This is an exciting time for software in my little corner of the world. There’s so much available, from apps aiding retirement planning and investment management, to software that helps me run my business. These are just fancy tools, of course, and can only be helpful if you know how to use them. But for planners like me who enjoy delving into the details, the level of innovation creates tons of possibilities, especially for the important subject of tax planning.

Our tax code is easily one of the most complicated parts of our financial lives. It has tons of moving parts, changes frequently, and just about everything is interconnected; one simple change can have expensive ramifications.

While I’ve long done tax planning and strategy work for clients it’s mostly been pen and paper, Google searches, and studying client returns and the IRS’s website. This is useful but often incomplete without help from the client’s tax advisor.

The issue is that most tax advisors don’t really do tax planning, or at least they don’t make the process easy. Instead they focus on preparing tax returns. We’re all aware that this is a difficult seasonal grind, so it’s understandable if some of the profession goes MIA between seasons. This creates problems, however, because tax advisors have client data in their own software and crunching numbers amid all the complexity pretty much requires replicating it.

I don’t normally use these posts to talk specifically about my business, but this week I wanted to introduce a new service: tax return review. I spent the better part of a year evaluating a new software program called Holistiplan and was waiting for after tax season to open it up to you.

My ongoing clients will get this at no additional cost and my hourly folks can access it as a separate project.

Let me be clear in that I’m not angling to replace your tax advisor. That’s a full-time job and I already have one. Instead, I want to provide better financial planning that helps you through life’s important decisions. Since just about all financial decisions involve tax considerations, efficiently analyzing your tax return will help me help you more.

Here’s how it will work –

The process begins with you getting a digital copy of your tax return. Upload it to my website www.ridgeviewfp.com by clicking on “Secure File Upload” in the Clients dropdown at the top of the homepage, or at the bottom of each page. There are no space limitations, so you can upload the whole document, ideally as a PDF. A clear scanned copy saved as a PDF works also.

We’ll upload your return to Holistiplan for analysis. It typically takes a few minutes.

Then the software deletes your return. It only holds the return data, not your personal information. This is an extra level of security I implemented with the company.

Then we’ll look for planning opportunities. Some are obvious while others might be deeper in the weeds. Or maybe you’re in good shape already. Either way we’ll be able to tweak your prior year numbers to gauge the impact of extra income, capital gains, funding an IRA, and the potential for Roth conversions, to name a few.

We can hop on a Zoom call and look at the information together, send you a report with our notes, or both. Also, Holistiplan keeps everything current, so we’ll be able to understand how any changes to the tax landscape might affect you.

Then we can look for help and confirmation from your tax advisor. You’ll be able to ask specific questions and, hopefully, get good answers.

Ideally, we’ll keep doing this every year. We’ll build up history for you and, hopefully, leverage tax planning to help make your financial life better.

Have questions? Ask me. I can help.

Change is all around us and has certainly been kicked into overdrive during the past year or so. There’s so much to stay on top of and in my industry, conferences have been an excellent place to take it all in. The conferences are virtual, of course, but are still a great way to hear from a variety of experts all in one place (so to speak) about the economy, the markets, taxes, and various other topics related to financial planning.

I spent the better part of last week at one of these virtual conferences. There was a lot of investment-related stuff that I won’t bore you with, but I will share other information with you today about expected changes to tax policy.

Late last month the Biden administration proposed the American Families Plan, a major tax overhaul reversing much of the last major overhaul from just a few years ago. There’s sort of a washing machine feeling that comes with these lurches in tax policy but deal with it we must.

I’m going to present this information in bullet format to try and replicate my notes from a couple of the sessions last week. There’s a lot to the tax plan and much is subject to change as it works through Congress. (That old saying, “the President proposes, Congress disposes” comes to mind.) Still, the thrust of the plan is what’s important and, with Democrats in control of the government, most of these proposals will likely be implemented even if the numbers end up a little different.

