Fiscal Cliff Negotiations: Our View Today

Important note:  This post is based on media reports from The Wall Street Journal and The New York Times, as of December 18, 2012. Fiscal cliff negotiations are very fluid, and until an actual deal is reached, and the fine print is released, a complete analysis is not possible.

The purpose of this post is to provide information and clarity, where possible, based on the information available as of this morning. It appears that concessions have been made by both sides, Democrats and Republicans, so basic concepts of a deal appear to be taking shape.

Tax rates: 

  • The White House has proposed permanently extending the Bush-era tax rates (current rates) on household income below $400,000. Above $400,000, they are proposing an increase from the current 35% to 39.6%.
    • While they are using a $400,000 figure, they probably mean “taxable income” of $400,000. So, after deductions, someone could actually earn well above $400,000, before the 39.6% marginal rate becomes effective.
  • For those with household or taxable incomes (to be clarified) of less than $400,000, it appears that there will be no increase from current federal income tax rates.
  • It is possible this $400,000 level will increase, as part of negotiations, but likely not to decrease.
  • As part of the health care reform passed in 2010, an additional Medicare tax of 3.8% will apply to unearned income (investment income, such as interest and dividends; capital gains and rental income), for married couples with income above $250,000. This is already law, and is not part of the current negotiations.
  • Also as part of the 2010 health care legislation,  income from self-employment and wages will be subject to an additional tax of 0.9%.  This applies to compensation of married couples in excess of $250,000 and single individuals in excess of $200,000 annually. 

Capital Gains and Dividend Tax Rates:

There has not been any published information on changes to the capital gains or dividend tax rates, or where these stand in the current negotiations. I would expect that the capital gains rate will increase from the current 15%, to 20% (plus the above 3.8% tax rate increase from the health care reform act). I cannot forecast what change, if any, there will be to the dividend tax rate, other than the known increase due to health care reform tax, discussed above.

Change in calculation of inflation:  There is a proposal to adopt a new method of calculating inflation, which is expected to result in showing less inflation. The impact would be to reduce the growth of certain benefits, such as inflation adjustments to Social Security. There are other impacts of this inflation calculation change, such as slowing the rate that tax brackets rise each year, so taxpayers would pay more Federal income tax each year, than if this change had not been made.  I have not seen any details on how the new inflation factor would be calculated, or whether this would affect the inflation factor that is used in the investment return for TIPS (Treasury Inflation Protected Securities). This change is subtle, but a very important provision.

AMT (Alternative Minimum Tax):  The White House is proposing to permanently extend the AMT inflation adjustment provisions, which Congress has done every year or two, for many years, as the original law did not include any inflation adjustments. This would provide needed clarity and correct a measure that Congress usually fixes anyway.

Payroll Tax Cut: The Wall Street Journal, but not the Times, reported that the White House did not request an extension of the Social Security payroll tax cut. This would represent a tax increase as of January 1, from 4.2% to 6.2% of the social security tax that all workers pay. This is a change in position for the Democrats, as it would directly affect workers of all income levels.


There were no reports of any changes to itemized deductions. It is possible there will be some type of cap or limitation on total itemized deductions, such as 28% or 35% of one’s adjusted gross income. It is possible that this change, if enacted, would only affect very high income levels.

Other items:

  • The White House is requesting upfront infrastructure spending, as well as a temporary extension of expiring unemployment benefits. Other tax breaks may be extended permanently, such as research and development credits for businesses. 
  • It is also expected that a permanent adjustment will be made to physicians’ Medicare reimbursements. This is to correct a 1997 law, that has been corrected on an annual basis, to prevent massive reimbursement reductions.
  • It is unclear whether there will be an increase in the age for Medicare eligibility, which is currently 65.  Republicans are proposing to increase this age to 67, to slow the growth of Medicare spending.
  • There are no details on specific spending cuts, or when the actual tax reform changes will be drafted. We would expect some tax changes to be approved in the near term, with further revisions in 2013.

