Q4 2018 Newsletter


Volume 9, Issue 4 - January 2019


What a year we witnessed in 2018, the worst performance wise for equities since the great recession and perhaps a signal that the global economic boom of the last decade has started to unwind. And while it appears late cycle economic conditions will continue in the U.S. into 2019 we feel recession risk remains relatively low primarily as a tightening labor market continues to push wages higher bolstering the American consumer. The result of which however, supports continued tightening of monetary policy by the Federal Open Market Committee (FOMC) as well as its counterparts abroad. This in the face of slowing growth in Asia, China in particular, a strong dollar, ongoing trade tensions and fading impacts of the 2018 tax cuts.   

As most know we have never been prognosticators of what lies ahead, yet it appears as though headwinds exist that could very well make it more difficult for risk assets, equities in particular, to perform than in recent years.

So, what does all of this mean to the retail investor, and in particular those who have chosen to work the 1st & Main? As you know we are and have been tactical portfolio managers dating prior to the great recession and have from time to time over the years enhanced the approach.

2018 was no exception and was a true test that saw no less than six risk-management events of between 5% and approximately 17%. Each one with its own unique challenges and subsequent opportunities. The most challenging coming in December of last year which witnessed a shift in the Tactical Allocation Portfolio (TAP) entirely away from risk and into historically more conservative asset classes including short duration government securities, cash and cash equivalents. The bottom line is that the process worked, reducing risk at appropriate times all the while searching for a new trend, either positive or negative, before adding risk back into the portfolio. It is precisely the next momentum supported trend we are searching for moving into the new year, one that more often than not, takes time and patience to form.

For those who have not engaged in a recent strategy review we are excited to share the latest enhancement to the model and also to gage what if any impact the wildly volatile markets of 2018 have had on your long-term view. 

As always, please do not hesitate to contact us at any time. We look forward to hearing from you!

Fraser, Dudley, Alex & Josh         


Six key changes under the tax reform plan

1 Standard Deduction Increases

No matter your filing status, the standard deduction increases in 2018.

·         Single and Married Filing Separately: $12,000

·         Married Filing Jointly: $24,000

·         Head of Household: $18,000

2 Personal Exemption Eliminated

Under the tax reform, taxpayers can no longer claim the $4,050 personal exemption for each of their dependents.

3 Child Tax Credit Rises

The Child Tax Credit increases in value from $1,000 to $2,000. The tax reform bill also introduces a new $500 credit for non-child dependents. 

4 State and Local Capped

Taxpayers can deduct up to $10,000 in state and local income taxes. Previously there was no cap.

5 ACA Individual Mandate Repealed

Beginning in 2019, individuals who choose to go without healthcare coverage for the year will not have to pay tax penalties.

6 Mortgage Interest Deduction Drops

Individuals who purchase a home in 2018 can only deduct interest up to $750,000 in mortgage debt (previously $1 million). The interest deduction on home-equity loans is eliminated.

Tax Brackets.PNG

Source: https://bit.ly/2zKD2Gq


yes your 529 will affect financial aid

If you're considering using a 529 plan to save for future college costs, you may be worried about hurting your child's eligibility for federal financial aid. If so, you're not alone.

In fact, just under one-third of our 2017 College Savings Survey respondents believe that savings in a 529 plan are not considered when a college determines financial aid eligibility. But whether this is true or not really depends on a couple of things, like who owns the plan, when withdrawals are taken and what type of aid you're applying for. In most cases, your 529 plan will have a minimal effect on the amount of aid you receive and will end up helping you more than hurting you.

Types of aid: All schools that offer federal need-based financial aid require students to complete the Free Application for Federal Student Aid (FAFSA). Schools will use information from the FAFSA to calculate a students Expected Family Contribution (EFC). However, there are around 200 schools that use an additional form to calculate institutional award eligibility, called the CSS Profile. A family's assets will be counted differently on each form. For example, assets in a grandparent-owned 529 plan are not reported on the FAFSA, but students may be asked to include them in the CSS Profile.

Since there are so few schools that use the CSS Profile and their requirements can vary by school, let's focus on how a 529 plan can affect the FAFSA.

Account Ownership: The value of a 529 plan owned by a dependent student or one of their parents (529 plans do not allow joint ownership) is considered a parental asset on the FAFSA. Around the first $20,000 will fall under the Asset Protection Allowance (the exact amount depends on the parents' age). Any parental assets beyond that amount will reduce a student's aid package by a maximum of 5.64% of the asset's value. So if a parent's 529 account exceeds the Asset Protection Allowance by $10,000, his child's financial aid award could be reduced by $564. Of course, no one wants to lose $564, but the tax-free investment gains you've earned in your 529 account could likely outweigh this tiny loss. But other student-owned assets are not treated as favorably. A custodial account under UGMA/UTMA, for example, will be counted as a student asset and will reduce the aid package by 20% of its value. So in this case a $10,000 student asset means $2,000 less financial aid.

As mentioned above, assets in a 529 plan owned by a grandparent or other relative are not included on the FAFSA.

Earnings: Any interest, dividends or capital gains generated from a student's asset that are reported on their income tax return will be reported on the FAFSA. This untaxed income will be assessed at 50% when calculating EFC. Earnings in a student-owned 529 plan, however, do not have to be reported on the FAFSA and will have zero affect on financial aid.

Kids-BW.jpg

Withdrawals: 529 plan distributions are another area where the effect on financial aid will depend on the account owner. With a parent- or student-owned plan, 529 withdrawals used to pay for college will not be reported on the FAFSA. That means if you liquidate your account to pay for your child's sophomore year, there will be no effect on a subsequent year's FAFSA.

But the situation gets a little stickier when the account is owned by a grandparent or other relative. The student will have nothing to report on the FAFSA while the money is sitting in a grandparent-owned 529 plan, but any withdrawals used to pay for their college will be counted as untaxed income on the FAFSA. Let's say a grandmother wants to cover a full year of her grandson's tuition at a private college, which costs $45,000. He'll be a freshman in 2017, and he plans on applying for financial aid every year. On his first and second FAFSA, he'll have nothing to report, but when he applies for federal aid for the 2019-20 school year (when he's required to report prior-prior year income) his untaxed student income that was generated from Grandma's gift may reduce his aid package by as much as $22,500 – Yikes!

To prevent this from happening, Grandma can wait until January 1 her grandson's second semester of his sophomore year of college to pay his tuition, after he completed his last FAFSA. This of course, assumes he is graduating in four years. You could also transfer account ownership to the student's parent, but then the funds would be counted as a parental asset and reduce the following year's aid package by up to $2,538 ($45,000 x 5.64%). A third option is to rollover the money from the grandparent's 529 to the parent's 529, one year's worth of funds at a time. If you wait until after the FAFSA is filed to transfer the funds from the grandparent 529 to the parent 529, it won't be reported as an asset on the FAFSA. You just have to be sure to spend they money before the next year's FAFSA comes around. Also, be sure to open the parent 529 account in the same state as the grandparent 529, as some 529 plans have recapture rules when you roll over the funds to a different state's 529 plan.

Source: https://bit.ly/2seOhCb

Author: Kathryn Flynn - www.savingforcollege.com


planning makes a difference

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Source: https://bit.ly/2CVKShN

Author: PIEtech


*The interpretations and organizations of these ideas are the confidential thoughts of 1st & Main Investment Advisors and do not represent the opinions of Berthel Fisher & Co. Financial Services, Inc. nor Berthel Planning, Inc.

*Our firm does not provide legal or tax advice. Be sure to consult with your own legal and tax advisors before taking any action that may have tax or legal implications