New Tax Laws Might Influence How You Pay Your Mortgage

Should you pay off your mortgage early? The new tax laws might warrant it.

If you normally itemize your tax deductions each year, you do so because the sum of those itemizations exceed the standard deduction amount that the IRS otherwise provides as the alternative. For instance, in 2017 the standard deduction was $12,700 for married couples. If you were married and had more than $12,700 in itemized deductions then you itemized. If not, you claimed the standard deduction.

In the tax bill that Congress passed earlier this year, the standard deduction doubles from $12,700 to $24,000 for married couples and $6,350 to $12,000 for single taxpayers. This is effective starting this year. It means fewer taxpayers will itemize their tax deductions.

This is where your mortgage comes in.

For many taxpayers, the biggest deduction is the interest paid on a home loan. For some taxpayers it is the only itemized deduction and has historically exceeded the standard deduction by itself. Now, because that threshold has doubled the tax benefits associated with paying mortgage interest will go away if the total interest paid falls short of the standard deduction amount.

Let's use a couple examples...

Example 1:

  • You are married
  • Your mortgage balance is $500,000
  • Your mortgage rate is 4.25%
  • Therefore, the approximate interest you will pay in the year is ($500,000 x 4.25%) = $21,250

Result: Assuming you have no other itemized deductions, you would take the standard deduction because $24,000 is greater than $21,250.

Example 2:

  • You are single
  • Your mortgage balance is $275,000
  • Your mortgage rate is 4.50%
  • Your total mortgage paid would roughly be: ($275,000 x 4.50%) = $12,375

Result: Assuming you have no other itemized deductions, you would continue to itemize because $12,375 is greater than the new standard deduction amount of $12,000 for single tax filers.

As mentioned, the big assumption in both examples is that there are no other itemized deductions. If there are, such as if you make large charitable contributions, then you will likely continue to itemize.

For the married couple in example 1 above, there is no longer any tax benefit related to holding a mortgage. It is costlier to keep paying interest (in their case, 4.25%) if they have the extra funds to pay off their home loan sooner than the loan term.

There are other variables too. Such as..

  • If you are able to leverage your money – meaning make more on your cash than what you pay in interest – then you may prefer to hold a mortgage and invest your excess cash instead.
  • The tax laws could change again in the coming years and the standard deduction could be reduced.
  • You might not have additional itemized deductions this year, but you could in future years.
  • You might not have the extra funds to increase your mortgage payments in the first place.

The bottom line is, if you own a mortgage and have historically itemized your deductions it is at least worth assessing whether you will continue to itemize in the future. If not, consider a plan that involves paying off your mortgage early.

In The Market...

The S&P 500 gained +1.5% this past week. Let's look under the hood:

(price data via

It was a nice week across the board, as nearly every sector was positive. Health Care (XLV) was up +3.0% and is a sector fund that is now owned within most client accounts. Health Care looks like it could be on the cusp of a nice rally in the coming days/weeks. Technology (XLK) had a nice week as well (up +2.3%) and is a sector that we added to some accounts.

It was an encouraging week, but one that followed two-straight weekly declines for the S&P 500 index. Looking more broadly the overall market continues to see-saw. The S&P enters this week nearly -4% below its previous high, which again is the price level we need it to burst through in order for the rally to resume. Right now the market is coming up on six-straight months of stagnation.

On the bond side, long-term Treasuries, Corporate bonds and Preferred Stock were all up more than +1.0%. We added Preferred Stock (PGF) to many accounts and swapped out our Municipal bond fund (PZA) for Preferred Stock within any IRA accounts that owned muni bonds. The tax-free nature of the interest earned on municipal bonds does not make them as conducive to be owned within IRA accounts, which is why we made the swap to a more growth-oriented bond fund in Preferred Stock. As a reminder, given the characteristics of Preferred Stock we treat it as a bond fund for our stock vs. bond allocation needs.

We are back to being nearly 100% invested as a result of these moves.

In Our Portfolios...

What's New With Us?

My family had a nice trip to Utah for the 4th of July. It is nice to be back for a full week as the market nears its historically most volatile time of the year.

Have a great week,

Brian E. Betz, CFP

The Truth About The Stock Market Decline And 7 Ways You Can Take Advantage Of It

Top Of Mind...

I have so much to say about the past two weeks that I really do not know where to begin. Let's start here: Which of the following statements sounds better to you?

"The U.S. stock market has plunged -7% in the past six days."


"Through the first six weeks of the year, the U.S. stock market is down -2%."