Estate taxes:  There has been no public information about how estate taxes will change going forward, based on these negotiations.

If you would like to discuss any of these matters further, please contact our office.

    Sources:  The Wall Street Journal,

    The New York Times,


    Election and Investment Planning

    The election of 2012 is finally here. How will this affect your financial future? How will this affect your investment decisions?

    For many, the election and the impending “fiscal cliff” have been influencing their financial decision making. For some, these issues have led to a lack of decision making, as they are waiting for these issues to be resolved, before moving forward with financial decisions. Some are even waiting to allocate funds to stock investments until they can “see” more clarity.

    For our clients, we have been discussing these issues, but have certainly not allowed these issues to control our decision making or our actions. We adhere to the following motto: focus on what you can control and focus on things that matter, and especially when these two intercede.

    How does this apply to the financial advice we have been giving to clients throughout 2012?

    We have adhered to the financial plans that we have developed for our clients. For clients with stock allocations, that has been very beneficial during 2012. With many US and International broad stock averages up by approximately 10-15% for 2012, this is far superior to just holding cash, while waiting for these issues to be resolved.

    We have actively pursued various strategies for our clients, to take advantage of the market volatility which has existed in 2012.

    • For clients that purchased stock funds in early 2012, we did tax loss selling in the 2nd quarter of 2012, when the market declined. If we had not done this at that time, and waited until now, there may not be tax losses to harvest. Thus, these clients will have tax benefits, and still have unrealized gains. Our clients benefit from our monitoring of tax loss selling throughout the year, not just at year end.

      We have met with clients during the year, and assisted them with their estate planning matters and charitable gifting (working closely with their attorneys). The future of estate tax rates is not known. However, with uncertainty comes opportunities that must be addressed and analyzed.

      Once the outcome of the election is determined, one aspect of uncertainty will be removed. However, many issues will remain unresolved. Uncertainty will always exist, it is just the issues that change. As advisors, we guide our clients to handle these unknowns.

      No one has an accurate crystal ball to know what the financial and tax impacts will be regarding the “fiscal cliff” issues, and how they will be resolved. Many “Wall Street experts” will make post-election predictions and recommendations, but do they really know? Will they be accurate?

      Our investment strategy is not based on guesswork. By developing a globally diversified portfolio, we provide a solid and effective investment strategy. We know that structuring an investment portfolio that minimizes taxes and can reduce dividend distributions (if desired) will always be advantageous, and this is one of the strengths of our firm.

      We know that decisions must be made. By assisting our clients with these decisions, we enable them to have the comfort and financial security they desire.

      In these times of change, volatility and uncertainty, we can assist you with your important financial and wealth management decisions.

    What is an investor to do?

    The world is full of uncertainty. The US economy is struggling; not growing much, but not declining either. Job growth has been slow, but steady, particularly in the private sector. The European Union continues to face more significant challenges.

    Interest rates are at all-times lows. The 10 year US Treasury bill yield has ranged from 1.45-1.60% recently, which is actually a negative “real” return. This means that after inflation and taxes, the net return is negative.

    What is an investor to do?

    Many prominent stock and bond market “gurus” are decrying stocks, with comments similar to the “death of equities.” Bill Gross, one of the world’s largest bond fund managers, in his August, 2012 Investment Outlook, started his essay stating “the cult of equity is dying.”

    A few days ago, one of the largest hedge fund managers in the world, Louis Bacon, announced that he would be returning $2 billion to his investors (for which he was charging 3% annually, plus a 25% performance fee), citing his underperformance and inability to cope with worldwide market conditions.

    There have been huge stock market redemptions from mutual funds over the past few years. Per Morningstar, since the beginning of 2009, investors have redeemed $200 billion from US stock market funds. During the same period, $700 billion has been added to bond funds. Usually, mass inflows or outflows of mutual funds tend to be leading indicators…..of the opposite direction of the markets.

