Thursday, January 11, 2018

It's a New (Tax) Year - 2018

It’s that time of year again! As the joy of the holiday season comes to an end, we now turn to the joy of tax season – preparing the returns for 2017 and looking at what 2018 brings. Much is changing this year, as the Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law late 2017. Here’s a roundup of what to expect for 2018. There’s a lot here, so feel free to skim through to what applies to you!

Tax Brackets: The 2018 income tax brackets have received quite the makeover, as the TCJA kept seven tax rates but changed the rates themselves. The new brackets are more favorable than the old. See below for the 2018 brackets for Married Filing Joint Taxpayers and Single Taxpayers:

Source: Click here for a complete version of the 2018 Tax Tables.

Itemized Deductions and Personal Exemptions: Deductions and exemptions may have received the biggest changes from the tax law. The following changes have been made to your Schedule A Itemized Deductions:

·        Cap on state and local tax deductions at a combined $10,000.

·        Cap on mortgage interest deductibility to the first $750,000 of debt principal (was $1 mil.). This cap only applies to new mortgages taken after December 15, 2017, not current mortgage debt.

·        Interest on any home equity debt not used to acquire, build, or substantially improve a qualified residence is no longer deductible. The exact definition of deductible “acquisition” debt depends on how the funds are used. For example, a HELOC used to substantially improve a primary residence is considered acquisition debt with deductible interest. However, a cash out refinance of your mortgage to help pay off credit cards is not deductible. This does apply to current home equity debt. No grandfathering.

·        The deduction limit for cash charitable contributions to public charities has been expanded to 60% of adjusted gross income (AGI) from 50%.

·        All miscellaneous itemized deductions have been eliminated.

·        Medical expenses above 10% of your AGI are deductible. However, for 2017 and 2018 only, the floor has been scaled back to 7.5% of AGI. 

The Pease limitation, which creates a phaseout for itemized deductions of higher AGI earners, has been eliminated. But, it’s set to come back in 2026.

Personal Exemptions have been entirely eliminated, and have been combined into higher…

Standard Deductions: The repealed personal exemption amount has been consolidated into a higher Standard Deduction. The amount has nearly doubled to $24,000 for married couples filing jointly and $12,000 for individuals.

If you’re over 65 or blind, you can add an additional $1,300 to your standard deduction ($1,600 for single filers).

Qualified Dividends and Capital Gain Tax Rates: Qualified dividends and capital gains rates remain the same in 2018, however the tiers no longer line up neatly with ordinary income tax brackets.

While ordinary income tax brackets have shifted (see above), the TCJA will use old income thresholds for preferential Qualified Dividends and Long Term Capital Gains. Here are the brackets:

Personal Health Insurance: The individual mandate penalty for not having health insurance has been eliminated by the TCJA. This is set to take effect in 2019, meaning you'll still face the mandate in 2018. 

Roth IRA Contributions: The maximum Roth IRA contribution remains at $5,500 ($6,500 for those who attain age 50 or older during 2018). 

The Adjusted Gross Income (AGI) limit that disallows all direct contributions increased with inflation to $199,000 for Joint filers and $135,000 for Single taxpayers. Contributions begin to phase out at AGI of $189,000 for Joint filers and $120,000 for Single filers.

Retirement Account Contribution: The maximum 401(k), 403(b) and 457(Deferred Compensation) contribution increased to $18,500 in 2018 ($24,500 for those who attain age 50 or older during the year).

Estate Tax Exemption
: The Federal Estate Tax Exemption increased greatly from $5.49 million in 2017 to $11.2 million in 2018, making the total exemption for a married couple $22.4 million. The tax rate for amounts exceeding the exemption remains 40%.

Gift Tax Exemption:  The annual gift tax exemption (amount that can be gifted without requiring a gift tax filing) increased to $15,000 per recipient. Married couples can “split” their gifts, making it $30,000 per recipient.

Social Security Benefits: Social Security and Supplemental Security Income (SSI) Benefits will receive a 2% cost-of-living-adjustment (COLA) this year. While exciting, Medicare again has a surprise . . . 

Medicare Premiums: The standard premium for Medicare Part B remains the same at $134 for those married filing jointly at $170,000 income or less ($85,000 single). The premium moves up depending on income. If you are a new enrollee in 2018 or do not have the premium deducted from your Social Security check, you will pay the full standard premium.

However, if you are already receiving Social Security benefits and had at least one premium payment deducted in the year, you’ve been “held harmless” from the full amount of past premium increases. Instead, you’ve paid an increased amount based on the Social Security COLA.

