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Latest on taxes

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Capitol Hill is producing more drama than Hollywood.

We’ve got bold statements, ultimatums, cliff-hangers, and confusing sequels.

We’ve even got folks paddling up to Senators’ party boats to discuss tax reform.

Retirement accounts may see new restrictions

Let’s recap what we know with some educated speculation about what could happen next.

[Scroll down to the bottom for the nitty-gritty if you want to skip the details.]

Congress is currently debating two action items on President Biden’s “Build Back Better” agenda: The American Jobs Plan (which includes corporate tax increases) and the American Families Plan (which includes individual tax increases).1

Neither plan looks close to passing in its current form, so nothing is set in stone yet.

But the provisions below offer a blueprint for what could happen.

The House is negotiating a package of tax increases that would pay for expanding Medicare, free community college and prekindergarten, and increase the federal safety net.2

If passed as-is, it would:

  • Increase the top marginal income tax rate to 39.6% for individuals earning more than $400,000, joint filers above $450,000, and head of household filers above $425,000.
  • Raise the top long-term capital gains rate from 20% to 25% for those same folks.
  • Add a 3% tax on incomes of over $5 million.

But wait… there’s more. Here are a few other key provisions that bear watching:

Retirement accounts may see new restrictions.3

Roth conversions would be eliminated for individuals earning above $400,000.

Folks in that income bracket would also be prohibited from contributing to retirement accounts with an aggregate value over $10 million the prior tax year.

Another critical change that would affect all taxpayers: The bill prohibits all employee after-tax contributions to qualified plans and prohibits after-tax IRA contributions from being converted to Roth, thus potentially eliminating backdoor Roth conversion strategies.

Estate planning may get more complicated.3

Good news first: The “step-up” in tax basis on death is staying and the “deemed realization” rule that would trigger capital gains taxes on death is not included.

However, the estate tax exemption would revert from $11.7 to $5 million.

The deal would also eliminate certain tax benefits of “grantor trusts” as well as limit valuation discounts on non-business assets.

Currently, these provisions would apply only to future trusts and transactions that happen after the effective date of the law.

How likely are all these measures to pass?

Here’s where we start speculating.

To pass the American Families Plan using budget reconciliation, President Biden needs the votes from his entire party.

Progressives are committed to passing the full deal but centrists are balking at the price tag.1

To get through the Senate, it seems like both sides will meet somewhere in the middle.

A lower final cost to the bill would require less revenue to cover and might allow some of the tax increases to be eliminated.

Since the IRS has been targeting Roth conversions and large IRAs, it’s possible that those measures may pass.

When could the new laws go into effect?

It seems likely that most provisions would be effective on January 1, 2022 and apply going forward (not retroactively). However, separate deadlines could be negotiated for certain provisions.

Bottom line: Laws change. We adapt.

Here are the usual caveats:

We don’t know what the final bills will look like and when (or if) they will pass.

Taxes are just one part of your overall picture.

New laws usually contain a mix of positive and negative changes for you, me, and everyone else.

The long-term impact of the positives and the negatives won’t be visible for some time.

Have questions you haven’t asked me or concerns you haven’t raised? Please reach out.

If I see moves that I’d like you to make before year-end, I’ll contact you directly.

Sincerely,

Goran Ognjenovic
Independent Investment Advisors
(971) 350-8068
www.independentadvisorsnw.com

P.S. I’m also keeping an eye on the debt ceiling debate happening right now. I’ll update you if it’s needed.

1 https://www.cnbc.com/2021/10/04/schumer-aims-to-pass-biden-infrastructure-build-back-better-plans-in-october.html

2 https://www.schwab.com/resource-center/insights/content/will-taxes-rise-wealthy-what-you-should-know

3 https://www.foley.com/en/insights/publications/2021/09/democrats-introduce-tax-proposals

​​This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

The following posts and commentary are to be used solely as educational tools and do not contain investment advice. Investment advice must be tailored to a particular investor’s specific needs. None of the information contained should be construed to be investment advice. Individuals wishing to tailor a plan to their own needs should seek the help of a Registered Investment Advisor.