    These are all signs of stock market pessimism, which are actually positive, for long term investors.

    We view the current environment as a long term opportunity, for many reasons. For our current clients, we have developed investment plans and are adhering to them. We do not think it would be advisable to react to current economic issues by making major, sudden portfolio changes. We agree with the philosophy of Warren Buffett, when he wrote that “we attempt to be fearful when others are greedy and greedy only when others are fearful.” He is frequently a contrarian, and has been very successful doing so. As the stock market redemptions reflect, this has been a period when many others are fearful of stocks.

    We work with our clients so they avoid making major financial mistakes, so they are better able to meet their financial and personal goals. We advocate broad, global diversification.

    • US markets and many global stock markets are positive for 2012, though many people would not think so, based on media reports.
    • We have avoided the huge losses that many have incurred by not buying IPO’s in stocks such as Facebook or Groupon (including some very wealthy and prominent individuals and some of the largest stock market mutual funds).
    • We have taken advantage of certain market volatilities, by rebalancing and tax loss selling many times already this year (and not just waiting to do this at year-end).

    While we cannot predict how worldwide stock markets will perform, we know that we are providing advice for our clients that are in their best interests. We rely on academic and historical research, not unproven forecasts, or crystal balls, for our investing strategies and how we structure portfolios. We are confident that these strategies will continue to be successful over the long term.

    Why Perspective and Time Matters

    Our goal as a firm is to provide our clients with a greater sense of comfort and security. Each client defines this differently, but to most, this means having financial independence and adequate resources to be able to do the things in life that are most important to them.

    Today, information and news moves ever faster, which causes society’s perception and time frame to become much shorter. For an investor, this is not a good perspective. To be a successful investor, patience and a long time frame are very important. We discuss and stress this with our clients.

    Last week, my son graduated from high school. For the fun of it, I looked up what the S & P 500 was when he was born, in late 1994. At that time, the S & P 500 was 469.

    The day he graduated from high school, the S & P closed at 1,329.

    Review those figures again:

    October, 1994…………………………….469

    June 2012………………………………..1,329

    Many significant events occurred during these 17 years. There is never a period of time without uncertainty, or crisis of some form.  It is our role as financial advisors to work with our clients, to develop an appropriate financial portfolio, so that you and your family can benefit from the long term financial gains of owning stocks.

    How long will you save, to fund your children or grandchildrens’ education?  How long will you save for retirement?  How long will you live, during your retirement?

    A long time.

    Be patient. Have the proper time perspective.

    Develop a globally diversified portfolio, and the time perspective to allow yourself to reach your financial goals. It will be worth it.

    Note:   Other time periods may show different results, but the trend over long time periods are positive. The S & P 500 is an unmanaged index of US Large company stocks. Our firm generally structures stock portfolios to include globally diversified asset classes, which will include US and non-US stocks, of both large and small, growth and value companies.

    A Valuable Conversation Worth Having

    Extended families gather for many occasions. Celebrations. Holidays. Life cycle events. Family vacations. The discussions at these events and gatherings are generally the same: updates on kids and relatives, grandchildren, health, politics, sports, food, etc.

    Between the generations of most families, however, the topic of money is rarely discussed. These types of discussions should be happening. Sometime. Anytime. And sooner rather than later.

    We all have unique and different family backgrounds and situations. I did not get my education in money, investing and estate planning from my parents. We grew up as a lower-middle income family. I know that my mom struggled financially and worked very hard to support me and my three sisters. Investing was not a relevant topic. How I would pay for my college education, how much I had to work and save money for college education was a very relevant topic.

    Fast forward 30+ years… and now I advise people professionally about their money. We have many discussions about their finances, their goals and how to deal with the volatility of the world and financial markets. These discussions are critical, and the educational aspect of these conversations makes our clients better and more successful investors.