The second one, right? Both are factual, yet, your perception of the market will be largely framed by which facts you hear and how those facts about the market are editorialized to you. Context gets totally lost in an era where media outlets are competing for eyeballs and clicks. That does not mean that the past two weeks have been rosy. Far from it. But it also does not mean that financial armageddon is upon us, either.

Want to keep score? Stop counting points: On Monday when the major indexes fell roughly -4% apiece, here was a major headline...

The words "biggest one-day drop in history" is not only misleading, but it is factually incorrect. It was the worst day since August, 2011 when you look at the percentage change, which is the only calculation that matters. The number of points a particular index rises or falls is irrelevant because the stock market has gradually risen over its entire 100+ year history. This means that each additional point the Dow or S&P 500 rises or falls becomes less significant to whatever period you are measuring -- that day, that week, that month, etc.

The math is pretty simple. If the S&P 500 loses 100 points from a starting value of 1,500 then it has fallen -6.7%. Down the road if the S&P loses that same 100 points from a starting value of 2,500 then it has only fallen -4.0%, nearly 3% less severe of a loss. But of course you should not let facts and basic math get in the way of a good headline...

Yes, the past two weeks have been bad. But context is rarely given because, frankly, much of the financial media is lazy. My advice here would be to focus on percentages. Points are pointless.

What We Are Doing: I want to address how we are reacting to the recent market decline before sharing some options for you to consider.

Most client accounts carry a cash balance somewhere between 20% and 40%. These are funds we obviously want to reinvest, but given current conditions we are being patient. I said last week that the long-term stock market uptrend was not broken based on one week of activity. That uptrend is in more jeopardy now that the S&P encored with a -5% loss this past week.

We would like to invest the cash available into bonds, but the bond market has been in decline too (which is something I warned about a few weeks ago). The scenario that most concerned me after last week was one in which stocks continued to fall and interest rates spiked, meaning bond values fall too. Because that is exactly what has happened, patience is more important than rushing to try and pick when we think bond prices will bottom. Ideally it would be great if bond values were rising right now, as they often do when stocks fall. But they aren't. So cash is king for the moment.

What You Can Do: Here are 7 ways you can take the lemons the market has given you and make lemonade...

  1. If you have been sitting on cash because you wanted the market to dip before investing, is this what you have been waiting for? If not, how much further would it have to fall before you put new money to work? Whatever you do, do not freeze. If this sounds like you, be ready to act. You wanted the ball. You got the ball. You are wide open. Will you shoot?
  2. Along those lines, I read a terrific idea from industry adviser/pundit Josh Brown, who proposed something on his "Reformed Broker" blog. When market losses like this occur, pick a handful of blue-chip stocks that you think are great long-term investments to own. Pick a price that is well below whatever each one is currently at. Then, in your brokerage account (or IRA), set a limit order to buy them at those bargain prices you've identified. The bad news if those prices are eventually reached is that it likely means the overall market has tumbled even further from where it sits today. But the good news is that it means you likely acquired those shares at what could end up being massive discounts in the long run. Call it a potential hedge in the grand scheme of things.
  3. If your financial situation has improved and/or you are willing to take on more investment risk, call me. We can look at using the cash currently sitting in your account to purchase stock funds rather than bond funds when the time comes to reinvest. The idea being that stocks rally stronger than bonds do when both asset classes eventually rebound. Additionally, if you want to do my #2 suggestion above but do not have the desire to set up a brokerage account on your own, we can help you with this process of investing new funds. After all, it is what we do.
  4. Increase your 401k contributions. This year you can contribute up to $18,500 if you are under age 50 and $24,500 if age 50 or older. If the percentage you are deferring comes up short of those limits, consider increasing it.
  5. Make a lump-sum IRA contribution. You can contribute up to $5,500 for 2017 ($6,500 if age 50 or older), if done by April 17th. You can contribute the same amounts again for 2018. Just make sure you meet the requirements. I can easily help you figure out whether you qualify for a 2017 contribution.
  6. If you invest in a 529 college savings plan consider making a lump-sum contribution, particularly if your child or grandchild is not close to going to college.
  7. If none of these six ideas appeal to you despite having the cash or budget to do them, okay, fine... Increase your mortgage payment or other debt payments. Get those paid down quicker, especially if the interest rate associated with the loan is variable and subject to increase in the future. If what I have been saying about long-term interest rates continues to materialize, your loan could become more expensive to finance in the future.