There is a high degree of risk in investing and trading. Independent Investment Advisors assumes no responsibility. Principles of Independent Investment Advisors may, at times, maintain directly or indirectly, positions in securities or derivatives mentioned in these comments.

Storms ahead? What you need to know

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The stock market got a little crazy this week.

Is a storm coming?

Let’s take a look at what’s driving markets right now.

(Scroll to the end if you just want my takeaways.)

A few things are driving the market volatility:

Fears of a financial crisis in China.

China’s overheated real estate bubble is starting to pop and Evergrande, a giant Chinese property developer, is heading toward defaulting on more than $300 billion in debt.1

Its failure could trigger a cascade of defaults among banks, materials suppliers, and investors, potentially leading to broader financial issues in China and abroad.

Worries the Federal Reserve will start tapering soon.

The Fed meets this month and traders are uneasy about the idea that the central bank could start pulling back the support now that inflation is higher and the jobs market has improved.2 Firms that depend on low interest rates and easy credit could be hurt.

Concerns about COVID-19 case numbers.

Variants continue to pop up and the delta variant continues to keep cases and hospitalizations high. Investors are concerned that another winter resurgence (like we saw last year) could slow down business and economic activity.3

Fears of another debt ceiling showdown.

Once an ordinary part of federal accounting, adjusting the debt ceiling is now a political negotiation, threatening the Treasury Department’s ability to pay its bills next month.

Though it’s unlikely either party will allow the U.S. to default on its obligations, this political brinksmanship adds anxiety each time it comes up. Another government shutdown could exacerbate political risks to markets.4

Do you see a trend? Markets are being driven by fear, anxiety, and doubt.

Which of these squalls will fade away and which could blow into a tempest?

We can’t know.

So, here’s the real question:

Goran, could we see a 10%+ correction in the weeks or months ahead?

Possibly.

Corrections and pullbacks happen regularly and it wouldn’t be surprising to see a market drop.

To show you just how ordinary corrections are, here’s a chart that shows intra-year dips in the S&P 500 alongside annual performance.

(Take a look at the red circles to see the market drops each year.)

A chart that shows intra-year dips in the S&P 500 alongside annual performance.

The big takeaway? In 14 of the last 20 years, markets have dropped at least 10%.5

Even years with strong performance saw big drops.

We’re dealing with a lot of uncertainty and investors are feeling understandably cautious about what’s ahead.

But, that doesn’t mean that we should panic and rush for the exits.

Pullbacks, corrections, and even downturns don’t last forever.

Trust the process. Trust the strategy.

I’m keeping an eye on the Chinese property market situation, as well as workings over in Washington. I can’t predict which way markets will go in the coming weeks, but I’ll be in touch as needed.

Have questions? Feeling uneasy? Please reach out. That’s what I’m here for.

Warmly,

Goran Ognjenovic
Independent Investment Advisors
(971) 350-8068
www.independentadvisorsnw.com

P.S. This email was originally going to be about updates to the tax legislation negotiations, but the market turmoil took precedence. I’ll be in touch on taxes when we know more about how the politics could play out.

P.P.S. Some folks handle stressful situations better than others. What helps you keep your cool when things get turbulent? I’d love to hear. Just hit “reply” and let me know.

1https://www.cnbc.com/2021/09/17/china-developer-evergrande-debt-crisis-bond-default-and-investor-risks.html

2https://www.nbcnews.com/business/markets/dow-futures-tumble-more-600-points-september-slide-intensifies-n1279618

3https://www.cnbc.com/2021/09/19/stock-market-futures-open-to-close-news.html

4https://www.nytimes.com/2021/09/20/business/stock-market-federal-reserve.html

5https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

The following posts and commentary are to be used solely as educational tools and do not contain investment advice. Investment advice must be tailored to a particular investor’s specific needs. None of the information contained should be construed to be investment advice. Individuals wishing to tailor a plan to their own needs should seek the help of a Registered Investment Advisor.

There is a high degree of risk in investing and trading. Independent Investment Advisors assumes no responsibility. Principles of Independent Investment Advisors may, at times, maintain directly or indirectly, positions in securities or derivatives mentioned in these comments.