    I now want my firm to emphasize an additional type of conversation. This is a conversation between generations. These can be difficult discussions, which is why they are generally avoided. But if these discussions take place, tremendous value and important long term benefits can result. Clients can have these conversations (or “family meetings”), or we can assist in facilitating them.

    Many couples deal with estate planning. Most view it like going to the dentist; painful, put it off, but they eventually get it done. Once an estate plan is completed, it usually becomes a set of documents that remain locked in a cabinet. One aspect of the discussion that I’m addressing is to make the estate plan real. Make it a living and breathing document and set of plans. Talk about your intents and wishes. Now, while you are healthy and able to have the discussion.

    I’m suggesting that parents and grandparents sit down with their next generation, or generations, and talk about their “family” finances. For example, my extended family is going on vacation later in June. My siblings and my parents will be together for a week. We should set aside some time to have a discussion of what will happen when each of them passes away. What is their intent? How will we handle things?

    We have actually had this discussion, but it was many years ago. It should happen again. But most families have never had a multi-generational discussion. The topics can vary, depending on the financial assets (small, large or very wealthy), and the ages of the different generations.

    At family events, the telling of family stories is how family histories are remembered. The discussion of money, both positive and negative, can be important as well. Parents and grandparents can share their financial and investment lessons, both good and bad, with their next generations. This would be very valuable.

    Note: I would like to thank Nathan Dungan, for the valuable session he led on this topic at a seminar I attended in May, as well as Susan Weiner (@susanweiner), who wrote an excellent blog post encouraging financial advisors to write in a more personal manner, which inspired this post. Thanks to both of you.

    Graduation, my son and his impact

    My second son, Scott, is graduating from high school next week. While I am obviously very proud of him and his many accomplishments, I have also thought about his impact on me and my firm (and thus, my current and future clients).

    Parents teach their children. Children also teach their parents. Scott has taught me many things, and we have learned some things together.

    Five years ago, no one would have thought of me as a techie or an early adopter of technology. That is very different today. Thank you Scott, for pushing and encouraging me.

    At Scott’s insistence, I was one of the first to get an iPhone, when they were initially introduced. That enabled me to “consume” information in a new and better manner. As a voracious reader of business and news, I could then begin to read the NY Times and Wall Street Journal, whenever and wherever I wanted. Years later, I got an iPad. Now, Instapaper and Good Reader are indispensable apps.

    Scott encouraged me to use Twitter years ago. I am not a follower of celebrities. I have used Twitter primarily as a learning tool, to connect with thought leaders in various fields and professions, and well as to meet and establish relationships with people I otherwise would have never met. I have made great business and personal connections, and some very close friends. Also, through “following” these people, I read articles and blog posts they refer and “link” to. This has been invaluable for my personal growth and learning, and it has benefited my firm in numerous intangible ways.

    Through Twitter, I connected with individuals, like @michealport and @bobburg. As a result, in 2011, I attended a 3 day seminar with Michael Port. Within weeks of this seminar, my firm implemented a Client Relationship Management (CRM) program. This helps us maintain better information about current and future clients. This is generally an area of weakness in most professional services firm, which we have resolved.

    Earlier this spring, I attended a conference sponsored by Bob Burg, another great friend and source of inspiration I met on Twitter. I wrote about this conference in a previous post, dated April 24, 2012: Remarkable Experience. Worthy of an Encore. At this event, I met a number of national speakers, who I now follow and continue to learn from.

    Scott and I have also developed a wonderful relationship with @jasonwomack, a thought leader in personal development and time management. Jason Womack is one of the most positive, inspiring people anyone could meet (and I strongly recommend you meet him!). Scott has provided Jason with technology assistance for the past few years. While doing this, Scott has learned business and life lessons that few adults ever learn and absorb, let alone a 17 year old. Scott and I have enjoyed many great and important discussions, initiated by Jason’s podcasts, blog posts and book.

    It is important to note that Scott’s relationship with Jason started because Scott was willing to help Jason with a tech question, via Twitter, late one Sunday evening. As Bob Burg would say, Scott is a “Go Giver.” Others would say you are a “mensch.”

