What To Know About Employee Stock Purchase Plans (ESPP)

/ Percension Wealth Advisors, LLC/

Hi everyone,

We created a brief video explaining Employee Stock Purchase Plans (ESPP). We discuss how an ESPP works, the benefits of such a plan and the tax consequences that participants should understand. If you have an ESPP through your employer, take a look:

Similar to other videos we’ve created, this ESPP one is always available on our site, under: FAQ > ESPP

Speed up your mortgage payments? Last week I mentioned that it might be wiser to pay down your mortgage before saving for college. How so? Let’s explore…

Under the new tax laws the standard tax deduction increased from $12,000 to $24,000 for married couples ($6,000 to $12,000 for individuals). As a result, many taxpayers who previously itemized their deductions will now take the standard deduction.

If you historically itemized and your primary deductions are mortgage interest and property taxes, there is no tax benefit of paying those expenses moving forward if the sum of those things fall short of the standard deduction.

To illustrate this, consider the below example where a married couple owns a home valued at $500,000 and a mortgage of $250,000. If we assume a 1.0% property tax and a 4.5% interest rate on the mortgage, using rough math we can conclude that the sum of those two expenses are roughly $16,000 for a given year. Here is how the tax deductions compare under the previous tax laws (2017) versus the new tax laws (2018 and on):

Notice how this married couple would have itemized their deductions under the previous tax laws and now claim the standard deduction under the new laws. Since they now take the standard deduction their mortgage interest is no longer deducted, which means there is no tax advantage to carrying the mortgage.

What does this have to do with saving for college? Well, frankly it isn’t just saving for college. This applies to other savings that occur outside of tax-deferred retirement accounts as well. The question that needs to be asked is: Can I reasonably earn more by investing (after taxes) than I pay on my mortgage?

Obviously, the higher your mortgage rate the more you need to earn to justify the investment. But there is another factor, which is the risk component. In order to earn what you need, you have to assume some degree of investment risk. Assuming your mortgage is a 30-year fixed rate, there is no risk of that rate going up, which gives the edge to paying down the mortgage (in my opinion).

The trade-off of doing this is that you are obviously not allocating that money toward other savings goals. This means you would need to fund those with future income when the time comes. Ideally though, your mortgage would roll off sooner, which would free up that money to allocate toward other things like retirement, college, etc.

These new tax laws will sunset at the end of 2025. So this approach could be short-lived if things revert back to the way they were. For now though, consider reevaluating how you prioritize spending and savings.

In The Market...

The S&P 500 fell -0.7% last week. Let's look under the hood:

(price data via stockcharts.com)

It looked liked the market was poised to post another nice week of gains, only to have those wiped out (and then some) on Friday. The S&P index fell nearly -2.0% on Friday to end the week right at 2,800. This is no coincidence, as 2,800 was previously a key level that the index had failed to rise above. Now we will see if 2,800 provides support from which stock prices can rebound.

The bond market rallied nicely following the Federal Reserve’s announcement that there would likely be no additional interest rate increases in 2019. This contradicted previous indications that there would be one or two more rate hikes this year. That news boosted demand for longer-term bonds. The 10-year Treasury yield fell to 2.4%, which is the lowest since Dec. 2017. 

The notable addition we made last week was adding a High-Yield bond fund (SHYG) to more moderate accounts. High yields have rallied nicely in recent weeks and appear to be continuing that ascent.

In Our Portfolios...

What's New With Us?

I was over in Spokane on Friday meeting with a couple clients but am back in the office all week.

As an additional reminder, let us know if you would like to establish or refresh your financial plan. We recently implemented a new financial planning software through Right Capital. Our previous Microsoft Excel-based financial planning model worked well, but we finally reached a point where it made more sense to purchase a more user-friendly software to create and maintain financial plans.

Have a great week!

Brian E Betz, CFP®
Principal

Are You In For A Tax Season Surprise?

/ Percension Wealth Advisors, LLC/

Hi everyone,

If you have yet to file your taxes, you will notice some significant changes. I mentioned these a year ago when the new tax laws passed, but now they really go into effect as tax returns are coming due for 2018.