This year’s 2% increase in Social Security increases Medicare Part B premiums by the same amount as well (up to the standard premium). This will likely result in many people who were used to paying less than the $134 standard premium now paying that amount.

Child Tax Credit: This credit increased to $2,000 per qualifying child and is refundable up to $1,400. Phaseouts begin with AGI over $400,000 for joint filers and $200,000 for single.

Business Tax Rates:

The highest corporate tax rate has been lowered permanently (until the law is changed, that is) to a flat 21% from a high of 35%. The corporate AMT has been repealed. If you’re the owner of a C-corporation, this tax break is for you.

Of even greater interest are the changes for pass-through business entities (e.g., sole-props, partnerships, LLCs, or S-corporations). The income of these businesses “passes-through” to the tax-returns of the shareholders. If you’re an owner, you’ll find this income landing on your Schedule E (or Schedule C for a sole-proprietor).

The new tax law gives a 20% deduction from the “Qualified Business Income” (QBI) of pass-through businesses. Meaning, they will only be taxed on 80% of business income.

This deduction will not be an “above-the-line” deduction to calculate your AGI, but it also won’t be an itemized deduction. Meaning, you can claim it even if you take the standard deduction. There are exceptions to the types of businesses that can claim, potential phaseouts based on your Taxable Income, and specifics on what constitutes QBI. This may be one of the more complicated portions of the tax changes, so check with your tax professional.

The above explanation is summarized. It is not all inclusive. Please confirm all specifics with your tax professional. 

Follow our blog for additional tax tidbits throughout the year and happy filing!

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Thursday, December 28, 2017

Bitcoin Mania in 2017

Pathways Advisory Group, Inc.
      Evon Mendrin

“People get excited from big price movements, and Wall Street accommodates” – Warren Buffett 

Boy have we seen big price movements! 2017 showcased our President’s dramatic first year in office, Congress passing Tax Reform by Christmas (sure to be 2018’s new hit holiday jingle), and media coverage of one “all-time stock market high” after another. But the trendiest story just might be the sudden rise of bitcoin.

Hovering around $900 in January, the price of one bitcoin suddenly skyrocketed to roughly $2500 mid-year and off to $15,883 in late December! That’s a near one-year climb of over 1400%!1

Likely to be locked in as the hottest water-cooler topic of 2017, some investors are rushing to buy this cryptocurrency. Some have even taken out mortgages, run up credit cards, and turned to equity lines. With all of the press and attention, do bitcoins have a place in a well-diversified portfolio? We don’t believe so.

First – what is it?

Simply put, bitcoin is a created digital currency. Launched in 2009, it works on a peer-to-peer system without using an intermediary. Meaning, you can create transactions without using a financial institution – such as a bank – as the middle-man. The transactions are recorded on a public ledger called ablockchainIts supporters claim it is a more secure, private, and cost-effective way to transact business.2

Why not jump in?

Any reasonable investment worth considering for your portfolio should carry a positive expected return. That is, there is an inherent value in the investment that will provide some future cash flow or higher value in the future.

Stocks, for example, are partial ownership in companies. These businesses produce products and services that people are willing to pay for. They have leaders, employees, and the power of their brands. These valuable aspects work to bring in cash flow (revenue). Profits can then be paid out to shareholders as dividends or reinvested into the business. Owning the stock of a company gives you a right to that future cash flow and business growth.

Bonds give you a promised future cash flow. When you buy a bond, you lend a company or government money, and they promise to pay you back with interest.

Both of these investments give you an expected return and the means for investors everywhere to reasonably value them. A globally diversified portfolio of stocks and bonds allow you to benefit from the cash flow and growth of businesses all over the world.

Bitcoin, however, does not provide a positive expected return. It doesn’t produce anything of value. Like a nugget of gold, or the dollar bill in your wallet, if you leave a single bitcoin in your digital wallet, a year later you will still have a single bitcoin. It won’t multiply into more bitcoins, and it won’t pay any additional cash.

The price is driven entirely by supply and demand. Meaning, a positive return only occurs when someone else comes along later and buys it for more than you paid. You have to hope the frenzy continues. But what happens when there’s no one left willing to pay $15,000 for a single bitcoin?

What about its actual use as a currency?

Holding a currency such as cash in a portfolio is not for maximizing return but for handling short-term expenses. Bitcoin is not currently very useful as a currency. It isn’t widely used or accepted, goods and services aren’t widely priced in bitcoin, and it’s extremely volatile.