    Scott, you are very talented and have pursued your technology passion. Along the way, you have helped so many others in your school and community. I look forward to seeing where this passion leads you, as well as your continuing to encourage me to try, and adopt, new technology. Because of you, our family is stronger, I have developed great business and personal relationships, and my clients and my firm have benefited. Thank you!

    Our View Today

    What is our view of the world today, as the stock markets worldwide have concluded the month of May with signficant declines for the month?

    The short answer would be, the same that it was on May 1.  While many things have occurred in the world that we cannot control, we have remained focused and worked with our clients on the things that we can control.

    Over the next month, I hope to write more frequently, to share in more detail our thoughts and our philosophies.

    We have had conversations with clients in recent weeks, which have primarily focused on their concerns regarding various economic and political situations, such as the European fiscal crisis, and the US debt and tax policy matters, which remain unresolved (and likely not to be addressed in a significant manner until late December, 2012).

    During these conversations, similar themes have reappeared. Our clients have concerns, which we are quite empathetic with.  However, as the conversations evolve, our clients recognize that we have structured an investment plan, or asset allocation strategy, that is appropriate for them. They recognize that the stock markets will have periods of decline, and these conversations help them to be prepared for such occurrences.

    For the stock portion of our clients funds, we are not investing for the next month or even the next year. For those short-term time periods, that is what the fixed income allocation of their portfolio is for. For the stock portion of their portfolio, we take a much longer view, which is years or decades. We know that in the long term, the stock market has provided significant gains, despite many problems and crisis that companies and countries have faced.

    We are more confident than ever that our approach to investing, our philosophy and the way we mange our clients’ portfolios and work with them (in discussions, in tax loss selling and planning, and other matters), are the correct approaches and are truly in our clients’ best interest.

    The stock market and the economy provides many lessons and on a frequent basis. I look forward to expanding on these thoughts during the month of June, in future blog posts.

    Regardless of the month-to-month volatility of stocks, we remain focused on providing our clients with a greater sense of comfort and security.

    Remarkable Experience. Worthy of an Encore.

    What makes something remarkable? Memorable? Have impact? Worthwhile?

    What inspires 200 people to travel from all over the US and 3 separate continents for 2 days to listen to a number of speakers?

    I returned Saturday evening from a remarkable 2 day conference, which was sponsored by Bob Burg, author of The Go Giver and a number of other books.

    Each one of us who attended took a risk, not knowing whether the time we would be spending away from our families and offices would be worthwhile. As I have learned from attending two different events, this year and last, great value can be obtained by attending these types of events. I trusted the person organizing it, Bob Burg, and was confident that he would gather an outstanding group of presenters. He delivered and exceeded my expectations.

    This was not an investment or financially related conference (which we attend a lot of). Will my firm and our client’s benefit? Absolutely! We recognize the value in continually learning, being exposed to new and different ideas from many different sources. This helps us to continually review our practices and procedures, to renew our energy and strive to improve.

    I heard (and interacted with) very diverse and knowledgeable speakers. They addressed topics ranging from leadership, service to our clients, marketing, social media and “personal development” (for lack of a better word).

    There were numerous takeaways for me and my firm. Some of the themes which were emphasized were the importance of deepening and maintaining relationships (even in a social media world), how to create even more value for our clients, being resilient through the ups and downs of life and a business, and the benefits of working with others in mastermind groups (like peer learning groups, which we have done for years). Another reminder was to have fun and add more humor to our lives. As with all events like these, the keys are to follow through and our ability to be disciplined and implement ideas from the conference.

    One of the speakers, Mark Sanborn, wrote a book titled Encore Effect, which discusses how to create something remarkable, and to be able to have the discipline to deliver it at a consistently remarkable level. He is encouraging us to create a performance, or a business, that is worthy of an encore, a standing ovation.