• It’s assumed that the new tax laws will take affect in 2022 and won’t be retroactive for this year. Hopefully Congress doesn’t wait until late in the year as they did with the Tax Cuts and Jobs Act, and the SECURE Act (both passed in late December 2017 and 2019, respectively). Doing so makes planning difficult.
• There’s a line being drawn in the sand at $400,000 of annual income. Those above are likely to pay substantially higher tax rates than those below. If you know, or at least expect, to be around that income number you should pay close attention to the news around these proposals. You may end up trying to pull income forward into this year and delaying expenses into next, if possible.
• Again, those well below this supposed threshold shouldn’t see their taxes go up. The opposite should be the case, at least on average.
• Higher earners could see a host of other changes, including itemized deductions getting capped at 28% and losing the Qualified Business Interest deduction for those with small businesses.
• Retirement account savings methodology could be flipped on it’s head. We could see deductibility capped on contributions to IRAs and 401k plans for higher earners while lower earners could receive a refundable credit. Essentially, this would take deductibility from higher earners and give it to lower earners to allow them to save more toward retirement (a so-called Robinhood provision. The man in tights, not the brokerage firm). This could make Roth IRAs and Roth 401k plans more appealing to higher earners and traditional IRAs more attractive to lower earners – a reversal of current thinking.
• The so-called SALT provision that caps deductibility of state and local taxes could go away. This isn’t in the Biden plan but is thought to have to be included to get support from coastal democrats.
• Capital gains, real estate exchanges, and the so-called step-up in basis could have a $1 million income threshold. Those with income (which includes the value of asset sales) over the threshold would pay higher rates, be unable to do exchanges, and even lose their basis step-up. All of this would lead to more capital gains taxes being paid by higher earners.
• As a reminder, your tax status is generally looked at one year at a time. You could have a more “normal” income situation followed by a surge of income from a business sale or maybe a taxable inheritance. This could bump you up beyond these thresholds for one year and you get hammered by taxes, only to go back to normal the next year.
• The ramifications of this last bullet are interesting in states like CA where folks often have a lot of home equity. Under the proposed plan it’s possible that death triggers a “sale” for tax purposes above this $1mil income threshold. The step-up in basis would go away and the larger gain becomes taxable for higher earners who inherit family property, for example.
• Also along these lines, the so-called death tax limit could be reduced to $3.5 million but could be as high as $6.5 million. Nobody I heard from thought it would be anywhere close to the current $11+ million level.

These and other proposals are now subject to the vagaries of our duly elected officials in D.C. The main point of this post is that, even with everything else going on in the world right now, major tax changes are being planned yet again. If you’re anywhere near the thresholds currently being talking about, you should pay close attention to how this plays out.

Also, I think this should be obvious, but I’ll say it anyway: none of the above should be taken as specific tax advice. I’m not a CPA and don’t even play one on TV. I am enhancing my services in the tax planning area, however, in part because of this latest round of proposed tax changes. More on that in the coming weeks.

Here are two links to read more about the proposals.

https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/28/fact-sheet-the-american-families-plan/

https://www.wsj.com/articles/whats-in-bidens-american-families-plan-proposal-11619621174

Have questions? Ask me. I can help.

Renowned economist Paul Samuelson once quipped that “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” This has stuck with me since hearing it years ago as one of the things that makes investing so darn hard for the masses but so profitable for brokerage firms.

We’re wired to want to feel good about what we’re doing, to feel validated in our decisions, and to get that sense of instant gratification. We invest a dollar, pull the lever, and want the noise and blinking lights to tell us we did the right thing. Casinos know this, of course, and that’s why they’re so profitable. They know how to push our buttons to keep us coming back for more.

Like any game, playing is harmless when the stakes are low and the rules clear. But start adding zeroes and complexity, and the situation quickly gets serious and shouldn’t be treated as a game. Or at least understand it’s a different type of game and play it the right way.

Different industries engage in so-called gamification and brokerage firms have built entire business models around it. Robinhood is the clearest example of this. The firm developed a phone app that gave its customers all the flashing lights and other forms of validation they require, even raining digital confetti at certain milestones. (The firm recently stopped the confetti thing since it was getting them into hotter water with regulators.) But one of many problems with this is that Robinhood customers aren’t playing slots while enjoying free drinks, they’re investing in complicated markets and in complicated ways, including being incentivized to buy more stock with borrowed money without fully understanding how it works.

Using borrowed money to buy assets is something we do all the time. Think of the mortgage on your home. You put down maybe 20% and borrow the rest to purchase a relatively stable asset. You usually get clear terms, like a fixed payment for 30 years and have disclosure documents that show how much interest you’ll pay over the life of the loan. If the value of your home drops, just keep making your mortgage payments and nobody will kick you out, and so forth. That’s a good use of leverage and the mechanics are easily understood.

