What is Up With China?

Pathways Advisory Group. Inc.
Michelle Carter, CFP®

Client meetings are a great time to discuss timely headlines and the impact on your Portfolio.  During the month of January, I noticed a theme… 

What is up with China???

Or, put another way…

What is going on with Chinese stocks and how do they affect my Portfolio?

The information available about the current economic climate in China and its effect on the global economy could fill 100 blog posts.  I thought it may be best to narrow it down to the 3 most common questions in my office on this topic.

Q:  Do I own Chinese stocks in my Portfolio?

A:  Yes, with a caveat.  Most of our clients hold DFA (Dimensional Fund Advisors) emerging markets funds.  Chinese companies trading outside mainland China (i.e., on the Hong Kong stock exchange) are eligible for Dimensional’s emerging market’s trading strategies.  Dimensional has not approved mainland China markets, mostly due to their restrictions… local Chinese investors do not have full access to outside capital markets, which restricts their ability to participate in global trading.  This inhibits outside investors’ ability to properly assess the prospects and risks of their market.  Many Chinese companies are listed on both the mainland China and the Hong Kong exchanges.

Q:  I saw China-related headlines daily.  So, how badly did China’s stocks actually decline in January 2016?

A:  I included this question because the answer is quite interesting… For simplification purposes, we can look at this in 3 categories… “Mainland China” (represented by the MSCI China A Index), the “China component of the MSCI Emerging Market Index” (represented by the Hong Kong exchange and other overseas listings) and the MCSI Emerging Market Index (return of all emerging markets within that index).  While “mainland China” declined 24.86%, the “China component of the MSCI Emerging Market Index” declined about half that amount, at 12.72%.  Looking at the MCSI Emerging Market Index as a whole, the January decline was 6.49%.  Knowing these numbers help to put the decline in perspective, and show how the January decline might affect the emerging markets area of your Portfolio.

Q:  I’ve heard a lot about the Yuan.  How does Chinese currency play a factor in my Portfolio?

A:  By not investing directly in the Chinese market, Dimensional emerging markets strategies do not have direct exposure to Chinese currency.  This, along with the fact that currency flow restrictions have not been directed at investors holding shares on the Hong Kong exchange or outside Chinese listings, has minimized the impact.  

China seemed to be the hot topic in January, a bit of déjà vu from the fall of last year.  So far, February’s headlines have been dominated by fluctuations in oil prices and the Federal Reserve.  I look forward to our continued discussions on these and other timely issues.  Thankfully, our investment philosophy remains constant through whatever current storms pass over us.

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Tax Time is Here!

Pathways Advisory Group, Inc.

We have been informed that all Schwab 1099s will be mailed out by Tuesday, February 16th. If you are expecting one and haven’t received it yet, you should have it next week. Yet again, Schwab extended their mailing date into February to reduce the number of corrected 1099's, but corrections are still a possibility. Please give our office a call if you have any questions.

Good luck with your taxes!

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It's a New (Tax) Year - 2016

Pathways Advisory Group, Inc.
Leslie Dermon, Paraplanner

It’s that time of year again. Here is a summary of some key 2016 provisions and updated brackets:

Tax Brackets: 2016 income tax brackets changed with inflation. See below for the 2016 brackets for Married Filing Joint Taxpayers and Single Taxpayers:

Married Individuals Filing Joint Returns and Surviving Spouses

Individual Taxpayers

Source: Forbes.com Click here for a complete version of the 2016 Tax Tables.

Itemized Deductions and Personal Exemptions: Most taxpayers benefit from a Personal Exemption (increased to $4050 in 2016) for the filer and each dependent, and Itemized Deductions (on Schedule A). However, both are subject to reductions if AGI is over $259,400 for Single Taxpayers, and $311,300 for Married Joint Taxpayers.

Qualified Dividends and Capital Gain Tax Rates: Qualified dividends and capital gains rates remain the same in 2016: 0% for taxpayers in the 10% and 15% marginal tax brackets, 15% for taxpayers in the 25, 28, 33, 35% tax brackets, and 20% for those in the 39.6% bracket.

Personal Insurance: The individual mandate fine for going without insurance did increase in 2016. The tax is typically the greater of two amounts: The basic fine (rises from $325 in 2015 to $695 per person, and $162.50 for each family member under 18 in 2015 to $347.50 in 2016), or an income based levy (rises from 2% in 2015 to 2.5% in 2016 of the household income over the tax return filing threshold).

Roth IRA Contributions: The maximum Roth IRA contribution remains at $5500 ($6500 for those who attain age 50 or older during 2016). The Adjusted Gross Income (AGI) limit that disallows contributions increased with inflation to $194,000 for Married Joint Taxpayers and $132,000 for Single Taxpayers. Contributions begin to phase out at AGI of $184,000 for Married Joint Taxpayers and $117,000 for Single Taxpayers. 

Retirement Account Contribution: The maximum 401(k), 403(b) and 457(Deferred Compensation) contribution remains $18,000 in 2016 ($24,000 for those who attain age 50 or older during the year).

Estate Tax Exemption: The Estate Tax Exemption also increased from $5.43 million in 2015 to $5.45 million in 2016. 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) remains $14,000 per person.

Social Security Benefits: Social Security Benefits did not receive a cost-of-living-adjustment (COLA) this year. Benefit amounts will remain unchanged.

Medicare premiums: Similar to last year, taxpayers have to fall below a Modified Adjusted Gross Income (MAGI) of $170,000 ($85,000 for Single Taxpayers) to pay the standard monthly Medicare Part B premium of $104.90. However, the Bipartisan Budget Act of 2015 increased the amount to $121.80 per month for new enrollees (in 2016) and recipients that do not have premiums deducted from monthly Social Security benefits.

Social Security Payroll Taxes: The Social Security wage base, upon which payroll taxes are due, remains at $118,500 this year and the FICA tax rate (paid on income up to the wage base) remain unchanged at 6.2% for both employer and employee.

Medicare Tax: The Medicare tax rate remains at 1.45% (2.9% for Self Employed) for Married Joint Taxpayers with earned income below $250,000 ($200,000 for Single Taxpayers). For earned income above these thresholds, the Medicare tax rate increases to 2.35% (3.8% for Self Employed).

529 College Savings Plan: Under new rules, qualified higher education expenses will now include computer equipment and related expenses such as computer software and internet access. Additionally, if a 529 Plan distribution is used to pay for college tuition that is later refunded (no longer qualifies for the tax-free treatment), new rules allow you to return the 529 funds within 60 days.

Qualified Charitable Distributions (QCD): Now a permanent law, taxpayers age 70 ½ or older are permitted to make a Qualified Charitable Distribution (QCD) up to $100,000 directly from an IRA to a charity. The contribution is not tax deductible, but the distribution from the IRA is non-taxable. The QCD counts towards the taxpayer’s Required Minimum Distribution (RMD) for the year.

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

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