The biggest changes have to do with deductions and exemptions. The standard deduction doubled from $6,000 to $12,000 for single tax filers and from $12,000 to $24,000 for married couples who file taxes jointly. This means fewer taxpayers will itemize their deductions. You will continue to itemize if the sum of things like your mortgage interest and property taxes paid exceed the standard deduction. If they do not, you will claim the higher standard deduction.

The benefit that many will enjoy from the doubling of the standard deduction will be offset to some degree by the elimination of personal/dependency exemptions. Historically you could claim an exemption for you, your spouse and each of your kids (as well as other dependents you care for, such as a grandparent or cousin who lives in your home). In 2017 the exemption was $4,050. So if you were married with 2 kids you could claim $16,200. You were phased out from being able to claim personal/dependent exemptions if you earned too much, but most taxpayers were able to benefit from this.

These exemptions are now gone and while a boost in the standard deduction may compensate for exemptions lost, for many it will not.

The best example of this would be the family whose itemized deductions tally between $20,000 and $25,000. These taxpayers probably won’t see their deduction total change much, only how they arrive there. They will either claim the increased standard deduction of $24,000 or they will claim their typical itemized deduction total, provided it exceeds the $24,000 standard deduction.

This family will feel it when their exemptions go from $8,000 (married couple) or $12,000 (married + 1 kid) or $16,000 (married + 2 kids) to zero. Said differently, the amount of income that is taxed will increase by whichever of these exemption amounts previously applied.

It is worth noting that the marginal tax brackets went down slightly. For instance, where taxable income between $76,000 and $153,000 was previously taxed at 25% for a married couple, taxable income between $77,000 and $165,000 is now taxed at 22%.

It is hard to say just how much the reduction in income tax rates will help in light of the increased standard deduction and removal of exemptions. Frankly, I think the changes in the tax brackets and corresponding rates is mostly window dressing.

The bottom line? Don’t be surprised if your tax bill is different than in years past. In light of the increased standard deduction, next week I will explain why it may be smarter to prioritize paying off your mortgage over saving for college.

In The Market...

The S&P 500 gained +3.0% last week. Let's look under the hood:

(price data via stockcharts.com)

A really solid week for stocks, for a number of reasons:

  • The S&P index crossed nicely above 2,800 (finishing at 2,822). This marked the highest weekly close since July 2018.

  • More importantly, the S&P cleared the previous price-high from early December. Back then, stock prices quickly reversed lower when they reached that point, losing roughly -15% before stabilizing. This matters greatly and needs to hold going into the next couple weeks.

  • Stock prices “gapped” higher in 4 of the 5 days last week, which is often a sign that a new rally is commencing. A “gap higher” is when a stock’s price opens the next market session measurably higher than where it closed the previous session. In this case, the gap higher I’m referencing is for the S&P 500 as a whole. This shows collective strength in the U.S. market.

  • Coming off of last week’s losses, I was curious how stocks would respond to start the new week. The S&P quickly jumped back above its 21-day moving average, which is another sign that investors were ready to buy the dip. (I don’t often discuss the 21-day moving average because it is such a short-term indicator, but I think it is relevant here.)

As crazy as this may have sounded back in December, the S&P 500 is back within a few percentage points of its previous record high. That value for the S&P index is 2,930. If this rally does continue toward that price (and I think it will), it will become much more difficult at that point for the rally to sustain. Why? Because I believe there will be plenty of investors looking to sell at that level, when we get there. This does not mean that I expect prices to plummet from there, but I would expect prices to stagnate for a time.

We added to our S&P 500 index funds early in the week. These were not major additions, but are still worth mentioning. We are nearly fully invested across most client accounts.

In Our Portfolios...

What's New With Us?

This is setting up to be a fantastic week. Spring is here, the temperature is supposed to reach 70 in Seattle and March Madness kicks off Thursday. Other than having to start mowing the yard again, it is nice to see more daylight and warmer weather.

Also, we added a new financial planning software that we will begin implementing during/after client reviews. If you are interested to learn more or apply it to your situation, let us know.

Have a great week!

Brian E Betz, CFP®
Principal