    By attending events like this, by making the time and effort, we are continually striving to improve ourselves and create a firm that others will feel is worthy of the term, an “Encore Effect.”

    The Value of a FInancial Advisor: Perspective

    This post was originally written on March 16, 2011, a little over a year ago.  As the title indicates, perspective is important. I hope you find this helpful to consider.

    As I sit at my desk, with spring beginning to arrive in Farmington Hills, MI, it is hard not to think about world events and their impact on the financial markets.

    The horrific events in Japan, both nature and nuclear, are profoundly sad and scary. The events in the Middle East over the past months may be very positive, resulting in increased democracy and freedom for many, but could result in oil disruptions.

    Neither of these series of major events could have been predicted on January 1, as 2011 began. As no one could have predicted these events, no one could have made investment decisions based on these events occurring.

    Which leads to one of our basic investment tenets: we focus and plan for our clients, for the long term. While we recognize that there are many issues and problems in our country, and throughout the world, we try to assist our clients by keeping a long term perspective. While the events of today are important, they should not control or even impact your financial goals, which may be decades into the future.

    As we plan, we are realistic, but optimistic about the future. Our country, and the world for that matter, has proven to be very resilient, if viewed by years or decades, and not day to day. For any time period you select, challenges were faced. Thus, we structure your portfolio with safe, fixed investments for the short term or to provide a foundation of current cash flow, and with stocks to provide growth for the longer term.

    We plan for our clients when we begin to work with them. We develop an Investment Policy with them. Then, at times like this, or during 2008-09, we are here to talk to them, if they desire. That is key. By talking about the financial markets and what is going on in the world, we help our clients to keep a long-term perspective, which really means they are able to keep their long term strategy in place (and not panic). That is key to helping their investment experience to be positive, so they will have the comfort and security to know that we are helping them move toward reaching their financial goals.

    From Lottery Tickets to Real FInancial Planning

    Except for three lucky lottery ticket holders this weekend, for the rest of us, real financial planning and wealth management is still a very important priority.

    Our goal for our clients is to help them achieve a sense of financial comfort and security. For each client, this may mean something very unique and different.  Our objective is to assist them in making good financial decisions, allocating their investments properly and working with them over time, so that they will be able to handle the volatility (the ups and downs) of the stock market.

    While winning hundreds of millions of dollars Friday night sounded great, the reality is that your financial success will be the result of a few key decisions that you make over the course of your lifetime.  Note that I did not state many decisions, but a few key decisions.

    These key decisions may include:

    • Having a proper team of advisers, including a financial advisor and an estate planning attorney.
    • The spending decisions you make, particularly on how much to spend on your house, cars and vacations. Are you living within your means and saving money on a regular basis?
    • Deciding to stick with an investment plan, or jumping in and out of the stock market, because you are scared or can’t handle the ups and downs in the short term. For example, if you got out of the stock market during 2008 or 2009, or during the summer of 2011, those may have seemed liked good decisions at the time. However, they were probably not decisions that in the long run were in your best financial interest. 

    Some of the benefits that our clients receive, or they have told us they have received, are:

    • Less financially related stress, as they know that they have a good long-term investment plan in place and a team of advisers they can talk to.
    • An investment plan that includes minimizing your taxes in a very effective manner.
    • A real understanding of the high costs of their investments. When we begin to work with clients, many are very surprised about the true cost of their previous investments, which they were not fully aware of. We can almost always reduce this cost.
    • A lot less mail, and thus, less time that they have to spend dealing with their investments.
    • Knowing that they have a wealth management firm that has the client’s interest as a priority, which comes ahead of the firm’s financial interest (we actually have a legal obligation to put the client’s interest first, which not all financial advisory firms can say or do).

    So as the first quarter of 2012 ends, with the US stock market up a very surprising 12%, and international markets up even more, please take a moment to consider your investment decisions.

    Are there any key decisions you could make today, other than buying a lottery ticket, that will have a significant impact on your financial life, 10, 20 or 30 years from now?