful to see more women having the courage to raise awareness of sexual harassment in workplaces and protect more women.  One of my “Me Too” stories happened many years ago when I was about 19 years old in China.  

After graduating with an accounting diploma from Shenzhen School of Business and Economics at age 17, I received a great job offer to become an accountant at the Bank of China, Shenzhen Branch.  In this, my first full-time job, I was paid more than my parents, who were high school teachers, had ever been paid. I felt excited to spread my wings to fly far away and I requested a placement to the office in Shekou, a small seaside town about 30 miles from my parents’ home.  I moved into the two-story building the bank provided, where each person had own room and shared the two bathrooms at the end of each floor.  I liked my room at the corner on the second floor as it had a door to an outside large balcony.

On a winter night, a few days before the Chinese New Year, I went to bed as usual after listening to soothing piano music and studying English.  It was a dark and cold night (there were no heaters in the rooms back then). I put an extra blanket on the top of my comforter and closed my eyes.  

I woke up suddenly in the middle of the moonless night, feeling a great weight on top of me.  Before I could react, duct tape covered my mouth. I opened my eyes, but couldn’t see him in the darkness, even though he was close. He was sitting right on top of me with the comforter and blanket between him and me.  His right hand was pressing the duct tape on my mouth very hard.  I immediately used my left hand to grab his right wrist and then my right hand to grab his left wrist, feeling his metallic watch band.  He didn’t say a word.  I was so afraid, but my natural instinct told me to get out of there fast!  Holding onto both of his wrists tightly I twisted to my left, trying to shake him off my small bed.  

What Should You Do Now to Protect Your Identity?

By Echo Huang, CPA, CFP®, CFA

This month, we were told that 143 million Americans had key identifying information stolen through the credit reporting company Equifax.  In addition, we just learned that Equifax purchased an identification protection service called ID Watchdog on August 10, two weeks after Equifax discovered the data breach but a month before disclosing it publicly.  Law enforcement officials from about 40 states are in the process of investigating Equifax’s behavior before and after the data breach.  At this time of uncertainty, what should you be doing right now to protect your identity?

  1. Monitor credit reports closely.  You can request your free credit report on an annual basis by going to www.annualcreditreport.com.  Download a copy and read through everything to ensure accuracy.  In addition, consider using a free credit monitoring service such as www.creditkarma.com and use its mobile app to stay up-to-date in real time.
  2. Open your account with Social Security Administration.  You can go to www.ssa.gov to open your own account and download your recent social security statement.  You should verify that your past income information is accurate.  You should compare the income on this statement to the numbers on your past tax form W-2.
  3. Consider a credit freeze.  A credit freeze is the single most effective way to protect against fraud, in my opinion.  It literally freezes the ability of anyone, including you, to open new credit of any kind in your name or under your social security number.  If a prospective lender can’t pull your credit report, he won’t issue a new loan.  This usually stops identity thieves from setting up fraudulent accounts in your name.   Not everyone is blocked from getting your credit report, but it's close.  Banks and credit unions where you already have accounts can still check your credit report, as well as collection agencies and certain government agencies.  In light of recent events, I decided to place a credit freeze this week. In doing so, I evaluated the website and the telephone customer service line and found out that using its website is easier than calling the phone number due to the large volume of phone calls.  These are the links and phone numbers to use if you decide activate your own credit freeze:

A. Equifax, 1-800-349-9960. www.freeze.equifax.com

B. Experian, 1-888-397-3742.  www.experian.com/freeze

C. Transunion, 1-888-909-8872.  www.transunion.com/securityfreeze

Evernote: The Best Tool to Get Organized

By Echo Huang, CPA, CFP®, CFA

Evernote is a cloud-based, information organization app.  I have been using Evernote since 2011 to capture ideas, notes, important documents, images, and track projects and my goals.  Initially I used the free basic version, but then I upgraded to the premium level ($69.99 per year now) and I find it is well worth it as I can do so much more by adding Word documents, PDF documents, and Excel files as well.  I would like to share with you a few of the ways I use it to increase my productivity and reduce paper clutter.