If you have questions on any of the above, call me. More on the state of the market below.

In The Market...

The S&P 500 fell -5.0% this past week. Here is how the individual sectors performed:

(price data via

Another week of red across the board. Every sector was negative, and as mentioned above, the S&P index is now slightly negative year-to-date (down -2.0%). The bond market continued its slide lower as well, as long-term interest rates climbed higher and remain at highs not seen since late-2013. 

The S&P 500 did something it had not done since Oct. 2016, which is fall below its 200-day moving average price. The 200-day moving average is one of the pillars of our investment process. It is the best reflection of the long-term trend of the market.

We look for two things in regards to the 200-day moving average. 1) We want the price of any given investment to be above its 200-day average price; and 2) We would like the slope of the 200-day moving average itself to be rising over time. When both of these conditions are met, that is most ideal. Take a look at the current price of the S&P relative to its 200-day moving average (the pink line):

(created in

Also shown on here is a trend line that I believe is relevant (the blue, dashed line). The price of the S&P index closed this past week just above both this trend line and its 200-day moving average. That is crucial if the bleeding is going to stop.

If we take the same chart but blow up the timeframe from an 18-month view to a 3-year view, you will notice how the slope of the 200-day moving average (pink line) started rising back in June 2016. It is no coincidence that it was right around that time when I became bullish on the stock market again. You will also notice that by that time, the price of the S&P 500 had already been above the 200-day moving average for nearly three months. Here it is:

(created in

The positive view: Once both those conditions were met (the price climbed above a rising 200-day moving average) it was lift-off for the U.S. market. I would contend that the S&P 500 now having fallen to its 200-day moving average could set off a new rally as well. It is one of the primary points that we consider to be "price support", where the price can get buoyed and then begin to rise from there. So far that has been the case, as the S&P touched down to the 200-day moving average on Friday before bouncing higher to end the week.

The negative view: If the S&P 500 falls below its 200-day moving average, market conditions will become more problematic. Conditions are likely to be choppy for the foreseeable future anyway, but the risk-of-loss increases significantly if stock prices collectively break below their long-term moving average. Why? Because it would reflect that the collection of 500 companies that comprise the S&P, thus comprising the broad market. are moving lower in unison. And, because the 200-day moving average is a popular metric among professional investors, it would likely trigger more selling activity if the price does in fact break below it.

The bottom line: The rising price trend remains in tact, although it is hanging on by a thread heading into next week. I still look at this as a buying opportunity, but that could change very soon.

In Our Portfolios...

In Financial Planning...

I got this reminder the other day from the Social Security Administration (SSA). At first I quickly deleted it, before restoring it from my trash folder. You would not have received this notice unless you established an account on the Social Security site, which you can do here.

If you do not have an account on the SSA site, create one (it's free). I then encourage you to check your reported wage information for accuracy. It is NOT unusual for wage information to be incorrect. Since this wage data directly impacts the amount of future Social Security benefits you will receive (if still working), it is a good idea to keep records of your income each year and crosscheck it against what the SSA has on file.

What's New With Us?

I had a great meeting with our rep at State Street, one of the primary exchange-traded fund (ETF) providers we use. State Street is one of the largest ETF providers and the creator of the first-ever exchange-traded fund, its S&P 500 index fund "SPY" that it created back in 1993. If you want more info on the funds we use, why we use them and how we select them, let me know.

I will spend most of the weekend prepping for next week and working on our house. Fun times.

Have a great weekend,

Brian E Betz, CFP®

The Biggest Mistake You Can Make

Top Of Mind...

I saw a news story the other day where supporters of President Trump were hailing him and his policies as the sole reasons for this persistent stock market rally. Ironically though, none of these people interviewed were investing themselves.

This got me thinking...  As the U.S. stock market just completed its 4th-straight weekly gain to start the year and its 17th among the past 20 weeks, most of the conversation is about how impressive this market rally has been and how much longer it will continue. For me though, there is a more relevant, tangible conversation that should be happening that supersedes our sentiment on the market...

How you put money to work.

This is the most important thing you can do. It does not just mean buying stocks and bonds. You could invest in real estate. You could pay down interest-bearing debt. You could invest in your skills/education in order to boost your future career earnings potential. You could start a business. There are many ways to effectively use money rather than stockpiling cash or spending it frivolously.

This concept is simple, but gets overlooked if we are consumed by the ebbs and flows of the market or the impact that one, polarizing political figure might have on the economy. As I wrote on this blog pre-election, no one knows how the market will react to uncertain, future events. So there is no point wasting our energy trying to predict as much.

