2016 Fourth Quarter Newsletter
Fourth Quarter, 2016
My Comments and Opinions
Markets go up. Markets go down. Up is better.
Up has been the trajectory of the equity markets in America since the November elections. Why? Perhaps it’s because there’s been a surge of optimism among investors. They seem to be anticipating more jobs in our country, lower taxes, and an improving business environment. Investors and business owners like what they’re hearing. The message that our new president has been trumpeting is encouraging shareholders to add to their portfolios. But it’s not all candy and roses. Chief among our concerns is what to do about our National Debt, now $20,000,000,000,000. If the population of the United States is, say, 325,000,000, then each child, woman and man in America “owes” about $61,000 to ourselves and to our other creditors. To ourselves, because millions of us own U.S. Treasury Securities. To others, because companies and countries the world over also own our debt. We’re not the only country with national debt. In fact, there are only five nations on earth without any debt – Macao, British Virgin Islands, Brunei, Liechtenstein and Palau. Source: http://www.therichest.com/rich-list/rich-countries/the-only-5-countries-in-the-world-living-debt-free/.
Americans are clearly divided. Secretary Clinton received a majority of the popular vote, but our Electoral College brought Mr. Trump to the White House. When the Founders designed our Constitution they worried that the more populous states would have a disproportionate influence on the elections. The result of their deliberations is our Electoral College.
“The Electoral College is a process, not a place. The founders established it in the Constitution as a compromise between election of the President by a vote in Congress and election of the President by a popular vote of qualified citizens. The Electoral College consists of 538 electors. A majority of 270 electoral votes is required to elect the President. Your state’s entitled allotment of electors equals the number of members in its Congressional delegation: One for each member in the House of Representatives plus two for your Senators. Most states have a “winner-take-all” system that awards all electors to the winning presidential candidate. However, Maine and Nebraska each have a variation of proportional representation.”
America’s body politic has been divided since political parties first appeared in our earliest years. Our first Commander-in-Chief, George Washington, was never a member of any political party. In fact, he disdained them. But by the time John Adams became our second president, political parties were furiously attacking each other. The election of 1800 was particularly nasty. Here’s a short version of the story. After the initial votes were tallied, Thomas Jefferson and Aaron Burr remained in a tie which threw the election into the House of Representatives. It took 36 ballots over eleven days to determine the victor. After the wheeling and dealing was over, Thomas Jefferson became our third president by two votes when Maryland and Vermont switched sides. Source: John Ferling- smithsonian.com November 1, 2004. Every four years we, the ‘shareholders’ of the United States of America, get to elect our Chief Executive Officer. Many of our former CEOs were lawyers. Our newest one is a business person.
Money is not so much currency, e.g., the Dollar, Yen or Euro, as it is purchasing power. Money is apolitical. The purchasing power of our money doesn’t care who the president is or who is in which political party. Money is also socially agnostic. Money has no interest in who has more of it or less or it. Money can’t think. It’s just a medium of exchange. Money exists because it’s better than bartering for what we need.
Political winds can blow the economy hot or cold. Warm political air, i.e., lower taxes, fewer regulations, etc., makes it easier for businesses to form and for commerce to increase. High tax rates and onerous regulations have a cooling effect on the economy. There is, of course, no “just right” temperature for any economy. Instead, we’re always moving in and out of the thermoclines in this ocean of activity which is our economy.
Tax policy is the favorite football of politicians. From the April 15, 2016 edition of the Washington Examiner here’s a quote from an article by Jason Russell: “As they rush to file their taxes by April 18, 2016, Americans are rightfully frustrated with the complexity of the 74,608-page-long federal tax code. The federal tax code is 187 times longer than it was a century ago, according to Wolters Kluwer, CCH, which has analyzed it since 1913. Amazingly, in the first 26 years of the federal income tax, the tax code only grew from 400 to 504 pages. Even through President Franklin Roosevelt’s New Deal, the tax code was well under 1,000 pages. Changes during World War II made the length of the tax code balloon to 8,200 pages. Most of the growth in the tax code came in the past 30 years, growing from 26,300 pages in 1984 to nearly three times that length today. This growth in the tax code has not come without consequences. ‘Over the decades, lawmakers have increasingly asked the tax code to direct all manner of social and economic objectives, such as encouraging people to buy hybrid vehicles, turn corn into gasoline, purchase health insurance, buy a home, replace that home’s windows, adopt children, put them in daycare, purchase school supplies, go to college, invest in historic buildings, spend more on research, and the list goes on.’ according to the Tax Foundation’s chart book, Putting a Face on America’s Tax Returns.”
Presidents Kennedy, Reagan and Clinton helped lower many tax rates which resulted in economic growth rates that persisted for several years after each reform. Every Dollar you don’t give to the tax collector frees up a Dollar that can go into the economy. This means when we have more money in our wallets we can spend more. Each time we make a purchase there are taxes to pay: Sales taxes to the states and income taxes from the companies and their employees to the Federal coffers. Also, lower capital gains taxes encourage more sales of appreciated assets. Reducing tax rates is a win-win proposition. Tax payers have more money to spend. Government tax collections actually increase, as counter-intuitive as that may seem. Most states must balance their budgets. The Federal Government does not have to balance the national budget, thus the growing deficits and the debt.
America’s economy has been growing at a fairly anemic 1% to 2% rate annually. Some economists have suggested that we should try to increase our growth rate to 4%. A book published in 2012 called The 4% Solution: Unleashing the Economic Growth America Needs, contains essays by academics and business
people, five of whom are Nobel Prize-winning economists: Robert Lucas, Gary Becker, Edward Prescott, Vernon Smith and Myron Scholes. According to a review published in The New York Times, “The ideas in the book include lowering corporate tax rates, shifting away from taxing income to taxing consumption and property, promoting innovation by letting professors keep gains from their research, expanding free-trade pacts with Japan and other countries, refocusing immigration policy to recruit more high-skill workers, and expanding the work force by lowering payroll taxes on employees with children.” These essayists go into the reasons they believe a 4% growth rate would produce the greatest good for the greatest number of us by increasing the velocity of money. Velocity measures the number of transactions per unit of time.
