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STA Weekly Report – Strategies to Consider that May Improve your Tax Situation

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INSIDE THIS EDITION:
Strategies to Consider that May Improve your Tax Situation
Foreign Stocks Are Rising
Eurozone IShares Are Also Stronger
Timely Tax Related Articles
401k Plan Manager*Updated on 12/31/2018

While it is hard to believe, the tax deadline is less than two weeks away. For accountants and other tax preparers, this means an increased workload. For investors however, this time of year serves as a reminder that using a strong tax strategy for investments may help boost net returns over time and make reaching your goals and objectives more probable

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This can be a challenge for investors though, as tax rules change over time.  That said, there are several tax intelligent strategies that shouldn’t really change year to year that every investor might consider using if they aren’t doing so already. We will discuss six of them below.

Before doing so, it is important to note that the discussion of these strategies is not tax advice and recommend that you consult with a tax professional before implementing any of the strategies below.

Make contributions to tax-efficient investment accounts

The first thing investors should consider doing is taking full advantage of tax-efficient retirement accounts. Using these tax advantaged accounts during the year can reduce tax liabilities because often contributions are tax deductible or are made with pre-tax money, thus reducing taxable income.

Source: smartfinancialstrategies.com

Of course, there are some limits to how much can be contributed into each type of account, but the table below provides some general guidance on the limits allowed by the IRS. Consult your tax professional for more information about these contribution limits.

Source: The National Law Review

Use a Mix of Account types

The second strategy is to use a combination of tax-advantaged account types when possible. This strategy can help maximize the benefits the tax code provides to investors and can provide a huge long-term benefit via tax savings and total return over time. The reason this works so well is that different account types offer investors the ability to tap into different income sources with different tax treatments. In retirement, these can be managed to minimize taxes.

Along with having different account types, it is also helpful to choose tax-efficient investments and correctly matching them with the most tax appropriate account type. This is something that we look to do for our clients. By understanding the tax benefits of specific investments, we can place them in the correct account types to maximize after-tax income or returns. Take for example, income that is earned from a tax-free municipal bond. There is no reason to hold that bond, because of its tax-advantaged status, in a tax-deferred account. Additionally, investments that generate taxable income, like equity funds that exhibit high turnover, might be more appropriate for a tax-deferred account.

Additionally, investments that generate taxable income, like equity funds that exhibit high turnover, might be more appropriate for a tax-deferred account. Of course, it is always important to consult with your tax advisor to make sure you understand the tax implications of certain security types in different types of accounts.

Hold Investments longer term when appropriate to minimize capital gains

Before getting carried away with this strategy, it is important to note that taxes should never be the sole reason to hold or exit an investment. However, sometimes an investment is only days or weeks away from having the gains generated by it reclassified as long-term. In these cases, it may be prudent to wait to exit the investment because as some investors may know, short-term capital gains (typically on those investments held for less than a year) are taxed at ordinary income rates. These can be anywhere between 15% and 20% for most investors and can have a detrimental impact to the overall after-tax value of an investment portfolio.

Source: Taxfoundation.org

Tax Loss Harvesting to offset gains

In addition to the strategies above, tax loss harvesting can further help reduce current tax liabilities for an investor. The idea behind tax loss harvesting is to use investment losses to offset the gains an investor may have realized in the same year. For example, if in 2019 an investor realizes $5,000 in capital gains and then realizes $3,000 of capital losses, the tax liability will be calculated not on $5,000, but rather on $2,000 (capital gain – capital loss). Although this is an over simplified example (there are some nuances including what happens if an investor realizes more losses than gains in a year) it does show conceptually how tax loss harvesting can help manage investments in a tax efficient manner.

Foreign Stocks Are Rising

Much of the concerns since the fourth quarter of last year have centered around weakness in foreign stocks, and whether that would eventually pull U.S. stocks lower. The general feeling seemed to be that sooner or later the discrepancy between strong U.S. stocks and weak foreign stocks would have to be resolved one way or the other.