Instead, focus on the biggest known risk: Inflation. It is a fact that the price of goods and services will increase in the long run. Always. Yes, some markets have experienced peaks and valleys, like real estate and stocks did last decade. But both of those have since rebounded and gone on to new highs. Meanwhile, there are other areas where prices have constantly appreciated, recession or not. Here are three I often cite:

Child care -- Because people have not stopped having kids
College tuition -- Because kids have not stopped going to college
Health care -- Because no one has stopped aging

Prices will continue to rise, so how do we at least keep pace with inflation? By putting money to work. Invest in such a way that you outpace inflation. Pay down debt so that you increase your capability to invest. Invest in yourself so that you maximize your single greatest asset for making money...  YOU.

It is important to maintain an adequate cash balance. In fact, this is one of the first things we address in financial planning because having cash means not having to take on debt in the event of a budget crunch or emergency. But cash is a little like Vitamin C -- the right dose of it is good for your health, but having more than you need will not make you any healthier.

I would recommend taking a step back and using tax season as a good opportunity to take inventory of how your assets and debts are dispersed. If you feel you are sitting on too much cash, are spending too much or are not investing enough, let's talk. The biggest mistake you can make is failing to put your money to work for your future. Most of us work years and years for money, but shouldn't that money work years and years for us in return?

In The Market...

The S&P 500 gained +2.2% this past week. Here is how the individual sectors performed:

(price data via

Another impressive week for the U.S. market. The S&P is now up +7.5% this month, which would be the best January since 1987 provided the bottom does not fall out in the three days remaining. This plays well for those who trust in The January Effect, which is a seasonality-based belief that however January goes, so goes the rest of the year. Historically, The January Effect has been more predictive than not, but the results are not overwhelming. In some ways it is self-fulfilling, given that the odds for the remaining 11 months will slant based on how January performs.

At the sector level this was arguably the best week of the year. Every sector was up more than +1.0%, This was good news for our positions in Financials, Utilities and the two growth-oriented index funds we own. It was also good news for the gains we recognized from selling our Technology sector fund (XLK) this week.

Somewhat surprisingly, bonds had a good week as well. I highlighted last week how long-term interest rates might be on the verge of a major breakout, which would be bad news for bond owners. The bond funds we own (high-yield, investment-grade corporate and long-term Treasury) managed to gain on the week despite the fact that the 10-year Treasury bond rate actually DID rise from 2.64% to 2.66%. It was a minimal increase, but an increase nonetheless. I am lukewarm on Treasuries right now and am actually looking for the right opportunity to sell that position (TLT) if it presents itself.

In Our Portfolios...

In Financial Planning...

One more note about tax forms (and hopefully my last)... As mentioned previously, TD Ameritrade tax forms will be available over the next month. In addition, for most of you there will be a second 1099 form for the time in 2017 that we held accounts at Scottrade. The following relates to how you will receive those Scottrade tax forms.

Your Scottrade Form 1099 -- whether for a taxable account or an IRA (or both) -- should be available in the next week or so. They will be sent to you using the same delivery method by which you were previously receiving Scottrade statements. For most of you this means email. For some of you the forms will be mailed to your home. For those of you who are newer clients and never had an account with us held at Scottrade, disregard this altogether.

In recent weeks I have said to ignore any notices you receive from Scottrade. Let me revise that... KEEP any notices you receive that resemble tax documentation. Unfortunately, I cannot call Scottrade on your behalf and request information because our firm is no longer a servicing firm to them. So, if for some reason you do not get the information you need or want to follow-up on something with Scottrade, you will need to contact them.

You can do so by calling: (800) 619-7283. Provide Scottrade with your old account number (which I can provide) and they should be able to put in a request with their back-office to provide you whichever forms are needed. I apologize that I cannot do this for you, but again, our firm is no longer authorized on those legacy accounts because they were closed out when the funds were migrated to TD Ameritrade back in May 2017.

Finally, if you deduct investment management fees as an itemized deduction in your taxes, I can provide you those fee numbers. This current tax season (2017) is the last year you can do so following the recent tax law changes.

What's New With Us?

I am a little under the weather, so I am hoping to be back in top shape in a day or two. My goal over the next month is to try and watch all of the Oscars movies nominated for Best Picture. Hopefully I can stream one or two of them this weekend. It seems like a good opportunity.

Have a great weekend,

Brian E Betz, CFP®