But then we get to a form of leverage available in brokerage accounts referred to as “buying on margin”. Using margin magnifies gains when times are good but can also lead to catastrophic losses when markets turn. This can be sort of like the initial excitement of pouring gasoline on a campfire that then spreads to melt your tent. Margin gets incredibly complicated and should only be for seasoned investors who know (or at least think they know) what they’re getting into and can afford the risk.

The reason is that margin, at its simplest, is a loan with terms meant for short-term trading, not long-term holding as with your mortgage. This can come back to bite investors when stock prices are volatile. The stocks in your portfolio act as collateral for the loan and can only fall by a certain amount (which is set by government regulators) before you’re “called” and must deposit cash to make up for the decline. If you can’t afford that you’re forced to sell stock, something that usually catches investors unawares. That old saying of “when it rains it pours” is never more apt then when investors are forced to sell stock in a down market to meet their margin requirements. This can leave the uninformed and unprepared in a state of utter bewilderment, wondering where all the money just went.

This has been the unfortunate reality for many Robinhood customers in recent months. The firm made it far too easy to buy stock on margin. Just a few clicks and that was it. Yes, they provided disclosures, but I seriously doubt most customers read them. And why should they have? Investors were receiving lots of validation from Robinhood and social media, and stock prices were mostly going up. In short, it felt great for a while until it didn’t. I repeat this all the time, but it’s just like an adult version of musical chairs. The music stops suddenly and only then do you truly realize the risk you were taking. Maybe investors should be required to play the game before being given access to margin; sort of like having teens wear those goggles that simulate drunk driving. It might be instructive.

I’m attaching a link to an article from The Wall Street Journal that ties all this together. It’s a sad commentary on how far things have gotten with gamifying the investing process. I suggest you send it to anyone in your life who might be getting into day-trading or using margin. If nothing else, perhaps it will jar them into getting better educated on how to play the game the right way.

The Journal has a soft paywall so let me know if you can’t access the story and I’ll email it to you through my subscription.

https://www.wsj.com/articles/robinhood-three-friends-and-the-fortune-that-got-away-11619099755?mod=hp_lead_pos5

Have questions? Ask me. I can help.

Here we go again. Stock and bond markets have been volatile lately due to fears about inflation. I say fears, but perhaps uncertainty is the better word. Either way, there’s an ongoing and growing disconnect between how investors, central bankers, and ordinary folks think and feel about inflation.

Last week the Bureau of Labor Statistics announced that the Consumer Price Index had ticked up from last April to this April at the fastest rate since at least 2008. As usual, some parts of the economy were moving normally but others were ripping right along. Prices for used cars and trucks were up more in April than at any time since at least 1953. Airlines, recreation, and costs for housing and home furnishings also rose rapidly.

Much of this was expected following the one-year mark from the pandemic lows as year-over-year comparisons on all sorts of things started to show dramatic change. But many were wondering and worrying about the rate of change. Energy prices were up 25% from April 2020, but you’ll recall that the price of oil went negative for a short while back then and the industry was hammered. So, while 25% is a big increase, it’s from an extremely low level. The CPI also showed that hotels and car rentals were up huge in April compared with a year prior. Pent-up demand is a powerful force.

Not all prices rose dramatically. Food at home (versus restaurants, which rose faster), alcohol, apparel, and new vehicles were up a relatively modest 2%. All told, headline CPI came in at 4.2% from April to April. The “core” number that strips out volatile food and energy prices was 3%.

While those numbers might seem small, it’s a big change from where we’ve been. And you might report your personal inflation rate as being much higher. Also, you feel this surge of activity all around you and it makes sense that it would be inflationary. I mean, seriously, the government will have pushed trillions of dollars into the economy when all’s said and done. How can the Fed and others suggest that all this activity and corresponding inflation is only “transitory”? Two words: excess capacity.

(For reference, the Fed has targeted a longer-term average of 2% core inflation. We’ve been below this for so long that they’re willing to let things run hot for a while before trying to tap the brakes.)

The Fed has two mandates from Congress; to manage inflation and to shoot for full employment. Even with all the free money flowing into the economy helping to fuel demand, the Fed expects that the recent consumer spending spree won’t last long enough to be a problem. They’ve also been saying there’s room, or excess capacity, in the economy to soak this up. Millions are still unemployed and service workers, those near the bottom of the employment food chain, still aren’t fully back to work. In other words, everyone isn’t out there buying cars and booking hotel rooms. Until they are, at least from the Federal Reserve’s perspective, it’s much ado about nothing when it comes to last week’s inflation numbers.