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That meant that U.S. stocks would have to weaken, or foreign stocks would have to strengthen. Right now, it looks like the latter is the case. In other words, foreign stocks have started rising again which is helping support the 2019 rally in U.S. stocks. The solid blue line in Chart 1 shows the MSCI All Country World Index Ex US iShares (ACWX) rising to the highest level in six months. In so doing, the ACWX has also risen above a falling trendline drawn over the highs formed since last February. That signals that the nearly yearlong decline in foreign stocks has probably ended. The ACWX has risen back over its 200-day average for the first time in ten months; and its blue 50-day line has crossed over the 200-day line. All are bullish signs that suggest that foreign stocks are heading higher. The global rally is being supported by rising stocks in foreign developed and emerging markets. One of the most encouraging signs is coming from much stronger Chinese stock market which is rising even faster than U.S.

Eurozone IShares Are Also Stronger

The eurozone remains one of the weak spots in the global economy. But a stronger China may help there as well. That’s because Europeans sell a lot of their exports to China. A stronger Chinese market could lend a helping hand to the eurozone economy and stock market. Chart 6 shows the MSCI Eurozone iShares (EZU) having just cleared its s 200-day moving average (red circle). The EZU has also risen above its falling trendline going back to the start of 2018. Since stocks usually lead turns in the economy, rising foreign stocks are giving encouraging signs that the global economy is starting to strengthen. There is one downside to rising foreign shares however. U.S. stocks were the best place to be over the past year. Renewed interest in cheaper foreign shares could cause some U.S. money to rotate overseas.

Weekly Global Asset Class Performance

If you have any questions, please feel free to email me at luke@stawealth.com.

Luke

STA Investment Committee

Luke Patterson, CEO & Chief Investment Officer

Mike Smith, President

Andrei Costas, Senior Investment Analyst (Equity Strategies)

Nan Lu, Senior Investment Analyst (Fixed Income Strategies)


With tax time quickly approaching, we wanted to provide access to information regarding the new tax laws initiated with the Tax Cuts and Jobs Act (TCJA) passed in December 2017. We understand it is hard to find pertinent and reliable information, so we designed a resource page allowing easy access to Timely Website Tax Related Articles. If we can be of any assistance before Tax Day, please call us at 281.822.8800.

Tax Rates and Deduction Levels:

  1. Summary of Individual Tax Law changes related to the Tax Cuts and Jobs Act.
  2. Summary of Business Tax Law changes related to the Tax Cuts and Jobs Act.
  3. Our Key Numbers for Tax Planning, Brackets, Deduction Levels, etc.  Detailed information in one place.
  4. Our Tax Preparation Checklist to make sure you are organized to report your income and take all your deductions
  5. Key Tax Dates for Retirees – Mostly Tax Related.  Don’t miss these deadlines!
  6. Hurricane Harvey Disaster Tax Relief.

Tax Issues and Planning:

  1. New Tax Strategies for Roth IRA Conversions given the new law.
  2. If you are looking to rollover your retirement plan, protect yourself from mistakes that would cause severe tax consequences.  Here is a good summary of the Top 10 IRA Rollover Mistakes and on the 60-Day Rollover limitations.
  3. Ready to take your Required Minimum Distribution (RMD), avoid these Dangers and Mistakes.
  4. Claiming Tax Free 529 Withdrawals – did you get a 1099-Q?
  5. If you are looking to roll your IRA to a Self-Directed IRA, avoid these Tax Landmines.
  6. Net Unrealized Appreciation (NUA) Tax Planning Strategy.
  7. Tax Planning options to consider: rolling over After-Tax Dollars from your 401k Plan.
  8. If you are in for a high tax year, consider some Tax Efficient Charitable Planning or other Charitable Giving.