Taper tantrum part deux?

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Could the Fed’s actions cause a correction or economic slowdown?

Let’s discuss.

First of all, what does ”tapering” mean?

In econ-speak, tapering means winding down the pace of the assets Fed has been buying since last summer.

Why is it a big deal?

Well, the last time the Fed tapered in 2013, during the recovery from the 2008 financial crisis, markets panicked and pitched a “taper tantrum.”2

That’s because traders worried that less Fed support would hurt fundamentals and potentially cause a market downturn.

Now, that old taper tantrum narrative is making folks worry that another market downturn could be ahead of us, especially with concerns about the delta variant.

Before we dive into what could happen, let’s talk about where we are and how we got here.

When the pandemic started, the Fed slashed interest rates and began buying $120 billion a month in bonds and mortgage-backed securities to reduce interest rates, lower borrowing costs, and give businesses and the economy a boost.1

Could the Fed's actions cause a correction or economic slowdown?

However, now that the economy is much stronger, the employment situation has improved, and inflation is a concern, the Fed wants to start paring back those asset purchases to return interest rates to a more “natural” level.

What could that look like?

Obviously, we don’t know exactly when or how the Fed will decide to act, but analysts have some pretty good guesses.

The latest prediction by Bank of America suggests tapering could start this November as the Fed gradually pares back asset purchases through next year.1

The takeaway is that the Fed isn’t going to stop buying assets and raise interest rates immediately.

It’s going to gradually remove the support and see how the economy reacts.

So, will we see another taper correction?

The main reason folks worry about Fed reducing support is because of the effect higher interest rates could have on stocks, particularly companies that rely on borrowed money.

However, interest rates are just one piece of the puzzle. Economic fundamentals, earnings, and other factors also weigh on stock prices.

With the benefit of hindsight, we can see that the 2013 taper tantrum wasn’t even that bad. The S&P 500 tumbled 5.8% over the course of a month but quickly recovered (the caveat here is always this: the past does not predict the future).2

I think the main reason markets declined last time was that investors hadn’t experienced tapering before; they didn’t have context for what the Fed would do.

Since we’ve seen this happen before fairly recently, I think that uncertainty is lessened.

However, we also have other worries to consider: a deteriorating crisis in Afghanistan, continued pandemic worries, and political wrangling over infrastructure.

Any of these factors could derail the bull market.

Stock Market Corrections

But it’s not going to be the end of the world.

Corrections are always something we should expect. They happen regularly and are a natural part of markets.

The Fed is one more thing I’m keeping an eye on, and I’ll reach out if there’s more you should know.

Be well,

Goran Ognjenovic
Independent Investment Advisors
(971) 350-8068
www.independentadvisorsnw.com

P.S. What’s something new or exciting in your world? Do you mind sharing it with me?

1 https://markets.businessinsider.com/news/bonds/fed-taper-asset-purchases-november-bonds-mbs-federal-reserve-economy-2021-8

2 https://www.barrons.com/articles/stock-market-taper-scare-what-comes-next-51629505091

The following posts and commentary are to be used solely as educational tools and do not contain investment advice. Investment advice must be tailored to a particular investor’s specific needs. None of the information contained should be construed to be investment advice. Individuals wishing to tailor a plan to their own needs should seek the help of a Registered Investment Advisor.

There is a high degree of risk in investing and trading. Independent Investment Advisors assumes no responsibility. Principles of Independent Investment Advisors may, at times, maintain directly or indirectly, positions in securities or derivatives mentioned in these comments.

7 Little Upgrades that Can Make Life Better in Big Ways

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What would make your life better?

A new house or car? A bigger paycheck or bank account?

It’s easy to want more when you think of being happier and living better.1

And there’s little doubt that money can buy some (more) happiness.2

But the happiness we get from money is fundamentally limited.3

It leaves us wanting more, and it’s not enough on its own to enjoy a truly satisfying life.

The reality is a lot of the things that can make us happy and enrich our lives have nothing to do with money.4

And some of the things that may bring us the most joy could already be within our reach.4

What are they and how can they improve our lives?

Find out the answer with these simple life upgrades. They can transform the way you experience and enjoy life.