Investors see it differently. Or, maybe it’s more accurate to say they don’t know what to think. We haven’t had to deal with an inflation problem for a long time. We also haven’t had a Fed this interested in propping up the economy. Then again, we haven’t gone through a Covid-level pandemic in recent history either. And millions of new investors have entered the markets and have mostly just seen things go up. So, maybe it makes sense that there’s uncertainty about the risks posed by inflation. It’s hard enough to understand the ins and outs of inflation in the best of times.

But what is inflation? Is it helpful or harmful? Is it something we actually need?

There are a variety of answers to these questions from diverse sources like bland Economics 101 textbooks to deep dives down the Bitcoin rabbit hole. But for a more straightforward conventional set of answers, here’s a few links from the middle of that spectrum.

The first is a video (about eight minutes long) from the folks who present Marketplace, a great program for distilling the complexities of markets and the economy down to something understandable.

Fun tip: try to watch the video without looking at the date. You might guess it if you stick around toward the end, but I’ll leave you to appreciate the irony.

https://www.youtube.com/watch?v=9sZdXJbK554

Here’s a short article that gets into why at least some inflation is necessary.

https://www.marketplace.org/2019/09/12/why-is-inflation-necessary/

Then here are two good articles from Schwab (one shorter, one longer) talking about the current outlook.

https://www.schwab.com/resource-center/insights/content/is-1970s-style-inflation-coming-back?cmp=em-QYD

https://www.schwab.com/resource-center/insights/content/world-inflation-transitory-or-more-nefarious?cmp=em-QYD

I’m purposefully leaving out the cryptocurrency stuff because it really is a rabbit hole. I don’t think that’s a bad thing, by the way, just that it’s way beyond the scope of this post.

Have questions? Ask me. I can help.

I can’t believe it’s already May. This year has been zipping right along and, as some of the pandemic concerns appear to be waning, people are starting to get optimistic about the rest of 2021. Let’s hope that lasts!

With the past year or so being tough in many ways this recent surge of optimism is leading some to take the leap and retire early. Life is waiting out there, they think, and restarting after a year-plus of living on hold may be the perfect catalyst for major change. For these folks, going back to the same old grind just doesn’t seem that appealing.

Retiring early is complicated from a financial planning perspective, but it can be possible with some creativity. Or maybe creativity mixed with a sense of adventure. The definition of retirement is changing. In short, you can define it however you want. Is now the right time for you? Of course I can help with the financial part of that, but the bigger “What does retirement mean to me?” question is something only you can answer.

This week I wanted to share a couple different stories centering on this theme of bucking convention and retiring early. What’s interesting is the age spectrum being reported on lately. The first story covers who you’d think of as more typical early retirees while the second, perhaps surprisingly, looks at much younger folks who are planning to “retire”.

Here are big portions of each article and I’m including links if you’d like to read each in full.

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We’re all aware how strong the Sonoma County housing market is right now. This is happening nationally as well and for a variety of reasons, but the dollar amounts are larger in our area. Zillow lists the typical single family home price at just over $800,000, up about 10% from last year. This is way higher than the national average of about $272,000 and higher (although to a lesser extent) than most popular retirement destinations. This begs a simple question: should you capitalize on home equity and retire in your dream location?

How crazy would you be to consider such a thing? After all, maybe you’re sitting in your dream location right now. Poking around online I found that roughly half of retirees don’t move. They stay in the same home they lived in during their 50’s. Others move later in life for medical reasons, and some are forced to move due to finances. Of the rest, many move somewhere else by choice. Let’s call it one out of every five moving for obvious reasons: lower housing prices and cost of living, maybe a better climate, perhaps to be closer to kids and grandkids. But that was before the pandemic hit. Numerous anecdotes and a variety of surveys from moving-related firms like U-Haul, Hire-A-Helper, and Zillow report a surge in retirees looking to relocate. Considering a move under the current circumstances isn’t crazy at all. In fact, you’re likely in good company.

But where can you move to? What are some options? You may already have locations in mind or maybe you’re looking for a change and don’t know where to begin.

Last week I wrote about questions to ask yourself to see if you’re emotionally ready to retire. One of those questions dealt with where to live. Obviously, it’s a huge and deeply personal question. There are tons of online tools available and lists of best places. These are helpful but with so many it can be tough figuring out where to start. Here are some notes and links from what I found when picking through a few this week.

Continue reading…