  • Organizing Projects.  We started building our new house in spring 2012, and there were just so many decisions and checklists to be made every day to meet deadlines.  I took pictures of homes, materials and web pages and uploaded them to my Evernote account.  I can attach notes and use multiple Tags for each note so that later I can search for it easily when I need it, even from another computer. 
     
  • Keeping Track of Receipts.  This is important, especially the receipts for the expenses that are tax deductible.  I can scan paper receipts to Evernote, so when I receive a receipt in my email inbox, I forward it to my Evernote and then Tag it as “Receipts” and “Tax Deductible”.  If the receipts are related to products I bought that have a warranty, I add another Tag for “Warranty” and the name of vendor.  Later, I can find them easily by searching for the Tags. 
     
  • Clipping Web Pages to Read Later.  How often do you say to yourself “I will read this later” when you browse websites?  Now it’s easy: Launch Web Clipper to start clipping. Click the elephant button in your browser toolbar to launch Web Clipper. Select a clip type, full-length or sections of web pages, such as news stories or research articles. Save time and review clipped content offline, during your commute.  I Tag these article as “Read Later” in Evernote and read them later.  After I finish reading them, I then remove the Tag.
     
  • Taking Notes on My iPad and Then Filing Them in Evernote.  This is so convenient when I go to conferences and monthly FPA meetings outside my office.  Using tags such as “FPA Symposium” or “TD Conference” I am able to find them later in my office to share the Notes with my team.  If I didn’t bring my iPad to the meeting, I can use my iPhone to take notes using the Evernote app and it will sync with my Evernote account immediately.  If you write something on the handout and take a picture to be unloaded to Evernote, you can actually search for the words you scribbled in the picture. It’s amazing.
     
  • Taking Pictures of License Plates, Printer Cartridges, Air Filter Models, My Foundation #. Anything you want to reference later and not use part of your brain to memorize should be captured.  When you are at the store, you can pull up the images you filed in Evernote to get the shopping done quickly.  Pictures of my daughter at special events, and the amazing art projects, photographic essays, and slide presentations she creates are filed and tagged accordingly.  Exactly two months ago today, we welcomed our first puppy, Luna, a petite Goldendoodle to our home!  She will have her first haircut this evening, and I will take a picture of her before and after, then upload them to my Evernote account.  If I like the hairstyle, next time I will show the picture to the groomer without even having to describe it.
     
  • Tracking My Goals and Reviewing Them Periodically. It doesn’t matter how big or important a goal is, if we don’t review it, it’ll fade from memory. It’s almost as simple as the old saying: “Out of sight, out of mind.”  Unless I’m tracking my progress against my goal, I’m probably not actually making much progress.  What that means is that we need an intentional, regular review process for our goals.  Evernote is perfect for tracking goals.  It’s a better goal-tracking solution than more robust, dedicated applications. (Remember: “Complexity is the enemy of execution.”)  In addition to business goals, I track personal goals including “New Year Resolutions”.  Don’t laugh, I still write down my resolutions, not on paper, but in Evernote.  Looking back a few years, I’m amazed how much I have accomplished in business by using this tool  Personal goals status: falling behind in learning Spanish, but doing well with piano practice, reading and travel.

Echo Huang, CPA, CFP®, CFA Awarded the Five Star Wealth Manager Award for 2017!

 

Echo Huang has been a six-year recipient (2012 - 2017) of this award.

Alternative Fixed Income Strategies in a Rising Interest Rate Environment

By Echo Huang, CPA, CFP®, CFA

After a long wait, the Fed finally did raise the federal funds rate by 0.25% last month.  You may not have noticed the impact in your financial statements yet, but investing in fixed income is becoming more challenging, because traditional bonds with fixed coupons or longer maturities typically recede in price as interest rates rise.  Bonds have performed well in the past decade but even they may struggle to deliver the total return you expect over the next few years.  So what can you do to reduce the interest risk in your portfolio?