So, what’s the reason for all this mania? Likely pure speculation. It’s the hottest thing, and no one wants to be left out. We are hooked by the glamour of digital currencies and stories of overnight millionaires.

The blockchain technology behind it may be of great use, and its use as a currency in the future is a different debate entirely. But bitcoin today is far from a usable asset or currency.

Remain disciplined with your investments as the year comes to a close. Always start with your goals and have an understanding of how your investments work. Remember the basic foundation of what drives returns over time – expected future cash flow. When it comes to cryptocurrencies, it’s the wild west out there. We urge you to stay indoors, hide the children, and wait for the mess to be over.

We wish you Happy Holidays and great success in meeting your financial goals in 2018 (and beyond)!

1Daily prices through 12/26/2017 from CoinDesk.
2See for detailed information on how it works. 

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Friday, December 8, 2017

Tax Reform a MONUMENTAL Task

Pathways Advisory Group, Inc.
      Dustin J. Smith, CFP®

As you may have heard, Congress is working towards a Tax Reform bill to take effect in 2018.  I’m not ready to use terms like tax relief or tax cuts but both proposals favor simplifying the tax code - a monumental task.  There’s work to be done, but there appears to be enough momentum (House and Senate bills must merge through conference committee, pass the House and Senate and the President must sign) to take a look at some key provisions and a few differences:

Lower Tax Rates and end of The Alternative Minimum Tax – Both tax bills (House and Senate) favor lower tax rates and an end to the Alternative Minimum Tax, but there are a few differences:

Difference:  The House tax bill repeals the Alternative Minimum Tax entirely but a last minute change to the Senate tax bill only lessened the bite (impacting fewer taxpayers).  

Difference:  The Senate tax bill lowers tax rates but doesn’t reduce the number of tax brackets (seven).  The House tax bill lowers tax rates and simplifies tax brackets extensively (down to just four).

Fewer Itemized Deductions offset by an increased Standard Deduction – Both tax bills support an increased Standard Deduction (roughly doubling it) offset by fewer potential itemized deductions (only beneficial to the extent greater than the Standard Deduction).  However, there are (again) some differences:

Difference:  The House tax bill reduces the eligible mortgage interest (itemized) deduction to interest paid on balances up to $500,000 (for new mortgages), while the existing mortgage interest (itemized) deduction limit remains unchanged in the Senate tax bill.   

Difference:  The (itemized) deduction for medical expenses is retained in the Senate tax bill but eliminated entirely in the House tax bill.

Replacing Exemptions with an increased Child Tax Credit – Both tax bills suggest replacing personal exemptions with lower tax brackets (to simplify) and an increased Child Tax Credit. 

Difference:  The Senate tax bill phases the child tax credit out at $230,000 of income while the House tax bill does so at $500,000 of income.

Difference:  The child tax credit itself differs too ($1,600 tax credit per child in the House tax bill and $2,000 tax credit per child in the Senate tax bill).

Estate Tax Exemption and Gift Tax Exclusion – We appear to be headed for an increase to the Estate Tax Exemption (amount you can transfer free of Estate Tax) and no change to the Gift Tax Exclusion (amount you can gift per individual, per year, without any Gift Tax filing implications).

Difference:  Both tax bills roughly double the Estate Tax Exemption (to $11,000,000), but the House tax bill goes one step further by eliminating the Estate Tax entirely in 2024.

The impact of 2018 Tax Reform will vary by taxpayer.  Taxpayers who don’t typically take the itemized deduction (or barely do), stand to benefit quite a bit.  The fate of taxpayers who typically take advantage of numerous itemized deductions (especially California taxpayers, with elimination of the deduction for state income taxes paid in both tax bills), will have to wait for the final merged tax bill.  Either way, if/when the rules change, we will look to interpret, adjust and clarify opportunities the same way we always do. 

Dustin J. Smith, CFP®

The above explanation is summarized and generic.  Please consult your tax professional with any specific questions and take a look at this summary from for a more comprehensive look at Tax Reform.  Feel free to play around with this calculator too.  

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Thursday, November 30, 2017

Catchphrase Investing

Let's face it - we love catchphrases. They're easy to remember, easy to talk about, and easy to follow along with. The investment world is full of them - FAANG, the Nifty Fifty, the dot-coms, BRICs - capturing the hot takes and hottest investments of the time. They get us excited, ready to jump on board and to hunt for the next group. Who doesn't want a piece of today's hottest stocks?