Read Our August Newsletter Here!

We’ve come so far!

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Headlines are looking grim again, so let’s pause and take stock.

Why are the headlines terrible?

Because the media loves drama. This is not news to you or me or anyone who pays attention. The 24-hour news cycle is there to whip up emotions and keep us glued to the latest “BREAKING NEWS.”

So, what’s behind the noise and should we worry?

Before we jump into unpacking the news, let’s take a moment and remind ourselves of how far we’ve come since the pandemic began.

You can see it right here in this chart:

Cumulative change in jobs during the pandemic

We’ve recovered the vast majority of jobs lost since the bottom of the pandemic’s disruption last April. The economy is still missing several million jobs to regain pre-pandemic levels, but we’ve made up a lot of ground, and jobs growth is still strong.1

In fact, there are more job openings right now than job seekers to fill them.2

But there’s an important caveat to the chart above.

The monthly jobs report is what economists call a “lagging” indicator, meaning that it’s telling us where the economy was, not where it’s going.

To figure out what might lie ahead, economists turn to “leading” economic indicators that help forecast future trends.

So, what are the leading indicators telling us about the economy?

A couple of the most popular indicators are manufacturing orders for long-lasting (durable) goods, since companies don’t like to order expensive equipment unless they expect to need soon.

Another one is groundbreaking (starts) on new houses, which indicate how much demand builders expect for housing.

Let’s take a look:

Leading indicators show bumpy growth

Both indicators suggest continued (if bumpy) growth. Now, those are just two sectors, and we want to be thorough, so let’s take a look at a composite.

The Conference Board Leading Economic Index (LEI) gives us a quick overview each month of several indicators.

It increased by 0.7% in June, following a 1.2% increase in May, and a 1.3% increase in April, showing broad, but slowing growth.3

What does that tell us? That the economy still has legs.

Will the delta variant derail the recovery?

A serious slowdown due to the delta variant seems unlikely, but we could potentially see a bumpy fall, especially in vulnerable industries and areas with surging case counts.

There’s also some potentially good news about the delta variant that we can take from other countries.

India and Great Britain both experienced delta-driven surges earlier this summer.4

And what happened?

A steep and scary rise in case counts and hospitalizations…followed by a rapid decline.

It seems that these fast-moving delta waves might burn themselves out.

Unfortunately, these surges come with a painful human cost to patients, overburdened medical staff, communities, and families.

But, if this pattern holds true in the U.S., it doesn’t appear that the economic impact will be heavy enough to derail the recovery.

All this to say, it’s clear that the pandemic is still not over.

But we’ve come such a long way since the darkest days of 2020 and the road ahead still seems bright (if a little potholed).

Please remember to take panicky headlines with a shaker or two of salt.

I’m here and I’m keeping watch for you.

Have questions? Please reach out.

Be well,

Goran Ognjenovic
Independent Investment Advisors
(971) 350-8068
www.independentadvisorsnw.com

P.S. The bipartisan infrastructure deal is still making its way through Congress, and we don’t yet know what the final details will look like. The Democrat-led infrastructure deal is also in the works, but we’re not likely to see serious movement until the fall. I’ll keep updating you as I know more.

1 https://www.cnbc.com/2021/08/06/jobs-report-july-.html

2 https://www.cnbc.com/2021/08/07/there-are-about-1-million-more-job-openings-than-people-looking-for-work.html

3 https://conference-board.org/pdf_free/press/US%20LEI%20PRESS%20RELEASE%20-%20July%202021.pdf

4 https://nymag.com/intelligencer/2021/08/the-u-k-s-delta-surge-is-collapsing-will-ours.html

The following posts and commentary are to be used solely as educational tools and do not contain investment advice. Investment advice must be tailored to a particular investor’s specific needs. None of the information contained should be construed to be investment advice. Individuals wishing to tailor a plan to their own needs should seek the help of a Registered Investment Advisor.

There is a high degree of risk in investing and trading. Independent Investment Advisors assumes no responsibility. Principles of Independent Investment Advisors may, at times, maintain directly or indirectly, positions in securities or derivatives mentioned in these comments.