Hedged Equity Strategy - Targeting A Smoother Ride for Equity Investors

By Echo Huang, CPA, CFP®, CFA

As the US stock markets have done well for the past 8 years, many investors wonder if their portfolios are positioned well for potential market corrections.  Though it is impossible to predict the future, expecting volatility in the coming years is a safe bet.  Market volatility is normal, and feeling uneasy about a lower portfolio value is normal too.  Historical analysis shows that pullbacks of 5% have occurred about once a quarter, and pullbacks of 10% are likely to occur once per year.  Large pullbacks greater than 20% tend to occur just once per market cycle.  It is especially important to be mindful about how to dampen portfolio volatility in the later stages of the business cycle.

With the memories of large losses in stock markets in year 2008 when S&P 500 Index lost 38%, many investors feel like allocating more to bonds and cash now to reduce volatility of portfolios.  However, while bonds are part of a diversified portfolio, bonds are not paying much interest and the value of bonds tend to go down as interest rates are likely to increase in the future.  Money market funds are earning less than 1% and are not likely to provide returns exceeding inflation.  At Echo Wealth Management, we have considered various alternative strategies to reduce equity risk and have implemented three equity alternative strategies in our client portfolios.

One of the equity alternative strategies is hedged equity strategy that can hedge against equity’s downturns in order to help investors stay invested by avoiding the emotional mistakes of getting out of the stock markets near the bottom.  This is not a hedge fund (with tax form K-1), it is a liquid equity alternative solution that is engineered to be constantly hedged. 

Downside protection:   This disciplined option overlay is combined with an enhanced index portfolio.  Buying puts at 5% below the investment and selling puts at 20% below this investment aim to limit declines in this investment to a negative 5% in any given quarter (capped at negative 20%).  So if the investment declines 16% in one quarter, this investment is only down 5%.  To generate additional cash flow, calls are sold at 3.5% to 5% above the investment price that allows this investment participate in about 3.5% to 5% upside in any given quarter.  While this is riskier than a bond, it has much more upside potential and it is not sensitive to interest rates.  

Have You Considered This Mega Roth Strategy?

By Echo Huang, CPA, CFP®, CFA

Last month, one of my new clients and I called the administrator of her old 401(k) plan to rollover the balance to her IRA account at TD Ameritrade.  To her surprise, she had $36,000 in after-tax contributions (not the same as a Roth) with earnings of $70,000 from the after-tax contributions she made many years ago in addition to $700,000 pre-tax contributions and earnings.  She was able to request two checks - one for the $36,000 to a new Roth IRA account (a Roth conversion that is tax-free because there is no taxation on otherwise after-tax funds!) and one for the $770,000 to a traditional IRA account (which does not incur an income tax assessment by virtue of being a rollover).  The end result – now she has $770,000 of all pre-tax funds in an IRA, $36,000 in a Roth IRA, and her tax cost this year is zero!

One great benefit is that the balance in her Roth IRA account will now grow tax free!  It was a pleasant surprise for both her and for me, but I thought to myself “If she had rolled-over the $36,000 to her Roth IRA earlier in 2014 or 2015, the earnings from this after-tax contribution in the past two to three years (i.e. $7,000) would have been tax-free instead of being in an IRA that will be taxable upon distribution.”  And this made me want to tell you, that if you have made any after-tax contributions to your 401(k) from before the Roth 401(k) became available, you should consider reviewing the plan provisions on in-service withdrawals if you still work for this company.  If you have already left or retired from this company, it’s still easy, you can do what my client did.  But leaving an after-tax balance in the plan does not help you grow tax-free because the earnings from the after-tax contributions are taxable if you take distributions from the plan to spend in the future.

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