Should we be shifting our investments to each day's hottest acronyms? In this guest post, Dimensional Fund Advisors' Jim Parker touches on how to respond to today's (and tomorrow's) investment catchphrases. 

Jim Parker
Outside the Flags
Vice President

The financial media is drawn to catchphrases, acronyms, and buzzwords that can be sold as the new thing. FAANG (Facebook, Apple, Amazon, Netflix, and Google) is the latest of these. But does this constitute an investment strategy?
For journalists, commentators, and marketers, acronyms like FAANG are useful. They fit easily into headlines and they appeal to a feeling among some investors that their portfolios should match the “zeitgeist” or spirit of the age.

But as we’ll see, investment trends tend to come and go. This is not to downplay the transformative nature of new technologies and the possibilities they present. But as an investor, it is wise to recall that all those hopes and expectations are already built into prices.

The FAANG acronym has become particularly popular in 2017 as returns from the five members of the unofficial club have far outpaced the wider market. Exhibit 1 shows the total year-to-date returns of the FAANG members compared to the S&P 500.
Such is the public interest in the tech giants that the parent company of the New York Stock Exchange recently launched the NYSE FANG+TM Index that includes the quarterly futures contracts of the FAANG members apart from Apple (hence only one “A”), plus another five actively traded technology growth stocks.

So, does this mean, as some media gurus suggest, that you should reweight your portfolio around these tech names? After all, these companies have fundamentally reshaped traditional sectors like newspapers, television, advertising, music, and retailing.

For investors, there are a few ways of answering that question, none of which involve denying the significant influence Facebook, Amazon, Apple, Netflix, Google, and other technology names are having on our lives.

Firstly, market leadership is constantly changing based on a myriad of influences, including shifts in the structure of the global economy, commodities, technology, demographics, consumer tastes, and supply factors. Trying to build an investment strategy by anticipating these forces is like trying to catch lightning in a bottle.

In the 1960s, the then often-quoted Nifty Fifty of solid, buy-and-hold blue-chips included such names as Xerox, Eastman Kodak, IBM, and Polaroid, all of which were disrupted in one way or another by newer, more nimble competitors in the following decades.

By the late 1990s, the media was full of stories about the dot‑coms, companies that were building new businesses using the transformative power of the internet. A handful of those companies (Amazon, for instance) fulfilled their promise. Many others (retailer, prototype social network, and pet supplies firm were just three examples) crashed and burned.

In the mid-2000s, the focus turned to companies with a large exposure to the so-called BRIC economies, an acronym based on the fast-growing emerging economies of Brazil, Russia, India, and China.

Several financial services companies even set up BRIC products, with mixed degrees of success. One investment bank, having argued that the superior growth for emerging economies justified a bias to stocks exposed to these markets, ending up closing its BRIC fund in late 2015 after years of poor returns.1

So, while individual sectors each can have their time in the sun, it is not clear that weighting your portfolio toward an industry currently in favor is a sustainable long-term strategy.

A second way of looking at this issue is that accepting it is difficult to pick winning sectors does not mean you should exclude these zeitgeist stocks in a diversified marketwide portfolio. You can still own them, but you do so by casting a much wider net.

The more concentrated the portfolio, the more you are exposed to idiosyncratic forces related to individual stocks or sectors. Being highly diversified means you can still benefit from the broad trends driving technology or whatever is leading the market at any one time, but you are doing so in a more prudent manner.

Put another way, by diversifying you are not only reducing the risk of placing too much of a bet on one sector, you are improving the odds of holding the best performers. Look at Exhibit 2, which shows what would have happened if you had excluded the top 10% and top 25% of market performers in a global portfolio from 1994–2016.

We’ve seen that even professional investors can find it tough to pick which sector will lead the market from year to year.

It’s true that technology companies like Amazon and Facebook have performed well recently. But it is worth recalling that current prices already contain future expectations about those companies. We don’t know what future prices will be because these will reflect information we haven’t received yet. Because no one has a reliable crystal ball, a better approach is to diversify. That way we increase the odds of being positioned in the next big winning sector without chasing hot trends or latching on to cute‑sounding acronyms.