While we’re on taxes, it’s that time of year again. Investors who own stocks, mutual funds and partnerships should wait a few weeks before filing their final tax returns because corporations sometimes discover accounting errors which causes them to send out CORRECTED 1099 forms. If you wait a while you may save yourself the cost of having to re-file your income taxes. If you prepare your own taxes I recommend that you meet with a CPA or Enrolled Agent every three years just to be sure you haven’t missed anything important. We tell our clients to keep their investment and bank statements in files chronologically by month. With most mutual fund statements, retaining the year-end statement is usually enough. If you need specific information about gains or losses in your taxable accounts, they are usually readily available on your mutual fund annual summary and 1099 forms. Or just call us at 508-240-0320.
10 common tax-filing mistakes to avoid By Kay Bell@bankrate.com. Read more: http://www.bankrate.com/finance/taxes/10-common-tax-filing-mistakes-to-avoid-
1-Math miscalculations – The most common error on tax returns, year after year, is bad math. Mistakes in arithmetic or in transferring figures from one schedule to another will get you an immediate correction notice. Math mistakes also can reduce your tax refund or result in you owing more than you thought.
2-Computation errors – These are cousins to the standard math mistakes. In these computation cases, taxpayers or their tax pros make mistakes in figuring such tax-return entries as taxable income, withholding and estimated tax payments.
3-Misspelled or different name – The IRS is all about numbers, but words – specifically names – are important, too. When the names of a taxpayer, his or her spouse or their children don’t match the tax identification number that the Social Security Administration, or SSA, has on record, that difference will cause the IRS to kick out or slow down processing of the tax return.
4-Direct deposit dangers – Taxpayers can have a refund directly deposited into multiple bank
accounts. This option is a great way to save your refund money, but the more numbers you enter on a tax form, the more chances you have to enter them incorrectly. And a wrong account or routing number could cause you to lose your refund entirely.
5-Additional income, additional filing work – Did you have a side job this year? If so, as a contractor you probably received a Form 1099-MISC detailing the extra earnings. What about savings and investment accounts? For these, you should have received Form 1099-INT and Form 1099-DIV statements.
6-Filing status errors – Make sure you choose the correct filing status for your situation. You have five options, and each could make a difference in your ultimate tax bill. If this is the first tax-filing season since your divorce and you now are a single parent, writing “head of household” probably will be more beneficial. And what if you’re still married, but you and your spouse are thinking about filing separate tax returns? That works in some cases, but not all.
7-Social Security number oversights – Because the IRS has stopped putting taxpayer Social Security numbers on tax package labels in response to privacy concerns, some taxpayers forget to write in their identification numbers. Your tax ID number is crucial because there are so many transactions – income statements, savings account interest and retirement plan contributions – keyed to this number.
8-Complete charitable contributions – Do you give to charitable groups? All types of donations, from cash to cars, could be valuable tax deductions, so make sure you count them all when you file. Be sure to follow the donation tax rules, the most important being that you give to a qualified organization – that is, one that has tax-exempt status with the IRS. Also be careful when calculating any gifts of clothing and household items. Tax law now requires that these donations be in good or better condition or the deduction is disallowed. And remember that the amount you can claim for donated goods is the fair market value of the items; that’s what a willing buyer would pay for it in its current condition, not what you paid for it.
9. Signature required – Sign and date your return. The IRS won’t process it if it’s missing a John Hancock, and that means on e-filed returns, too. Taxpayers filing electronically must sign the return electronically using a personal identification number, or PIN. To verify your identity, you’ll have to provide the PIN you used last year or your adjusted gross income from your previous year’s tax return.
10 – Missing the deadline – Millions of taxpayers put off filing until the very last minute. That’s OK as long as your mailed paper return is postmarked by the April filing deadline or you hit “enter” to e-file your 1040 by midnight of the deadline day.
Our Goal at Brimmer Financial is to Help You Achieve Your Financial Goals. Do you know the amount of money you will need to supply you with the purchasing power for a retirement that might last 25 to 30 years? If not, we can determine that number for you using methods that Certified Financial Planner™ professionals have used for years. Do you have the right amount of the right kinds of insurance? If you’re not sure give us a call. Do you have up-to-date wills, powers of attorney, health proxies or trusts, if appropriate? If you don’t have a will that you wrote, the state has one that they wrote under the laws of intestacy.
As always, call or email us with any questions.
DISCLOSURES – The views expressed contain certain forward-looking statements. Although they are forecasts, actual results may be meaningfully different. The material represents an assessment of the market and conditions at a particular time and is not a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any security in particular. The opinions expressed here are the author’s and do not reflect any opinion of National Securities Corporation, member FINRA/SIPC, my Broker/Dealer, or any of its Affiliates. Source material for this letter include quotations from http://www.therichest.com/rich-list/rich-countries/the-only-5-countries-in-the-world-living-debt-free/; from: https://www.archives.gov/federalregister/ electoral-college/about.html; From: John Ferling- smithsonian.com November 1, 2004; From: April 15, 2016 edition of the Washington Examiner a quote from an article by Jason Russell; From: The 4% Solution: Unleashing the Economic Growth America Needs, 2010 And: http://www.bankrate.com/finance/taxes/10-common-tax-filing-mistakes-to-avoid
Securities offered through National Securities, Member FINRA/SIPC