Articles from “In the News”:

At STA Wealth, we are often contacted by media to contribute to an article providing expertise in a specific area of finance or financial planning.  You can find these articles on our website at STA In the News.  Many of these articles are related to tax planning.  Here are some highlights:

  1. CNBC – Last Minute Tax Tips based on New Tax Law.
  2. Prudential – 4 Tax Planning Tips for Retirees.
  3. Bloomberg – How to Game Next Year’s Taxes Now
  4. MarketWatch – How to Claim your Tax  Break for Charitable Donations under New Law
  5. MarketWatch – 5 Ways the Tax Bill will Affect Your Retirement.
  6. Washington Post – Seven Money Moves by Year End – it may be too late for 2017, but start planning for 2018.
  7. Investopedia – “Top 10 Mistakes to Avoid on Your Roth IRA”.  If you opened, contributed to or converted to a Roth IRA, here are some mistakes to avoid.
  8. Washington Post – “Saving and Spending your Tax Refund” – What should you do with your refund?
  9. New York Times – “Tax Refund as a Financial Opportunity” – Can you get your finances back on track with your refund?

With Tax Time coming, we wanted to refer you to a lot of great information on the STA Wealth website www.stawealth.com. This is especially important given the new tax law (The “Tax Cuts and Jobs Act”) that was passed in December 2017.  As we know it is hard to find good information, we took the liberty of organizing Timely Website Tax Related Articles below.

Tax Rates and Deduction Levels:

  1. Summary of Individual Tax Law changes related to the Tax Cuts and Jobs Act.
  2. Summary of Business Tax Law changes related to the Tax Cuts and Jobs Act.
  3. Our Key Numbers for Tax Planning, Brackets, deduction levels, etc.  Great detailed information in one place.
  4. Our Tax Preparation Checklist to make sure you are organized to report your income and take all your deductions
  5. Key Tax Dates for Retirees – Mostly Tax Related.  Don’t miss these deadlines!
  6. Hurricane Harvey Disaster Tax Relief.

Tax Issues and Planning:

  1. New Tax Strategies for Roth IRA Conversions given the new law.
  2. If you are looking to rollover your retirement plan, don’t make any mistakes as you can trigger severe tax consequences.  Here is a good summary of the Top 10 IRA Rollover Mistakes and on the 60-Day Rolloverlimitations.
  3. Ready to take your Required Minimum Distribution (RMD), avoid these Dangers and Mistakes.
  4. Claiming Tax Free 529 Withdrawals – did you get a 1099-Q?
  5. If you are looking to roll your IRA to a Self-Directed IRA, avoid these Tax Landmines.
  6. have an article discussing the Net Unrealized Appreciation (NUA) Tax Planning Strategy.
  7. Rolling over After-Tax Dollars from your 401k Plan – here are good tax planning opportunities/options to consider.
  8. If you are in for a high tax year, consider some Tax Efficient Charitable Planning or other Charitable Giving.

Articles from “In the News”:

At STA Wealth, we get a lot of requests from the media to help in many areas.  You can find these at STA In the News.  Many of these are related to tax planning.  Here are some highlights:

  1. CNBC – Last Minute Tax Tips based on New Tax Law.
  2. Prudential – 4 Tax Planning Tips for Retirees.
  3. Bloomberg – How to Game Next Year’s Taxes Now
  4. MarketWatch – How to Claim your Tax  Break for Charitable Donations under New Law
  5. MarketWatch – 5 Ways the Tax Bill will Affect Your Retirement.
  6. Washington Post – Seven Money Moves by Year End – it may be too late for 2017, but start planning for 2018.
  7. Investopedia – “Top 10 Mistakes to Avoid on Your Roth IRA”.  If you opened, contributed to or converted to a Roth IRA, here are some mistakes to avoid.
  8. Washington Post – “Saving and Spending your Tax Refund” – What should you do with your refund?
  9. New York Times – “Tax Refund as a Financial Opportunity” – Can you get your finances back on track with your refund?

Important Disclosure:
Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by STA Wealth Management, LLC (“STA”), or any non-investment related content, made reference to directly or indirectly in this article / newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article / newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  STA is neither a law firm nor a certified public accounting firm and no portion of the article / newsletter content should be construed as legal or accounting advice.  A copy of the STA’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a STA client, please remember to contact STA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. STA shall continue to rely on the accuracy of information that you have provided.

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