1."Goldman Closes BRIC Fund," The Wall Street Journal, November 9, 2015.
2.The “All stocks” portfolio consists of all eligible stocks in all eligible developed and emerging markets. The portfolio for January to December of year t includes stocks whose free float market capitalization as of December t-1 is greater than $10MM in developed markets and $50MM in emerging markets and with non-missing price returns for December of year t-1. Annual portfolio returns are value-weighted averages of the annual returns on the included securities. The portfolios “Excluding the top 10%” and “Excluding the top 25%” are constructed similarly. Individual security data are obtained from Bloomberg, London Share Price Database, and Centre for Research in Finance. The eligible countries are: Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Republic of Korea, Malaysia, Mexico, Netherlands, New Zealand, Norway, Peru, Philippines, Poland, Portugal, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United Kingdom, and the United States. Diversification does not eliminate the risk of market loss. Past performance is no guarantee of future results.

Dimensional Fund Advisors LP ("Dimensional") is an investment advisor registered with the Securities and Exchange Commission.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This content is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

Monday, November 20, 2017

Holiday Office Hours

Pathways Advisory Group, Inc.
The Pathways Advisory Group, Inc. office will be closed for 
the following holidays:

Closed at Noon - Wednesday, November 22nd, 2017
Thursday, November 23rd, 2017
Friday, November 24th, 2017
Monday, December 25th, 2017 
Monday, January 1st, 2018 
Monday, January 15th, 2018
Monday, February 19th, 2018
Friday, March 30th, 2018
Monday, May 28th, 2018
Wednesday, July 4th, 2018
Monday, September 3rd, 2018

In case of an emergency, 
please contact Schwab directly at 1(800) 435-4000.

Happy Holidays!

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Thursday, September 14, 2017

Equifax Data Breach

Pathways Advisory Group, Inc.

By now, you’ve likely heard about the data breach at Equifax. From May through July, Equifax - one of the three major credit bureaus - experienced a breach in data affecting at least 143 million people.  For information on this breach, please visit the Federal Trade Commission’s website here.  You can also check for updates directly from Equifax here, including whether you were potentially impacted.

Equifax is offering a free 1-Year subscription to TrustedID.  You can see the details of the program here.

We’ve written about credit and identity protection in the past.  Jeff’s blog post, Credit Protection, highlights freezing your credit among a other key ways to protect your information.  Leslie’s post, 10 Steps to Protect Your Identity, outlines other valuable options available to you. 

While many credit card companies and banks notify their customers of suspicious activity, proactively taking a few of the steps above can make a huge difference in keeping your identity secure. 

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Friday, September 1, 2017

Marshmallows and Retirement

Back in the 1960’s, Walter Mischel, a psychologist, studied preschool children to assess the level of self-control they possessed. Using marshmallows, he placed one on a plate in front of each child. He then left, but before doing so, gave each child the same two choices: either eat the marshmallow, or wait 15 minutes until he returned. If the child was able to wait, he would receive two marshmallows (Delaying Gratification, n.d.). 

Only about a third of the children could wait the full 15 minutes. Why? Willpower and impulsiveness are the two competing cognitive processes that come into play. Willpower is based on a person’s strategic planning, while impulsiveness comes more from a person’s emotions (Delayed Gratification, n.d.). If a person employs willpower in a situation, it decreases the chances of submitting to impulsiveness in the next situation. In other words, a person must practice willpower to have willpower.

We see our clients practice willpower every day in order to save for a comfortable retirement. Younger clients are typically in the midst of buying a house, having children, and achieving career goals. It’s sometimes harder for this generation to save towards their retirement goals. But, if possible, it does have a significant effect on portfolio size at retirement. How much? See the following spreadsheet from our website's Young Investors page

Ben’s willpower to save those first ten years made a huge difference! In addition, isn’t it a little crazy how compounding interest can substantially increase our savings over time? The point: Today’s choices completely affect our future.

So, what happened to those preschoolers? Mischel tracked down nearly 60 of those original subjects more than thirty years later. The children who had exhibited high self-control remained that way throughout life, and vice versa. The higher self-control group led healthier lifestyles, received higher SAT scores, and had higher income (Konnikova, 2014).

Later in life, Mischel addressed some worried parents. He explained that children who fail The Marshmallow Test need to practice. Start out small, a few minutes maybe, and increase the time slowly (Konnikova, 2014). After all, 15 minutes is a long time for a little kid.

Remember: Practicing willpower builds willpower. Whether it is marshmallows or regular savings, willpower pays off.

Also, if you would like to see children take The Marshmallow Test, check it out here on YouTube. It’s quite entertaining.

-Written by Katie Nelson from our March 2016 Client Newsletter Article.


Delaying gratification (n.d.). American Psychological Association. Retrieved from

Konnikova, M. (2014). The struggles of a psychologist studying self-control. The New Yorker.

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